I have friend whom I never met before.

I got to know her during my early days when I was trying to figure out all these finance stuff in a forum where we used to be in.

We recently reconnected online after sporadic interaction on my blog.

And she mentions that she is going ahead to purchase** Aviva MyRetirement Choice**.

While she made her decision, I thought perhaps I can help work the numbers a bit. If you are evaluating Aviva MyRetirement Choice, this article might be useful for you.

### What Aviva MyRetirement Choice is about

Based on the name, you will get the idea that this is a plan about retirement.

MyRetirement Choice (MRC) is a participating insurance savings endowment. A lot of insurance policies such as this comes with a fancy name and are either classified closer to being a **cash based whole life insurance policy** or a **cash based insurance endowment**.

This is a savings plan that is customized to distribute cash flow at the end of the accumulation phase.

**Different accumulation terms**. You can choose to accumulate over various duration. They range from 5, 10, 15, 20, 25 years. In my friend’s case the illustration was 5 years due to how close she is to retirement.

**Monthly de-accumulation cash flow**. After the accumulation, the MRC will distribute both guaranteed and non-guaranteed cash flow. The payout period can be from 5 years to 35 years, where you can customized at a 1 year interval. The payout period is subjected to your entry age + premium payment term + accumulation period + income payout period being less than 99 years old.

**Premium Waiver attached**. Future premiums are waived if the assured suffers from totally and permanent disability.

**Long Term Care attached**. The assured will received care income benefit if the assured cannot perform 3 out of 6 activities of daily living.

**No underwriting required**. Knowledge of this lets me know this is closer to being a wealth building vehicle than an insurance protection vehicle.

### Projected Cash Flow Value and XIRR

The focus of this plan, is its objective which is to provide cash flow.

Unlike the whole life insurance plan that distributes cash flow, which I covered in this article, insurance endowment plans typically have a finite distribution period.

In the case of my friends illustration the plan is broken into 2 phase:

- Accumulation over 5 years. This is when she contributes by putting in money
- Accumulation without funding for 5 more years.
- Withdrawal over 10 years. So out of the 5-35 years, she chose to get it in 10 years.

Remember that your payout can be in a few schemes:

- monthly guaranteed cash flow payout + monthly non-guaranteed cash flow payout
- monthly guaranteed cash flow payout + surrender sum at the end of accumulation period

#### The Guaranteed XIRR

What my friend is most concerned with is the guaranteed monthly payout. We want to see what is the rate of return over time, or the “interest” the policy earns.

The table above shows the XIRR for this policy if you take 10 years to fund & accumulate and 10 years to de-accumulate.

You pay $99,025 in premiums and you get a guaranteed $114,000 in payout.

The XIRR is **1.14%**.

To give you a good comparison, the prevailing 10 year Singapore government bonds rate is **2.13%**. As a guaranteed sum, she will get less than a 10 year government bonds.

#### The Guaranteed + Non Guaranteed Monthly Payout XIRR

Now what if we consider the cash flow she will get if we consider the non guaranteed portion. We assume she chooses to receive the non guaranteed as monthly cash flow payout.

The amount of non-guaranteed payout my friend will get depends on **the investment return of the participating fund**.

The 2 projections Aviva used is 3.25% and 4.75% in investment return.

The table above shows the XIRR of the non guaranteed + guaranteed monthly payout of $12,783/yr if the investment return is 3.25%. The **XIRR over 20 years is 2.07%**.

This is around the yield if you purchase a 10 year Singapore Government Bonds.

The non guaranteed is made up of the reversionary bonus, if converted to monthly income and monthly cash bonus.

The table above shows the XIRR computation when the projected investment return is 4.75%. The XIRR is 3.64% over this 20 years is pretty normal.

Of course, the investment return of the participating fund needs to reach that level of returns for this projection to be true.

#### The Returns if there is no Withdrawal

My friend is purchasing this for her retirement, and thus it is likely purchase with the idea of having recurring cash flow.

