Personal Finance Archives | Investment Moats

Retiring in the Worst 30-year Period

July 23, 2019 by Kyith 8 Comments

You may be planning for your retirement.

And you might be thinking about what kind of risks you should be considering in your planning. The common fear is that in the first 5 years of your retirement, you experience a very large draw down of your portfolio.

On Investment Moats, I have highlight the risks of a negative sequence, and the havoc it could do to your retirement. Some friends have asked me: What if you have very good rate of return? Does that mitigate the risk?

Well…. Yes and No.

Because while sequence of return is a big monster to tackle, high inflation seemed to be a bigger monster.

I managed to do some data crunching recently. They told me that the most challenging 30 year period was either 1966, 1968 or 1969.

1969 was a real monster. But the most surprising thing about 1969 after I looked at the numbers was that…. I couldn’t detect what was so bad about this sequence.

I am going to show you how some indexes perform for the period of 1969 to 1998:

We factor in a 1% annual expense ratio
The portfolio is a 100% equity portfolio in that index
The initial portfolio is $1000 and we will withdraw $40 in the initial year (the 4% withdrawal rate)
After spending the $40, the year after, we adjust by the inflation for that particular period

We want to see if we are able to spend an inflation adjusted income for the 30 year duration.

A Pure S&P 500 Portfolio

S&P 500 1969 to 1997, 1% Expense Ratio, exhausted in 1989

First up, S&P 500 portfolio. The annual withdrawal rose by high inflation. In 10 years, the spending doubled to $80. In 24 years, the spending have doubled again to $160.

The money was exhausted by 1989.

The compounded average growth for this period is 11.07% a year. That is not… low.

What if the Retiree’s brother retire…. just 1 year later?

S&P 500 1970 to 1998, 1% Expense Ratio, not exhausted

Now next, think of the brother of the retiree before, only for this brother, he chose to retire 1 year difference.

His net wealth last him for the full 30 years.

You realize that he went through almost the same high inflation. His compounded rate of return is 12.38%.

How can 1 year difference matter so much??

The whole of 1961 to 1970 was a tough decade. I realize for those years in that decade, you cannot have too big of a negative years in the first 2 years. In those high inflationary years, it is less forgiving.

I do not think anyone would term a -9% return as a very bad sequence. However, this -9% is the difference between a very successful retirement from a not so successful one.

So next, what if your rate of return is high enough?

The same time frame but… with Dimensional US Small Cap Value Index

Dimensional US Small Cap Value Index 1970 to 1998, 1% Expense Ratio, not exhausted

We replaced the S&P 500 with a Dimensional US Small Cap Value index. Small cap and value factors did very well in the past. The compounded average growth is much higher at 14.99% a year (after fees).

Observe that in the same sequence, the small cap value is more volatile than the S&P 500. It dropped almost 30% versus the S&P 500, which dropped almost 10%.

In 1973 and 1974, it dropped a massive 31% and 18%. That is a 44% draw down.

In 1974, the $1000 portfolio dropped to $239.

However, this sequence was able to survive because the growth from this portfolio was crazy.

What about Fama/French US Large Value Research Index?

Fama/French US Large Value Research Index 1970 to 1998, 1% Expense Ratio, not exhausted

We have another example of an index that did well. This large cap value index had a smaller draw down but still larger than S&P 500.

This portfolio ended with 10 times as more money as originally started:

after the high income requirement in this high inflation environment
after poor negative sequence

Conclusion

1969 was a tough retirement year.

Here is how the three pure equity portfolio stack together. I had initially thought having a great investment return may not alleviate sequence of return risk.

However, if the rate of return is high enough, apparently even if the sequence is poor, inflation is higher, things will still work.

This might make a case of choosing an index that have a high expected returns. It lends weight to the factor tilts of Dimensional Funds available to Singaporeans via MoneyOwl, Providend and Endowus.

In the chart above we zoomed into the first 14 years.

I do wonder that, if you are in retirement, and you see your portfolio go down from $1000 to $239, will you keep to the plan and not make adjustment?

I think we will make adjustment because this leans very close to failure mode.

In retirement planning, we should view it less as a failure, but that the client will need to adjust his or her spending plan:

Choose not to inflation adjust the income
Step down the income by 20% since current withdrawal rate is too high
Step up the income by 10% or slowly ratcheting up when you have more net wealth and can spend more.

In this way, you can be observe to be proactive and keeping up with the times.

