Or y'know. Not.
So. There’s been a couple of articles about retirement plans, CPF and retiring recently, from financial blogs like Dollarsandsense, InvestmentMoats... I wonder what Budget Babe's been up to.
...Maybe it’s because some of the insurance companies have either chosen to release a new plan or upgrade their plan all around the same time, so consumers are kind of spoilt for choice while the competition tries to snuff each other out. They sometimes just add a 'plus' to the back of the old name too.
How cute.
Like almost every plan in the market, the insurer’s typically find a niche selling point and stick with it. This allows them to appeal to people more specifically and avoid competition on losing fronts. And for consultants like myself who have multiple partners, its especially useful for our service.
But for the rest of us, there’s a variety of factors.
How much we trust our Financial Advisor, how suitable some of the icing on the cake is for our specific situation, and most importantly – are these retirement plans even necessary?
The retirement plan we know best is CPF – where we’re forcibly and painfully contributing 20% of our salaries, sure – but we also generate between 2.5% to 4% a year, with a bunch of bonuses in between that could let portions of it generate as high as 6%, all risk free.
It’s pretty hard to get a sweeter deal than that, let alone pay for it out of our own pocket.
In comparison, especially looking at yield alone, where you may not even get 4%... Aren't private retirement plans just terrible?
Let’s side track a bit – I don’t know what they are
For those of you unfamiliar with Private Retirement plans, or (but not accurately called) Private Annuities, they are insurance plans marketed to be designed specific for retirement.
As a result, most of them have a similar [but not identical] structure to the likes of CPF which goes along the lines of this 3 step plan:
1) Step 1: Accumulate and invest money, ideally a preferred fixed amount of sorts, until a specific age. [55 for CPF]. For example, your Full Retirement Sum has a very specific number… For now.
2) Step 2: Let it roll for a number of years until the payout year [65 for CPF].
3) Step 3: Pay out a minimum sum of every month with a small range of bonuses [e.g. ]. Meanwhile, the capital sum continues to be invested so that this large sum of money can continue to pay you out a regular income throughout your entire lifetime until it eventually hits zero or you die, whichever is sooner.
Investment Moats came out with a very detailed CPF analysis especially on their ROI, which you can read here. I think Dr Wealth came out with something similar as well.
Financial Consultants like myself with investment experience would also know how to create a self-made retirement plan with this structure, especially for people who are fond of the FIRE movement and need to keep up with inflation for over 30, 40 years or more.
Isn't this going to be another biased sales post?
I rarely address my bias because if you’re reading this blog and it says Financial Planner, you should kind of expect bias. But before we really get into the meat of it – let me be really clear…
I love investing.
I would seriously rather invest every single dollar at any given time. The entire process, from fund selection to technical analysis, is thoroughly enjoyable.
Comparatively, a retirement plan is not stimulating to me at all, and its returns are not super enticing for a risk taker like myself [generally CPF returns aren’t either, guaranteed or not].
And like I mentioned before, you can actually ‘make’ your own one, albeit with the downside of slightly less automation and slightly higher risk – but one that’s even more specific to your preferences.
…More importantly, retirement plan commissions can be high, but not high enough to justify any kind of bias. Trust me. Even though I learn everything in order to provide the best for my clients needs, these plans are just too situational.
In any case, I can actually give a fairly objective opinion on this matter.
And that’s why you have to look at how these Private Retirement Plans compare against CPF.
...With so much CPF optimism brimming online recently, who could resist?
The 5 reasons anyone would still purchase a Private Retirement Plan
1) Control
With CPF, you’re forced to contribute a fixed portion of your salary till you stop working no matter what, at least until you’re 55 or unemployed.
In contrast, a private retirement plan means that if you’re a 30-year-old and you only want to pay for 10 years (stop paying age 40) before receiving a monthly income from age 55 till age 85, you can… Instead of paying for the next 25 years and only receiving money from the government 10 years after that for life.
If you didn't understand that, you can look at the table below.
As an example of how this further benefits: this can allow you to get a higher income, since that money wouldn’t have to last from age 65 to 120, but from age 55 to 85.
You can control almost everything to a certain extent:
· The amount you’re willing to pay
· The number of years you’re willing to pay for
· How much you want to receive per month
· When you want to receive payouts
· How long you want to receive payouts for
Increasingly-improving plans may even allow you to change your income payout period under certain conditions.
2) Higher range of benefits
CPF is pretty straight forward, of which you can get the details on its website.