However, most policies give you the option of reinvesting to accumulate more compound interest. The returns would be higher but how different would returns be?

The table above shows how much the guaranteed value would grow to after 20 years. It is a low XIRR of 0.78%.

If we factor in the non-guaranteed investment projected growth of 3.25%, the XIRR would be 2.14% which is slightly higher than the XIRR if you take income on a recurring basis (2.07% above)

If we factor in the non-guaranteed investment projected growth of 4.75%, the XIRR would be 3.54% which is slightly lower than the XIRR if you take income on a recurring basis (3.64% above). I am puzzled why its lower, but that is the figure.

#### The Summary on Returns

Based on the projections, if you have frame your mind to only get guaranteed returns, the returns does not seem to be worth the effort.

You might be better off with Singapore government bonds, which are AAA rated in the world and higher return.

If its based on a 3.25% investment returns, it is also around the prevailing 10 year government bond rates.

It is only more worth it if the 4.75% investment returns come true.

If your purpose is for retirement, the goal here is ensure that you have cash flow. From this result, the XIRR of whether to surrender in 20 years or to take recurring cash flow after 10 years are very close.

Based on the objective, you should take recurring cash flow.

### Past Investment Returns of Participating Fund

In the benefits illustration, Aviva have provided the break down of the participating fund.

The portfolio is heavy on bonds, with 30% in equities and 7% in property.

Suffice to say returns should be closer to bonds than equities.

We talked a lot about the projected returns, so here is a good gauge of its performance in a period where bond generally do well.

In March 2017, the Straits Times publish an article summarizing the average investment returns of the participating funds of various investment companies.

You can take a look how it measures up to 4.75%.

### When will the policy break even?

The effects of deduction table shows when the policy will break even in surrender value.

The break even in this case, will be during the 10th year, where the policy starts distributing the monthly cash flow.

This means that if you surrender before that, your surrender value is less than your premiums paid.

### Distribution Costs Paid

Insurance plans on paper look very costly. The sales costs to the insurance company, the agents take place over the first 5 years.

This cost comes up to 8.3% of the policy.

While it looks high, bear in mind that if you invest in other assets, there are management fees as well. For example, REITs AUM fees is roughly 0.7% on their assets, or 8-20% of their net property income. It forms the bulk of the costs you lose as a unitholder of a REIT.

### Summary

While this plan allows wealth builders to save and then withdraw, a comparison of the XIRR puts into perspective how much compounded returns you will achieve versus the risk free rate (10 year government bonds)

Many would only consider the guaranteed portion.

I think it is unrealistic since based on the XIRR review.

The investment returns of the participating funds seem to hit 3.25%, and this is during a period where bond yields have fallen and bond prices have rose.

It will be challenging to plan for your retirement that if you purchase the MRC, you will get a monthly cash flow based on 4.75% return.

While retirees like that this plan provide a means to give you controlled cash flow, as a DIY wealth builder, you can put your money in other financial assets, systematically withdraw a conservative sum, to create your own cash flow stream.

You can take a look at some of my past insurance reviews:

- OCBC’s PremierLife Generation Case Study
- PRUflexicash Case Study
- Crowdsourced Insurance Savings Plans Return Table

BC says

As u pointed out, XIRR of 3.64%pa (non-guaranteed) over 20yrs if Fund performance achieves 4.75% pa returns.

To me, this is a gamble. There is unlikely to be further upside ie even if fund performance does better than 4.75%, insurer unlikely to pay more than the projected non-guaranteed returns.

There is all the downside if fund does not perform as well, resulting in worst case 1.14% pa. At least, capital is guaranteed.

What is shocking is banks are selling “savings plans” to retail customers (mom & pop) at branches, where worst case results in negative returns. There is no disclosure that such products are not capital guaranteed and yet allowed to be marketed as “savings plans”.

One such plan is Prudential PruSave Max10.

Kyith says

I think if most are endowment products they should not lose money.