Your plan for retirement is one:

That you can stick with over a period of time
And one that you are reviewing enough with someone who knows what they are doing, and adjusting when needed.

Some other take-away:

1969 was a bad year because 2 things add up
1. High inflation increase your spending so much that it puts pressure on the portfolio
2. Just a poorer sequence, although the sequence, by historical standards is actually rather livable for most
It is hard to simulate this sequence in a Monte Carlo. How do you add up a specific scenario that is high inflation and poor sequence?
Even if your money will last, there is every chance you will be forced to make stupid decisions
If your rate of return is high enough, relative to inflation, relative to what you need to spend, it might work out

I will probably talk more about 1969 next time.

My other retirement articles are below in my retirement planning, financial independence page.

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I break down my resources according to these topics:

Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
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Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
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The Cheapest Term Life Insurance in Singapore Updated June 2019

June 27, 2019 by Kyith 34 Comments

Life insurance coverage against death, TPD and critical illness is necessary and most people I know do not have adequate coverage. They think it is expensive to get themselves adequately covered. However, that is not the case. Adequate life insurance can be affordable, yet leave you with good cash flow to live life.

First and foremost, the basis of insurance is for protection.

When we purchase insurance, we sought to address a particular health risk that would create monetary challenges for ourselves or our loved ones.

Some of the most common ones are:

The risk that if you passed away, your loved ones will have a difficult time getting on with their lives, servicing still outstanding debts and mortgages. We buy life insurance against death for this
The risk that if you suffer from some major illness or require a major hospital stay, you do not have the money to pay for astronomical inpatient or outpatient medical bills. We buy hospital and surgical plans for this
The risk that if we suffer from an advanced stage illness, we do not have an income as we have to stop work, and we readily need money for miscellaneous treatment costs and alternative treatment. We buy critical illness plans to address this

There are more health risk that insurance can hedge, and a good primer on insurance is listed out in this FREE E-Book which I talked about here. If you are not sure what kind of health risk and what kind of insurance hedges those risk, this book helps you understand.

How much protection do you need to purchase? Will buying this protection cost a bomb?

Cheapest Term Life Insurance — How much you need to spend to get a 1 mil death coverage and 500k in advanced critical illness (it is affordable!)

The above table shows how much it would cost you to get covered for death, total permanent disability and advanced stage critical illness if you purchase the term insurance when you are less than 30 years old, 35 years old, 40 years old and 45 years old.

Getting adequate coverage can be pretty affordable! It would take $170 per month to insure $1 mil death and TPD plus $500,000 in late stage critical coverage at 30 years old.

MoneyOwl, an insurance portal that allows you to compare and purchase insurance plans of companies such as Manulife, Singapore Life, Tokio Marine, Aviva, NTUC Income, Raffles Health Insurance, has come up with a set of life insurance comparison tables.

These life insurance comparison tables lets you compare and easily see for the same coverage, how much annual premiums you will pay if you purchase from each insurer.

Let us go through each sections.

Term Life Insurance for Death and Total Permanent Disability (TPD) Protection

The first area of insurance protection, protects 2 areas:

the insurance assures your dependents that if you passed away, they have $X to maintain their life for Y years
the insurance assures a sum paid out if the assured suffers from permanent lost of both hands above the wrists, both feet or above the ankles, one hand or one foot, or that the assured is unable to perform 3 out of 6 “Activities of Daily Living”

For example, suppose the assured K has the following profile:

Earns $50,000/yr
Youngest child will be productive (graduated from university) in 22 years
Amount of outstanding debts other than mortgage is $2500
Cost of Education when required $180,000

The total amount of coverage that K requires, works out to be roughly $1,282,500, based on MoneyOwls death and TPD protection calculator. Roughly, the insurance will need to cover the number of years of income lost due to the death event, and the debts that K have.

The table below compares the term life insurance to age 65 for a coverage of $1 million. This is for a male, non-smoker :

Term insurance for men 2019 June — Comparison: Death, TPD for $1 mil coverage for Male at different age
** click to view larger image **

For Jun 2019, Tokio Marine have been the most competitive due to a massive ~~20-30 limited time discount~~. Update: I realize I made a mistake. Tokio Marine revised down their premiums for Term Assure (II) massively as a whole. This made their plan very competitive. Aviva also reduced their premiums for the quarter.

The annual premiums for the term life insurance plans change from time to time so do not take it that once you see it here, the figures will not change.

