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An annuity proposal: A case study.

Saturday, July 26, 2014

I would like to share this exchange which happened on Facebook just now and see if readers who do not follow me on Facebook have anything to say:

"I happened to ask for an annuity proposal recently. put in one lump sum at 50 and start drawing down at 55. AK, do you think this is a good deal?"

Click to enlarge.

My response:

"Basically, we are giving them $150,000 and letting it accumulate for 5 years before they start paying us.

"Conservatively, if we were to invest $150,000 for just a 4% dividend yield which is doable, we would receive $6,000 a year or $30,000 in 5 years, assuming we do not re-invest.

"So, in this case, at age 55, we should have $180,000 in the kitty (assuming investment value stays the same but I believe this is something of academic interest since we won't be able to sell the annuity and so, we have to assume, we won't need to sell the dividend paying stocks).

"Now, if we were to receive a 4% yield on $180,000 at age 55 onwards, we would get $7,200 a year. This is quite a bit more than the annuity payment of $530 x 12 = $6,360 a year. Of course, we can argue that there is a non-guaranteed portion to the annuity. Well, whether that portion will be paid or not is almost in the realm of speculation, isn't it?

"This annuity is, in my opinion, probably a good choice for people who are not very savvy when it comes to investments. I will also say that they want to consider a quarterly, half yearly or yearly payout instead of a monthly pay-out. If they choose a yearly pay-out, they get $20 more a month. They have to be quite disciplined and, of course, don't fall prey to the "magic stone sect".

"Just for the sake of comparison, for someone who is currently 55 years old and who has $155,000 in his CPF-RA, 10 years later, at age 65, under the CPF Life Standard Plan, he would be able to withdraw $1,221 a month. If you like, ask the insurance company which proposed this annuity plan to provide another table which allows an accumulation period of 10 years instead of 5 years so that you can directly compare against the CPF Life which we are automatically covered under."

CPF Life Estimator.

I am just sharing my own thoughts and this is not meant to be any sort of advice.

If you have any thoughts on the matter, please leave a comment. I am sure we will all appreciate a constructive and civil discussion on the matter. :)

Related posts:
1. An annuity plan for retirement needs.
2. Achieving level 1 financial security.
3. Retiring before 60 is not a dream.

9 wealth building blog posts for the LWE.

"Most people believe the key to wealth is a high-paying job. Yes, it's easier to amass assets if you have more money coming in each month, but the true secret to increasing your net worth is to spend less than you make.

"It is a cliche; but it is the fundamental, absolute, non-negotiable reality of money. To escape this trap, you need to understand that income is not wealth
. The level of your wealth should be measured by the length of time you could maintain your standard of living without an additional paycheck." Joshua Kennon

I see, I want, I buy?

Want to see how someone in his 20s is becoming wealthier by the day? I am talking about Matthew Seah. The chart he shared with me will blow your mind away: Becoming a millionaire next door.

It is about saving as much money as we can by keeping expenses low. This means that we should not buy luxury goods especially not in order to impress people when we have made some money!

I understand that we are human and sometimes we need to pamper ourselves a bit but, please, don't go  Buying a $500,000 watch after 3 years of work to make a point. The long and short of it, If we are not rich, don't act rich. Chances are that once we are rich, we won't bother.

Finally, don't get tempted by the dark side. Learn The secret to avoiding financial ruin.

On that sombre note, have a happy long weekend.

Related posts:
1. Two questions to help us build wealth.
2. An essential habit to becoming richer.
3. The millionaire next door.
4. A fast track to wealth building.
5. From rich to broke?

IPS forum on CPF: Something light and something dark (purple).

Friday, July 25, 2014

I have been doing quite a bit of heavy duty blogging on the "IPS forum on CPF and retirement adequacy" and I am glad I decided to focus on the 8 expert speakers at the two panel discussions because there is not enough coverage provided by the media.

If you would like to read what was reported in the media, here are links to ChannelNewsAsia's reports:

When the CPF system was introduced in 1955, the retirement age was 55. Life expectancy then, was between 60 and 62. Today, for those turning 65, one in two will live beyond 85, and one in three will live beyond 90. 

"What happens if you are that one in three? What happens if you are that one in two?,” said Mr Tan. “So when we talk about shifting goal posts, I would say it is actually not about shifting goal posts. I think the game has changed, it is the same game but the rules have changed. The playing pitch has enlarged in very significant ways, the game is played slightly differently."

The Minimum Sum provides for a basic level of retirement payout. As people live longer, the Minimum Sum goes up too, to ensure adequate payouts. Currently, the Minimum Sum stands at S$155,000, after adjusting for inflation, for those who turn 55 in July. How the sum will be calculated beyond that is being reviewed.

Source: ChannelNewsAsia

Speaking at a forum on CPF and Retirement Adequacy organised by the Institute of Policy Studies on Tuesday (July 22), Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said options like private pension plans have to be studied carefully and it is important that people understand the risks involved.

Mr Tharman said the CPF system has served Singaporeans well, and it will keep evolving to meet their changing needs. However, even as improvements are being made, it is important to keep the basic strengths of the CPF system, he added. These strengths include giving a fair return to ordinary CPF members, without exposing them to financial risks they cannot carry.

For those who can stomach higher risks, he said he agreed that the Government should study how to provide options so that they can try to earn higher returns than what is currently provided under the CPF investment scheme.

Source: ChannelNewsAsia

Anyway, enough of heavy duty blogging for now. Here is something light to give my brain a break.

Photos of lunch at the forum:

Garden salad.

Chicken, carrots, cucumber and potato.

Fruits and some French sounding dessert.

Everyone had the same 3 course lunch and I hope Roy enjoyed the lunch treat as well.


Which Roy?

This Roy:

Roy Ngerng at the forum.

I saw him during the coffee breaks but the face did not register until he stood up, identified himself before putting questions to DPM in the afternoon.

Till now, I still think his current situation could have been avoided. Seriously. Many have questioned the CPF system before. Many have criticised the CPF system before. However, not many, if any, were foolish enough to defame the Prime Minister in the process.

Still, I wish him the best of luck and I hope he does not do anything foolish again.

Related posts:
1. "Return our CPF" protest in Hong Lim Park.
2. "Return our CPF" protest? Why not a contest?
3. We can manage our money better than CPF can.

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