Why you need to include annuities as part of your financial planning

15 Feb 2019 

​Recent statistics show that Singapore ranks third in the world for life expectancy. 

In fact, one in two Singaporeans aged 65 today is expected to live till 85, and one-third of us beyond 90 years old. 

What does a longer life expectancy mean for Singaporeans? 

A longer life expectancy can be good or bad, depending on your quality of life. 

In good health, with the financial ability to enjoy your hobbies and ensure your living expenses are well taken care of, you will enjoy a comfortable standard of living. Likewise, the opposite is true if you find yourself with health or financial issues.

The solution to ensuring both good health and financial security is the same: Keep good habits from young, and build on them so you can draw on your reserves when you are older.

This is actually similar to an annuity, which is what this article is really about.

What is an annuity? 

If you’ve started looking into your retirement planning, chances are you’ve come across the term “annuity”. But what exactly is it, and how are annuities relevant to you?

There are many different kinds of annuities in the market, but they all carry out the same function. Simply put, an annuity is a financial instrument that pays you an income for a set period of time. 

You can think of it as a fruit tree that you’ve planted and are tending to over the years. When it’s ripe, you can start enjoying the fruits of your labour.

In the case of an annuity, you get to decide whether you want the payments to last for a lifetime (i.e. until you pass on), or for a fixed number of years. 

You also decide when to start receiving your annuity payments. The earlier you begin, the smaller your annuity payout will be as compared to if you choose to begin later.

Let’s use an example of a period-based annuity that gives you a total payout of $150,000 when it is matured. Assuming you choose to begin receiving payments at age 55 over a period of 30 years, you will receive about $444 each month until you reach the age of 85. Alternatively, if you choose to begin payouts at age 65 over a period of 20 years, you will receive $625 per month. 

Regardless of the variances in the type of annuity structure, you can enjoy a level of certainty in knowing how much you can expect to receive, and for how long.

However, the downside is that a period-based annuity will no longer give you payouts beyond the number of years that you’ve chosen. Which brings us to our next question…

What if I outlive my annuity payments?

Now, back to our earlier point on the life expectancy trends of Singaporeans. 

A greater life expectancy means one of two things: Either you postpone your desired retirement age, or you stick to your desired retirement age but accumulate more savings before doing so. 

If you pick the first option, you will be able to spread your retirement savings over a shorter period of time and also have more time to grow your nest egg. 

If you don’t want to delay your retirement, however, there are many financial instruments out there that can help you boost your retirement savings. 

And this brings us to…

CPF LIFE – The annuity for all Singaporeans
As a whole-life annuity, CPF LIFE will provide monthly payments for as long as you live. The amount you will receive from CPF LIFE depends on how much you have saved in your CPF accounts over the years, and when you choose to start receiving payouts.​

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There are also three CPF LIFE plans for you to choose from – the LIFE Standard Plan, the LIFE Basic Plan and the LIFE Escalating Plan​. The plan you choose will also affect the monthly payout you will receive and the amount you will leave (i.e. bequest) to your beneficiaries. 

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Maximise your CPF LIFE payouts

There are ways to increase your payouts depending on your personal needs and preferences.

The most straightforward way to go about it would probably be to work backwards, starting by estimating your desired monthly retirement income.

Based on your estimate, you can then take into account your entire financial portfolio – cash savings, investments, and CPF savings – and make the necessary tweaks to meet your targets. 

For instance, let’s say you wish to receive about $1,500 per month from age 65. You can aim to save $200,000 in your CPF Retirement Account at 55, so that you can receive approximately this amount of monthly payout for life. 

If you are unable to meet this amount at 55, you will have to supplement your monthly income from other sources such as investments or other forms of savings. Alternatively, you can plan ahead to leverage on the CPF scheme. For instance, you can make a top-up via the Retirement Sum Topping Up Scheme early on so that your money has time to grow before you retire.

You can also opt to transfer some savings from your CPF Ordinary Account to your Special Account in order to enjoy higher interest rates. 

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Once you reach the age of 55, you can make transfers from your Special and Ordinary Accounts to your Retirement Account in order to maximise your retirement savings.

The closer you get to your target savings, the more you can expect to receive as monthly payouts during retirement. 

Likewise, the earlier you start taking action, the more time you have on your side to grow your CPF savings with the help of compound interest!

Are you ready to make the most of your CPF LIFE annuity?

At the end of the day, your retirement expenses will vary according to your desired lifestyle, so you can consider using CPF LIFE to help cover your basic necessities. If you require a higher monthly payout than what CPF LIFE offers, you can make the necessary adjustments to your savings plans or purchase other financial instruments to help reach your goals. 

As an annuity, CPF LIFE offers stability in the form of a monthly payout for as long as you live. Even if you live longer than you expect to, you will be assured of having a retirement income for life – therefore helping you with financial longevity.​

However, to make the most of your retirement, it will be advisable to use both a mix of CPF LIFE and other financial instruments to grow your retirement nest. In doing so, you can ensure that you can enjoy the quality of life that will truly make those retirement years’ worth living!​

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