From time to time, some term insurance distributors will have discounts on premiums if you purchase a $1 million policy. The comparison tables have factored into the price above if MoneyOwl are aware of these discounts.

Use these tables to:

find out how much it will cost you to cover the amount you need
see how wide the annual premiums can be for generic coverage
find out which are the cheaper ones and more expensive ones

The younger you can get yourself enrolled the lower the annual premiums to pay.

The cheapest premiums for different age bands are also different. Aviva, FWD and Singapore Life looks to be the most price competitive.

If you wish to get coverage that is not $1 mil but less or more than this, it is possible. Go through their portal or contact them here.

The follow table compares the annual premium for death & TPD coverage for female:

Term insurance for female 2019 June — Comparison: Death, TPD for $1 mil coverage for Female at different age
** click to view larger image **

Again, the annual premiums for woman is cheaper with Tokio Marine due to the promotion discount.

Term Life Insurance for Critical Illness Protection (inclusive of Death and TPD)

Critical Illness Protection covers you, on top of the death and TPD protection mention previously, 37 major critical illness as defined by the Life Insurance Association (LIA).

These are illnesses that have reached advanced stage. Readers should be aware that there is critical illness protection for illnesses that are diagnose in the early stage. This is NOT that.

Typically the assured K tries to cover 3 to 5 years of his/her income and a sum of money for alternative treatment.

So if the assured K:

Earns $50,000/yr
Plans to have $100,000 for alternative treatment and out of pocket treatment

To be assured, K should be looking for a coverage of $250,000 to $350,000.

The following table shows the coverage for male for a sum assured of $500,000 to age 65:

advance stage critical illness Term insurance for male 2019 June — Comparison: Advanced Stage Critical Illness for $500,000 coverage for Male at different age
** click to view larger image **

For the quarter, FWD, Singapore Life and Tokio Marine are the most price competitive.

The coverage amount is less than a pure death & TPD, but the premiums is more expensive than death & TPD primarily due to the cost of the critical illness portion.

The following table compares the coverage for the female in terms of critical illness:

Comparison: Advanced Stage Critical Illness for $500,000 coverage for Female at different age
** click to view larger image **

Again, the annual premiums for woman is cheaper with FWD, Aviva, Tokio Marine and Singapore Life being the cheapest.

Compare, Get your Quote and Purchase Direct Today

You can look up, compare, then purchase the following term insurance direct from MoneyOwl:

Aviva
Manulife
Tokio Marine
Singapore Life
NTUC Income
Raffles Health Insurance

Get a quotation from MoneyOwl straight, and then the good folks at MoneyOwl will guide you through the process of purchasing:

Get MoneyOwl Term Insurance Direct >>

Note: If you are not so well verse in insurance protection, unsure whether the amount, or the kind of protection is what you need, yet you go to MoneyOwl because you think they will not hard sell you, you can talk to them.

While the process is DIY, they will be able to explain some of the nuances specific to the insurance protection segment you are asking. This will help you make the best protection decision.

You are in control all the way.

To purchase FWD Insurance, you can purchase the term insurance directly from them on their web portal here.

For Term Insurance of Smaller Amounts – Direct Purchase Insurance (DPI)

While the illustration shows term death and critical illness coverage of $1 mil and $500,000 respectively, you can vary the coverage based on your needs.

It does not mean the coverage is fixed.

However, MoneyOwl have shared that for term life insurance (death and TPD coverage only) that is less than $400,000, it would be more value for money if you purchase it directly from the insurers under the Direct Purchase Insurance (DPI).

The DPI is the government’s execution of one of the recommendation, to create an avenue for consumers like you and me to purchase term life and whole life insurance from the insurance company direct, and not have to go through agents.

All 12 insurers in Singapore have direct means for you to purchase, though they may be hard to find.

If the amount is $400,000 or more, or if you require critical illness coverage, then the term life insurance premium comparison table above is valid.

Explaining the Credit Rating of Insurance Companies

An insurance company credit rating is the opinion of an independent agency regarding the financial strength of an insurance company. An insurance company’s credit rating indicates its ability to pay policyholders’ claims.

The following table enables you to gauge the credit rating of insurance companies:

This article is a collaboration between Investment Moats and MoneyOwl. The views are of InvestmentMoats.com alone. I am an existing customer of MoneyOwl and recommend MoneyOwl due to the quality of the product, the service and the integrity of the people behind it.

