Are Retirement Income Products a Good Investment?

The emphasis on accumulating savings for retirement has been a key topic of interest pertaining to retirement planning. However, withdrawing  during retirement has not been discussed very often. Yet, retirement spending strategy planning is crucial and possibly more difficult than accumulation for seniors. This is because certain dangers that retirees encounter not only are specific to seniors but also have the potential to disrupt their way of life. These are the 5 risks:

1. Investment risk: Retirement investors are more affected by the timing of returns from investment portfolios than accumulators, in addition to the danger of not being able or willing to withstand market volatility. As a result, retirees may sell out early and lose money. For instance , retirees who take distributions from their portfolios during times of low returns are selling down at a terrible time, which raises the possibility of their money running out sooner. As accumulators do not need to sell down, they may just ride out the market volatility over their years of accumulating.

2. Inflation: Over time, there is a greater chance of losing their purchasing power, which lowers their standard of their living.

3. Overspending/underspending risk: A risk associated with not having a systematic and organized approach to spending, which could lead to retirees overspending in their early years of retirement and running out of money for their later years of life, or vice versa, retirees being overly cautious and leaving behind too much money without fully enjoying their retirement.

4. Longevity risk - The risk of experiencing a prolonged life and having their money run out before they do

5. Healthcare risk: The potential inability to pay for rising healthcare and wellness costs

I have observed that over the previous one and a half decades, product developers have introduced products to help retirees find an income source. Unit trusts that pay dividends have been introduced by fund companies and, most recently, roboadvisers. For a very long time, insurers have been offering retirement income programs. In this article,   I will be focusing on the importance of these products, which have been marketed in large quantities. 

A retirement income product is one that provides a stream of monthly or annual income, but the amount actually paid out depends on the performance of the investments it makes (i.e. life fund). Either you can pay premiums yearly for the first 10 years of the insurance and then, starting in the 21st policy year, be eligible to receive an annual income for the following 20 years. As an alternative, you can pay a single premium in full and start receiving annual payments three years later, or whenever you become 100. There are many other combinations, but you get the point.

These are similar to the old annuity products, except they might not pay as long as you live. To give you an idea of how well they perform, we compared 4 of these standard premium products based on a 45-year-old male.

	Insurer A	Insurer B	Insurer C	Insurer D
Yearly premium contribution	$18,844 for 10 years	$19,161 for 10 years	$19,467 for 10 years	$20,068 for 10 years
When income payout starts and duration	From 65-20 years old	From 65-20 years old	From 65-20 years old	From 65-20 years old
Guaranteed monthly income	$1,000	$1,000	$1,000	$1,000
Total monthly income (Guaranteed + non-guaranteed*)	$1,374 - $1,817	​$1,109 - $1,546	$1,574 - $2,023	$1,577 - $2,090
Additional non-guaranteed* payout at the end of the policy year	-	$25,014 - $111,390	-	-
​Effective return of the policy based on 3% p.a. illustrated returns projection	2.24% p.a.	1.65% p.a.	2.66% p.a.	2.56% p.a.
​Effective return of the policy based on 4.25% p.a. illustrated returns projection	3.40% p.a.	3.53% p.a.	3.71% p.a.	3.75% p.a.

*non-guaranteed income portion is based on insurers' return projection of 3% - 4.25% p.a. of their participating fund

The table demonstrates that the rate rate of return on premiums paid based on the insurer's participating fund's projection of total income payout at 3% p.a. ranges from 1.65% p.a. to 2.66% p.a., whereas the rate of return for the 4.25% p.a. projection ranges from between 3.40% and 3.73% p.a. Although the rate of return for the greater forecast of the insurer's participating fund appears respectable, it is still unknown whether insurers will be able to fulfill it in the next 20 or more years. I have seen insurers cut these forecast rates a few times  in the past two decades working in this line. What do all of them indicate, then?

First off, the "CPF Retirement Combo Pack," which combines the special and retirement accounts (SA/RA) with CPF LIFE, is a superior retirement income "product" since the return is larger, it pays for as long as you live, and for the time being, the return of at least 4% p.a. as well as your capital is guaranteed by the Singapore government. This is important if you want a safe retirement income floor (SRIF) in your retirement years. So, you might want to first think about topping up your CPF SA or RA if you still qualify before you buy your next retirement income plan. You may then consider using retirement income products to supplement it after you've completed this and if you desire a bigger SRIF.

Second, because such items have low returns, it is not a smart idea to purchase them if you have 10 to 20 years before you will need the money. If you have a longer time horizon, you should invest in the financial markets because you are more likely to need bigger returns and be able to withstand market volatility. Some could counter that not everyone wants to incur financial risks, and that purchasing retirement income products isn't necessarily preferable to doing nothing. All I can say is that an ethical counsel will invest a lot of time in educating you about investing so that you feel confident making long-term investments. The fact that insurance products offer high sales commissions is one of the factors contributing to their low return on investment. Just stating that customers desire it without spending enough time to offer a better and more acceptable alternative is a poor justification. That turns us into salespeople rather than advisors. Also, even if the client wants the substandard product, we should be professional enough to inform them that we do not wish to participate in the transaction.

Last but not least, remember that retirement income products and income-paying unit trusts are just products and not programs. Products are similar to the ingredients in a recipe that need to be prepared by a skilled cook. A good wealth adviser (the chef) can create a personalized spending plan (recipe) and skillfully utilize (cook) various products and other assets like CPF LIFE, retirement income insurance, properties, investments, etc. to provide their clients with a consistent stream of income for the rest of their lives (the great dish).

If you are interested in learning more about retirement income products, please feel free to contact me at 9790 1583.