When you retire, your employment income stops, but not your expenses. You still got to pay your food, your transport and your health care. If you are not lucky enough, you may still have outstanding mortgage loan to pay.
Do you have retirement plans which generate guaranteed passive income to pay off these expenses?
The best way to approach retirement planning is to stack up your “Income Sandwich”. It means to prepare multiple layers of passive income streams after your retirement. To achieve this, you need to accumulate Income Generating Assets (IGAs) in your working life.
Building IGAs is not as hard as it sounds. Most Singaporeans already have an IGA, which is your CPF life. CPF life is a government scheme which converts your CPF Retirement Sum into a monthly income. But an average Singaporean’s monthly CPF payout is only $948. Is that sufficient to you?
One of the best ways to supplement your CPF savings is through a guaranteed income retirement plan issued by an insurance company. Many people overlook the beauty of this because when they think about insurance, they only think about death benefit.
Today, I am going to show you 3 best retirement plans and how they can help you achieve your retirement goals.
What is a retirement plan
A retirement plan is a savings and investment plan that provides income during retirement.
It is created by insurance companies with a defined benefit. For example, an insurance company can say that if you pay them “x” amount of dollars from now till you are age 55, they are going to give you a guaranteed monthly income of “y” dollars from your age 60 to 80 years old.
In addition, the insurer will pay you additional bonuses for the investment returns during these years. These bonuses are often referred as Reversionary Bonus or Terminal Bonus.
Not all so-called retirement plans are created equal. A good retirement plan must have the following 3Gs:
- Guaranteed Capital – your total guaranteed return must be more than your total premium paid
- Guaranteed Income – the insurer must guarantee the retirement income for the entire payout period even in the worst economy
- Guaranteed Acceptance – the insurer should accept your application without loading or other conditions.
The same 3G principle can be used to assess other short term endowment plans like China Life’s SaveReward plan.
Why retirement plans are powerful retirement planning tools
What is the biggest challenge for retirement? It is to have guaranteed income. You can generate income from different sources, but there is no better financial product that can guarantee your retirement income like insurance plans.
Why? Because retirement plan is a disciplined process that will compound your small savings into big returns.
I recently talk about how you can use SMART goal setting system to achieve your financial freedom and early retirement. To recap, a SMART goal is Specific, Measurable, Actionable, Realistic and Time-bound.
If you think about it, an insurance retirement plan has all the 5 elements required to achieve your retirement goals.
- Specific – A retirement plan specifies exactly how much you can get back and you will know whether you are on target.
- Measurable – Unlike regular investment plans, the percentage of your return is guaranteed and you can calculate it from day one.
- Actionable – You can start your retirement plan right now, even if you have health conditions.
- Realistic – You know exactly how much premium you need to commit and you don’t need a big lump sum to start with.
- Time-bound – Your premium period and payout period are both pre-defined in a retirement plan.
You may say that you don’t like your money to be locked in. But for a long term project like retirement planning, you really need to adopt a simple and systematic approach.
Currently, there are 3 good retirement plans in Singapore market:
- AXA RetireHappy
- Aviva MyRetirement Plus
- Manulife RetireReady
All the 3 plans I am going to talk about have the shared commonalities:
- Your payout is clearly defined with guaranteed retirement income
- Your commitment is clear with guaranteed and level premium throughout the payment term
- You are offered options of premium and payment term so you can tailor the product to your unique circumstance
- You can choose when to start receiving your monthly payout
- You can change your mind later upon reaching your retirement age:
- Leave the funds with the insurer to accumulate more returns
- Choose to withdraw in lump sum
- Do a partial withdrawal and leave the remaining to continue accumulating.
Because the guaranteed income is for your retirement in many years to come. You have to ensure that the insurers having the ability to keep their promise.
As a start, these insurers have one of the highest credit ratings in the world. But even if any of them fail, your policy value is protected under Policy Owner Protection scheme up to $100,000.
The unique features of these 3 retirement plans
So which retirement plan should you choose? Here are the major differences between them.
AXA RetireHappy is the first inflation-adjusted retirement plan income plan. It means your retirement income will grow at a rate of 3.5% each year to combat inflation.
Comparatively, the plan offers the highest Guaranteed Maturity Yield for most scenarios and you can use both cash and Supplementary Retirement Account (SRS) to purchase.
One thing you need to take note is that such plan pays a very high longevity benefit. In the above example, more than $400,000 will be paid when you are age 80.
This can be good or bad. If you want to ensure sufficient savings beyond the maturity date, this is good money. But if your intention is to enjoy in the earlier years of your retirement, you probably have to move your maturity date earlier.
Fortunately, this plan also offers the most flexibilities to suit individual’s needs. There are total 120 ways of setting up AXA’s RetireHappy plan. But this could also cause information overload. That’s why a proper planning with a retirement planner is important before you embark on any of these plans.
Aviva MyRetirement Plus
Aviva brought in the concept of retirement plans for Singaporeans 5 years ago and named it MyRetirement. Fast forward now, they have revamped the plan and launch Aviva MyRetirement Plus. Similar to AXA’s Retirement Happy, this plan also adjusts the retirement income up by 3.5% each year.
The unique part of this plan is that you have the flexibility to withdraw your accumulated reversionary bonuses as you desire, so that you don’t have to wait until policy maturity to enjoy these investment returns.
Aviva MyRetirement Plus also offers very high Guaranteed Yield. The only problem I face with this retirement plan is that there is only one payout option of 20 years. This could be the hurdle to fit it into some people’s retirement portfolio.
As you can see from above, both plans from AXA and Aviva have a maturity or longevity benefit. What if you want to be more comfortable in your retirement? What if you prefer to receive your payout earlier?
Manulife’s RetireReady plan is a good alternative or supplement to Aviva and AXA’s plans. It can also be funded via cash or Supplementary Retirement Account (SRS)
From the illustration below, you can see that Manulife RetireReady’s payout has 3 layers:
- Guaranteed Monthly Income
- Additional Monthly Income – converted from bonuses before retirement
- Cash Bonus – projected bonuses after retirement
You also have other income options at your retirement age:
If there is one thing that can set back your retirement for 10 years, that is long-term care. While you have spent so much effort to build your retirement income, you don’t want your retirement savings to be eroded by hefty costs from severe disability.
The unique feature of Manulife ReadyReady is that it doubles your monthly income if you suffer loss of independence during your income payout period. The plan will also waive your premium if Total and Permanent Disability occurs during your premium payment period.
Loss of Independence means that you are not able to perform at least 3 of the 6 activities of daily living:
To summarise all…
With different premium payment and payout periods, each of the 3 products, AXA RetireHappy, AXA MyRetirement Plus and Manulife RetireReady will generate different outcomes.
You should engage a retirement planner to compare both the guaranteed yield and projected bonus. If you haven’t upgrade your Eldershield, you should do so to prevent loss of retirement income due to long term care cost.
Retirement planning can be simple but not easy. If you have any question about retirement plans, simply leave your questions here and I will be glad to answer them all.