Here are the Price comparison across the insurers during the Last Quarter in 2019 Mar

This is so that you have an idea of the price changes since last quarter.

Term Life Insurance – $1 million Coverage for Male and Female

Term Life Insurance with Critical Illness – $500k Coverage for Male and Female

Logs

2017 December Changes

HSBC Prices came down in the quarter. The prices were at least 17% higher last time around. We see some reduction in prices.

Prudential have reduce prices for Term with Critical Illness coverage in the quarter. Prices was at least 7% cheaper for life insurance with critical coverage. The plans without critical illness coverage stayed the same.

AIA comparison was taken out of the table. AIA secure Term Plus (II) Plan only provides fixed coverage duration for 5, 10, 20 or 30 years. In DIY Insurance’s comparison the terms are 25, 30, 35, 40 years.

Technically only the 30 years can be shown.

Also, since their plan do not includes total permanent disability (TPD), they were taken out of the comparison since it would not be apples to apples comparison.

Singapore Life is included. A new insurer is in town. Like FWD, in terms of their credit rating is low, all life insurers in Singapore are under the Policy Owners’ Protection Scheme, which protects up to a $500,000 cap on aggregated guaranteed sum assured.

Their prices are shown to be very price competitive.

2018 March Changes

AXA have reduced their premiums overall by 5.3% since last quarter across the various age band.

FWD insurance reduced their premiums for male term life insurance purchased when the male is 30 years old and below.

Singapore Life raised their premiums across all categories by 3.6%.

2018 June Changes

FWD insurance reduced their premiums for male term life insurance purchased when the male is 30 years old and below.

Singapore Life raised their premiums across all categories.

2018 Oct Changes

Aviva insurance premiums have went up since last quarter.

So has Manulife‘s premiums.

Both AXA and Singapore Life‘s Premiums have went down.

2018 Dec Changes

Does your Insurance Saving Plans (Endowment) give you 3 to 5% returns?

January 19, 2019 by Kyith 129 Comments

Insurance companies says that you can achieve higher savings returns from endowment, that it is a long term savings strategy. Are they as what they touted to be?

Insurance savings plans or Endowment plans are plans designed by insurance companies with an objective to provide and meet long term saving goals.

The assured (in this case you, or someone) pays the insurance company a fixed sum of money monthly, quarterly or yearly, or a one time amount.

The insurance company will:

Return you a sum of money upon maturity, which could be 15, 20 or 30 years. This is getting less common. Most insurance savings plans are more flexible.

Some endowment plans are designed to pay out after certain duration. (see above graphics as example)

An annual cash flow insurance endowment plan

Some endowment plans after the first few years will pay out an annual cash flow to the assured (see above graphics as example)

I am always fascinated about the returns of endowments.

They are sold to us as a great instrument to meet certain long term saving goals such as children’s University tuition fees, retirement.

The illustrations by the insurance agents and company often tout that their insurance saving plans yield 3 to 5% returns.

As a data driven person, I wonder if the reality of the returns is close to this.

If they are close to this range of returns then they are decent saving products. They are doing what they are being touted.

However, if they do not then the majority of the savers are being sold a hope.

I grew skeptical when two of my acquaintances told me their saving endowment yields them a low amount in return.

Two Examples of Supposed Low Insurance Savings Endowment Returns

One of my acquaintance is a project manager.

He said that his endowment from Great Eastern is losing money since he bought the savings policy in 1993 and matured in 2013 (20 years). I took a look and it turns out he is not losing money.

But the annualized return is 0.9%.

I was taken a back by that figure. I thought I have not factoring in some cash back.

Another reader then shared with me her policy bought during the period. Her calculation was that it yields here roughly 1%.

It should be noted that this reader of mine was rather well verse in finance so I wasn’t expecting any mistake when she say the returns were low.

I was astounded with the returns shared with me.

Endowment primarily invests in fixed income or bonds and for the majority the rates have been falling which means values are going up.

Also in this period you could possibly still invest in 10 to 15 year duration bonds yielding 3 to 4%.

