Category Archives for Retirement

4 reasons why annuities may not be good for your retirement portfolio

I’ve covered what are annuities and what they could do for your retirement portfolio in my earlier post. In this post, I want to provide a different perspective about annuities and why you may not want to have them in your retirement portfolio to give an all-round view about annuities. Like all financial products, there are pros and cons of annuities. As knowledgable investors, we need to decide for ourselves if annuities deserve a spot in our retirement portfolio.

1. Annuities are illiquid

As we transition towards retirement, the need to have cash and investments that can be quickly liquidated becomes much more important. What if you are suddenly hit with a family emergency that requires immediate cash? If you had locked majority of your retirement portfolio in an annuity, you will suffer heavy surrender fees if you surrender your annuity prematurely.

2. The guaranteed income from annuities may not be not as good as you think

As the time when you look at the guaranteed pay out from an annuity, the figure is often very enticing and seems adequate for retirement planning. But once you factor inflation into the equation, you may be seeing a totally different story. This is because the dollar value of the guaranteed income from your annuity diminishes over time as costs of living increases.

3. Your money is better off in the stock market

If you are deciding if you want to get that deferred annuity that only starts giving you regular pay outs 20 years later, would your money be better off invested in the stock market? The SPDR® STI ETF tracks the Straits Times Index and has been listed in the Singapore Stock Exchange since 2002. Over the past 10 years, with dividends included, the SPDR® STI ETF returned 8.4% on an annualised basis. While past performance does not guarantee future results, imagine what investing in the stock market for the next 20 years would be like, compared to letting it sit in an annuity that is guaranteed to deliver mediocre results.

4. You are not leaving a legacy for your family

Do you plan to leave a legacy for your family? Putting your money in an annuity means in exchange for a lifetime (or a fixed period) of guaranteed income, you are willing to accept minimal returns or in some annuities, zero returns as pay outs may be drawn down from total premiums.

What’s my take on annuities?

Like all financial products, the reality is that there is no one size fits all solution for everyone. Depending on your retirement plan, financial status and family needs, you need to decide for yourself if annuity deserves a place in your retirement portfolio. Personally, I won’t be taking up an annuity right now because I am still young and have decades ahead of myself to grow my investments as much as possible. That said, when I am closer towards my ideal retirement age, I would definitely take a look and see what are the different annuity plans available to determine if I need one.

Should annuities be a part of your retirement plan?

What is an annuity?

An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future (Investopedia). The disbursements can be made for a specific period of time or for the rest of your life. The goal is to provide a regular stream of income after you have retired, that you can use to pay for your monthly expenses.

There are 3 types of annuities – fixed, variable and indexed. A fixed annuity is one which pays out a guaranteed amount of money over a period of time or for the rest of your life. While the great thing about a fixed annuity is that the pay out amount is guaranteed, the figure usually fails to impress even the average Joe. To get a higher pay out, one would have to consider a variable annuity that is invested in an approach that is of higher risk in exchange for higher returns. The pay out amount is often non-guaranteed due to the risk involved. An indexed annuity is somewhere in-between where there is a guaranteed minimum pay out and a portion of the disbursement is subjected to the performance of a market index, e.g. the S&P 500 etc.

Annuities can be either immediate – where upon purchase the annuity starts making regular pay outs, or deferred – where regular pay outs start after a certain period of time.

In Singapore, the more common annuities offered by insurers are a mixture of fixed and variable annuities where there is a guaranteed minimum pay out and a non-guaranteed pay out depending on the performance of the insurer’s fund for the previous year. Pay outs usually starts at a specific age in the future.

Why should you consider an annuity?

As we grow older, job security is often not guaranteed even with decades of work experience. Some companies even encourage older workers to move into contract work where the hours are shorter and with lesser pay. Even if that is not the case, you may want to opt to retire into a job that doesn’t require you to work 80-100 hour a week to spend more time with your grand children or even travel the world.

This is where the regular payout from an annuity comes into play. The regular stream of income from an annuity can help to pay for your monthly expenses, e.g. utilities, food, transport, etc.

When you reach your target retirement age, you become more risk averse because you are now dependent on your retirement nest and cannot afford to go through another market downturn with 40% of your portfolio being wiped out. Switching out a good portion of your equities into annuities guarantees a steady income and takes away your worries about market performance.

If you have plans to retire overseas, some countries offer retirement visas that usually require applicants to meet certain monthly income requirements. Having regular income from annuities allows one to at least cover a portion of these monthly income requirements.

How much of my retirement portfolio should I allocate to annuities?

Towards your ideal retirement age, you gradually adjust your investment asset allocation from an aggressive 70-30 split between equities and bonds to a mild 30-70 split between equities and bonds. As the 30% in your equities asset allocation is meant for investment growth, the real question is how much of your 70% bond asset allocation should you use for annuities.

By the time you are reading this post and considering to purchase annuities as part of your retirement plan, I hope you have already done the essential and started tracking your expenses. The monthly payout from the annuity should cover a good portion, if not all of your monthly expenses when you retire. While most people use 80% of their current expenses as an estimate of their expenses upon retirement, I’d prefer to use 100% of my current expenses as an estimate of my retirement expenses because I don’t believe we really spend lesser when we retire. Instead, we probably spend more because we have so much time on our hands.

When should you be thinking about getting an annuity?

If you haven’t already realised this, getting an annuity is all about receiving a regular income. In exchange for this, insurers invest annuity funds in low risk investment instruments that yields them a higher return (which they keep the excess) and give you your monthly pay out.

When you are in your 20s-30s, you want to maximise your money to capture the biggest return while you have the luxury of time to ride the ups and downs of the market. This is the time when you do not want to your money stuck in an annuity generating minimal returns. On the flip side, insurance agents will try to convince you that buying an annuity early will reduce the total premiums substantially.