Private plans come with a wider range of benefits, such as:
a) Death Benefit: A 43-year-old who’s paid a capital of $150,000 will receive a minimum of 101% [$151,500] or 105%, with additional bonuses if he dies.
b) Loss of Independence Benefit: Depending on the private plan, insurers can pay out in a lump sum or larger monthly payouts in the event of partial/total and permanent disability. If you've arranged for a fixed income of a minimum of $1000 a month, that income can double once loss of independence (LOI) has been established. You can read what LOI is here.
c) Waivers: If one incurs a critical illness or disability while paying for the annuity before it comes into effect, a waiver will kick in, and the company will pay for the plan whilst you recover.
In contrast, you would have to simply stop working and not contribute to CPF following such incidences, and have less to live off on later in life.
3) Higher range of yields
Private plans have a massive range of yields depending on the plan structure of the insurer, the non-guaranteed and guaranteed portions, the selection of factors in point, etc.
You typically expect a guaranteed yield between 1.8% - 2.8% and non-guaranteed total yields to be between 3.5 and 5%.
A higher range of yields lets you choose the structure you prefer and the measure of added risk you wouldn't mind taking.
After all, the highest guaranteed yield doesn't necessarily mean the highest total yield, while guaranteed yield may be more important for others than total.
Certain companies may have more favorable structures than others, which is where a consultant like myself who offers multiple companies comes in.
4) Higher transparency
Out of the points made so far, this is the only one that may be non-factual [meaning that its based on feel rather than a proven, logical argument].
CPF is more transparent compared to before already, but I kind of think they can do better. Let’s look at the retirement plans as a positive example.
A) Tells you how much you can expect very clearly
B) Tells you both your range and reason for range [Using an Appendix Table]
C) Tells you their expense ratio versus what they actually give you
D) Updates you on their fund performance regularly
E) Updates you on their asset allocation regularly
F) Even provides a ‘benchmark’ in the form of Singapore Savings Bonds
In contrast, while CPF does tell you how much you can expect and their range, it’s not very clear on why. As for everything else… You can kind of forget it.
5) Higher(st) Ownership
Most importantly, a private retirement plan – with emphasis on the word private – is yours. Its been customized just the way you want it, and now it will go according to every detail that you wanted it to go to. It is your responsibility, but also your power.
CPF doesn’t give you that degree of power.
Look at your year for payout. In the last 15 years, the payout age has been moved from 55 to 60 to 65. That’s a 10-year delay in getting your payouts.
How about yield? In the 1970s, CPF OA was 6.5%. Now it's 2.5%. Go look it up! That may have seemed a lifetime ago, but some of you are accumulating now to reach that lifetime later in your 50s and 60s. There’s no guarantee it wouldn’t go down further (or hopefully, up).
How about the minimum sum, which you need to accumulate to retire with a little dignity? This phenomenon – which I like to call CPF inflation – is illustrated below, on CPF’s own website.
Just when you think it’s within your reach, the amount shoots up drastically every year, and you can’t predict by exactly how much.
With private ownership, you never have to worry about any of these things.
Closing Thoughts
…Upon finishing writing this article, I have no idea why it came out sounding a little anti-CPF. Incidentally, I like CPF very much. The risk free yields can be a little absurd.
And you can see the most prominent weakness of private retirement plans here.
It’s just important for people to realize that there are valid reasons for the existence of other products and opportunities, because CPF isn’t a perfect system. Not every single person will find it 'the best'.
And that’s okay.
While you can allegedly opt out of CPF by buying a private annuity instead, especially if you’re super convinced by my article – I actually wouldn’t recommend that. The hard reality is that if you’re looking for high yield, or for the fee-conscious, something cheap – private retirement plans aren’t likely to be right for you.
Additionally, some of the benefits that I illustrated are things that you can purchase externally, which is an arrangement I have done for long term clients who are set on creating their own annuity. A death benefit just means purchasing cheaper, term insurance. If you want something for partial disability, same thing - upgrading your Eldershield or future Careshield would probably do it as well. Of course, increased benefits can't hurt, and that holds true all around. That's why even the government stand on it is really to use a private retirement plan for complementing your CPF, and I think that’s always something that appeals to those who are just shy of heading towards retirement.
You can also use your SRS to purchase one, which makes this a particularly favorite option for the older and wealthier, since it gives it ample time to accumulate and pays out more if they lose independent ability.
Ultimately, I think one can see that while Private Retirement plans clearly have a niche market to the ones who want safety, control and some benefits instead of traditional investing or CPF: there could be some relevant benefits to you, too.
The concept of your own personalized retirement plan should appeal to you in the ways that matter – be it control, benefits, yields, transparency or ownership.
And that not too terrible.
Money Maverick
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