ST: Building your retirement nest egg

Building your retirement nest egg

Sun, Nov 11, 2007

The Straits Times

AT LEAST half of Singapore's population is not financially ready for retirement, according to a recent global survey.

Of the 600 Singaporean working adults and retirees covered in the AXA Retirement Scope 2007 survey, only half had done retirement planning. In contrast, 85 per cent of workers in the United States have started retirement planning.

The good news: In the light of recent events, the dismal figure for Singapore should improve.
Thanks to the recent publicity over changes to the Central Provident Fund (CPF), retirement issues are a hot topic now.

Announced in August, the changes include the Government paying higher interest rates on a portion of CPF savings, and making it compulsory to take up an annuity.

It is no wonder that insurers such as Prudential Assurance, UOB Life and Manulife have been quick to recognise the need for innovative retirement solutions. Of late, there has been a flurry of marketing activity - with more retirement products likely to hit the market soon.

What's your number?

MR GOH Yang Chye, the managing director of GYC Financial Advisory, believes that many Singaporeans are not aware of how much income they will need for their retirement. Nor do they know how to begin retirement planning.

'Start by asking yourself what kind of retirement you want. Do you wish to enjoy a standard of living similar to what you enjoy today? Based on your desired retirement lifestyle, you can work out your retirement goal and start building your retirement nest egg,' he said.

This objective formed the basis of Prudential's 'What's your number?' campaign, launched last month. It has worked out the likely expenses for five retirement lifestyles.

The model throws up a lump-sum savings goal, assuming a 20-year drawdown period in retirement after age 65. It also assumes a 1.5 per cent inflation rate and a 5 per cent investment rate of return.

The most modest lifestyle of the five - 'Budget' - assumes household spending of $1,040 a month for 20 years. This works out to a targeted savings pot of $195,000.

For a 'Modest' lifestyle, monthly spending is assumed to be $2,345. For this lifestyle, you would need to build up savings of $450,000.

The most luxurious is the 'Comfortable' lifestyle, for which monthly expenses are assumed to be $5,170. To keep up this lifestyle, you would need savings of $1,013,000.

Prudential's assistant director for marketing products, Mr Daniel Lum, said individuals can access its website at http://www.whatsyournumber.com/.

sg to identify their lifestyle aspirations, as well as how much monthly savings they would need to reach their retirement goals, assuming a specific rate of return.

Whole life plans with lifetime payouts

INSTEAD of a lump-sum premium outlay as required for an annuity, these plans allow for progressive saving over eight or 10 years to build a retirement nest egg.

A hybrid of whole life and endowment plans, they come with regular payouts. A major plus is that they are paid out for as long as the assured is alive, just as with annuities.

The exception is the AIA Platinum Rewards plan, where the cash payments, also known as coupons, are paid out till the assured turns 100. They are denominated in US dollars.

The fixed annual premiums are paid for a limited period only. The period is eight years for AIA Platinum Rewards and UOB Life Maxi Future, and 10 years for Manulife 3G.

With both UOB Life and Manulife, for a 30-year-old woman who has a sum assured of $100,000 for her baby, the annual premiums would range from about $8,000 to over $9,000.

Policyholders enjoy regular payouts with a guaranteed component of at least 2 per cent of the sum assured, after the premiums are paid up. There is also a non-guaranteed annual dividend, based on the performance of the insurer's life fund.

Such plans give the customer the chance to enjoy a lifetime of income and the option of leaving behind a legacy by taking up a policy on his child's life.

In this case, the policy owner can draw the cash coupons for as long as he likes up to the time that he is ready to assign the plan to his child. After that, the child would get the yearly cash coupons.

Based on a guaranteed cash payout of 2 per cent and a non-guaranteed dividend of 2.2 per cent of the sum assured, Manulife worked out that the total projected payout would be $515,904 after 85 years of cover. The premiums would add up to $82,500.

Calling such plans 'a no-brainer', Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, said he liked the feature of having lifetime guaranteed coupons that would not be hurt by market fluctuations.

'This plan can be considered part of an additional diversification in an investment portfolio,' he said.

Both AIA and UOB Life offer a benefit that covers 30 critical illnesses for an additional premium. In the case of UOB Life, the single premium for this benefit with a sum assured of $100,000 for 30 years would be $2,900 for a non- smoking male aged 30.

Here is Mr Lim's take on the plans' pros and cons.

AIA Platinum Rewards

Pros
The guaranteed cash payout of 3 per cent of the basic sum assured is the highest for all three insurers. Manulife and UOB Life come in at 2 per cent of the basic sum assured.

The dividends, if left to accumulate with the insurer, are also the highest at 4.25 per cent. This rate is not guaranteed.

Cons
As the plan is denominated in US dollars, there is some currency exchange risk, but if a person needs US dollars, this issue might not apply.

The high 'entry' level of about $8,500 probably places this plan out of the reach of both lower- and middle-income consumers. It is targeted at the mass affluent market.

The yearly payouts will cease if and when the assured reaches the age of 100.

The assumed projected investment rate of return is the highest at 5.75 per cent.


Manulife 3G

Pros
This plan is priced at a level that appeals to the widest segment of the population, with entry premiums of just over $1,500.

The assumed investment return of 4.2 per cent, comprising both guaranteed and non-guaranteed payouts, is pretty decent.

These payouts are made during the assured's lifetime.

Cons
The assumed investment return of 5.25 per cent is the highest for Singdollar participating products.


UOB Life Maxi Future

Pros
It assumes a lower projected investment return of 4.5 per cent.

Payouts are made during the assured's lifetime.

Cons
The fact sheet did not provide a specific figure for the non-guaranteed portion of the annual dividend.


Other retirement alternatives

RATHER than relying on retirement options with an insurance component, some financial advisers prefer to advocate separating insurance from investments.

'The best way to insure oneself is simply to buy a no- frills insurance plan. And the best way to manage one's investments successfully with consistent returns is to have a simple portfolio management of equities, bonds and cash,' said Mr Goh.

Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, prefers the flexibility of lump- sum investments plus future top-ups on a globally diversified portfolio of funds.

This strategy allows free switching to re-balance the portfolio periodically. Also, regular or ad hoc withdrawals can be made when the need arises by liquidating the fund that has gained the most in value.

Mr Goh worked out that, if a customer bought a term policy with a sum assured of $100,000 and invested the rest of the 10-year annual premiums of $8,250, the projected total returns would be $753,548 based on an investment return of 5 per cent, after 85 years.

The customer could also expect to receive an annual cash payout of $4,200 after 10 years. If a higher investment return of 7 per cent were assumed, the projected amount would be $9.13 million.

Nevertheless, even for people who are averse to risk in terms of investing, it is better to have a 'not so good' financial plan than no financial plan at all, added Mr Goh.