As you get closer to say, 10 years before your planned retirement age, I’d say that would be a good time to look at the different annuity plans available in the market. That’s because it’s also a time period where you start re-adjusting your asset allocation in preparation for retirement.

Retiring overseas – where would you go?

As the world’s most expensive city to live in, Singapore is not an easy place to plan for your retirement. Retiring in a less developed country could easily accelerate your retirement plans as you would require much lower monthly expenses. If you could retire in another country, where would you go?

Having backpacked in many countries, there were many occasions when I felt that I could live there for the rest of my life. Here are some of the countries I have visited and my thoughts.

Thailand

Named as one of the world’s most popular countries around the world to retire to by Huffington Post, Thailand is one of the most popular destination for Singaporeans who are planning to retire overseas. It’s even easier with a Retirement Visa that is obtained from the Thai embassy as long as you meet their minimum requirements (which are not that difficult).

Staying in the country’s capital, Bangkok, remains largely affordable in terms of living expenses. Traffic is a little crazy at times during the peak periods just like Singapore but public transport is relatively decent that I don’t see a need to own a car if I were to retire here.

If you are one for the beaches, take your pick at Hua Hin, Krabi or Phuket for a quick getaway on the southern part of Thailand. The beaches and scenery are much better than Sentosa but  I wouldn’t choose to retire by the beach because all of them are hot spots for tourists so the cost of living is a lot higher.

The second largest city in Thailand, Chiang Mai is also worth considering as a retirement destination. At a much slower pace and lower population density compared to Bangkok, Chiang Mai allows one to enjoy a relaxed lifestyle while enjoying the rich culture that the city has to offer.

China

Most would perceive China to be an underdeveloped and dirty country that’s not typically considered as a place for retirement. I would say that this is largely true in Tier-1 cities like Beijing where it’s more crowded and bustling with life. The sky is in a constant haze due to pollution and the roads are dusty.

China’s Tier-2 cities are the diamond in the rough. They are less dense in population and life is much more slower. The Tier-2 cities that I have visited in particular are Chengdu and Xi’an, both of which I fell in love almost instantly. Cost of living is much more affordable and the locals are much more friendlier and apparently less inclined to rip me off.

As someone who is bilingual, the beauty of China is that there’s no language barrier for me in conversing with the locals and many English speaking job opportunities available in China’s growing tourist industry. Imagine working 3 days a week as an English speaking tour guide for foreign tourists to supplement monthly expenses.

Vietnam

I visited Ho Chi Minh City last year for a short trip and didn’t have the chance to visit Hoi An so my inputs are on my experience in Ho Chi Minh. Famous for its busy traffic on the roads, Ho Chi Minh is not exactly the ideal place to retire in if you are looking somewhere quiet and slow pace. Be prepared to learn basic Vietnamese because only the younger generation is able to converse in basic English. The general population that I’ve interacted with, prefer to use the Vietnamese language.

The local food in particular was a big selling point for me. Many local dishes such as Pho and Banh Mi uses fresh vegetables and meats with very little monosodium glutamate (MSG).

Transportation is probably my biggest problem here because I don’t have a driving licence (and don’t fancy getting one) and Ho Chi Minh’s public transportation infrastructure has not progressed beyond old public buses. Other ways of getting around the city is using taxis and motorcycle taxis. Cars and motorcycles are inexpensive compared to Singapore but I hate to be stuck in traffic.

Cambodia

I spent 10 days in Cambodia and the experience was mind-blowing. Though the country has a grim history, I can see its hardworking citizens moving out of its past and into a great future. Almost everyone has a motorcycle or a car so if you are walking along the streets, you are usually alone. That said, the traffic is still not as crazy as Vietnam.

If you plan to be actively working in a job or maybe start your own business, you need to stay in Phnom Penh. But if you are looking for a small town to relax, Cambodia’s second largest city, Battambang is the place to be. Despite being Cambodia’s second largest city, it really is a nice little town to be honest. I love the slow pace and how everyone is all chilled out. I still don’t understand how everyone makes a living here apart from a small flow of tourists every now and then. That said, Battambang has a nice local vibe that makes me want to stay in and chill out. It’s also easy to rent motorcycles and explore the town’s outskirts.

Myanmar

I have a love-hate relationship with Myanmar. When i first arrived in Yangon, the city was very busy and the infrastructure seem rather inadequate for the kind of pace. Accommodation wasn’t cheap by any standards but the street food was affordable. In the night, street hawkers roll out with their makeshift stalls with a few tables and chairs. For 2 USD, you can have a nice plate of rice with 2 dishes, complimentary hot tea and catch a live football match on television. To retire there, you would need to know Burmese language, the official language in Myanmar as I was basically communicating through finger pointing and gestures most of the time. Like most developing countries, you can always count on the young kids who are learning basic English in schools to help you communicate with the locals.

Getting out of the capital, I visited Bagan which was famous for their large number of pagodas. It’s a booming tourist attraction with the locals struggling to keep up with the demand. As such, cost of living is ridiculously priced for tourists while the standard of living are below par. While there is little value to retire in this town, I do see many business opportunities to set up a small cosy hostel, offer bicycle rentals and run guided tours. But how to get around to do it, remains a question as foreigners are not allowed to own land in Myanmar and the laws to lease a property are not very clear.

The gem in the country that I really love is a small town called Inle on top of Inle Lake. Outdoor lovers would be spoilt for choice from cycling out of town to trekking up the mountains, there are lots to do. The town is also not over-populated and the scenery is lovely. I can’t say for sure that I could live the rest of my life in Inle, but I think 3-6 months each year is definitely do-able.

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