This kind of return has to be a mistake. Indeed, upon re-evaluating, the returns aren’t THAT bad as far as 1%. It is how we derive the returns. If we take it as a lump sum return, it looks bad, but the premiums are paid over 10 to 18 years, so the calculation of returns is different

Reader’s Policy 1

My reader is kind enough to provide the following:

Name: Manulife
Start Year: 2002
End Year: 2007
Duration: 5 Years
Premium Paid: $10000 lump sum premium
End Value: $11700
The returns you get: 3.2%
Does the plan have any cash back or return: No cash back

Reader’s Policy 2

Name: Manulife
Start Year: 2003
End Year: 2013
Duration: 10 Years
Premium Paid: $6000 annual. Total 60,000
End Value: $68,000
The returns you get: 2.76%
Does the plan have any cash back or return: No cash back

The returns from these 2 savings plans are not high but also not as low as they described. The returns are close to the corporate bond of safer blue chip companies.

A Family Member’s Great Eastern Policy

Here is an endowment bought by a family member:

Name: Golden Lion Endowment
Start Year: 1991
End Year: 2009
Duration: 18 Years
Premium Paid: $1244 annual for the endowment portion.Total for 18 years $22392. Rider and permanent disability another $356 more
End Value: Roughly $29000
The returns you get: 2.96%
Does the plan have any cash back or return: Yes. But they are reinvested back. (Yr 3 1.5k, Yr 6 1.5k, Yr 9 3k, Yr 12 3k, Yr 15 3k)

It is strange that whether it is 5 years, 10 years or 18 years, the returns per year based on XIRR we get are quite similar (3.2%, 2.76% and 2.96%). I would expect the returns for a longer duration savings endowment to be higher.

Our Problem: We do not have enough data on returns of endowment saving plans out there

The problem for most of us is that the actual returns that policy holders get are not readily available.

Insurance companies only revealed the returns of their participating policies.

However, that is not the returns the policy holders enjoyed. You still have to deduct distribution costs from these investment returns.

If the returns are around 3 to 5%, I like it.

Not that I like it for myself but for a group of wealth builders who:

Are very risk adverse about losing money
Does not want to be bother about taking up the investing responsibilities
Is OK to lock in their money for an extended duration
Earns very well at his job and able to put away more money than most of us

For this group of wealth builders, if you can give them such a return, its not too bad.

The problem is that non-guaranteed returns projection is very, non-guaranteed.

Let us Crowd source Insurance Saving Returns and Work Together

I am reaching out to you.

We would like to consolidate a data bank of past matured endowment returns so that, we, the wealth builders, can be better informed.

This table summarizes the crowd sourced policies that readers and friends have contributed:

Click to view a larger table

You can comment below or email me at [email protected] and tell me your thoughts of past endowments you bought, or friends, parents or acquaintance bought.

Do provide the following :

Name of policy
Start year
End year
Duration
Premium paid (whether it is monthly, quarterly and yearly)
What is the end value
The returns you get
Does the plan have any cash back or return
If there are cash back how much is it

I am looking for policies that have matured.

This means the policies that you have closed down, and received terminal bonuses for.

I am looking forward to hear from you.

Let’s make this a project for you and me.

Finding Someone to help you Re-configuring Your Financial Life

Through the years, I got questions about how they bought these policies when they were less informed and have problems sorting out whether they should cancel or not these policies.

I think a lot of times the answer is that they should not do such a drastic thing.

These policies can be part of your holistic wealth building plan.

But you need to sort out your overall wealth building plan.

You can do it the do it yourself (DIY) way, or you could also sort out a trusted financial planner. The problem about the later is that its tough to find one out there.

Wilfred Ling

If you want my personal recommendation, you could work with my friends at Providend, who are Fee Only Financial Planners or you can work with my friend Wilfred Ling, who is a fee based financial planner. Both have appeared enough in media publications dispensing holistic financial advice as well as nuance ones. Check out some of the knowledge I absorbed from Wilfred here, here.

The link to Wilfred is an affiliate link where you can get 20% off his advice package. Wilfred may or may not be the right fit, but if you set up a call with him, with his experience he could ascertain whether you could DIY your way through, or his help would be more beneficial to you. If things do not work out, you do not have to pay anything.

Usually readers I know gain a lot from that first phone call as well.

Reader’s Contribution of their Matured or Soon to Matured Insurance Endowment Savings Policies

From this point in the article on, you can check out the name of the insurance endowment, and its return over the duration contributed by readers from the first time round.

If you contribute your friends and family’s policies to the crowd sourced data, I will add them below.

If you see a spreadsheet table showing an XIRR. That is my standard of measuring the return of an insurance endowment over the period.

Think of XIRR as a methodology of computing the various cash inflow and outflow between you and the insurance plan such that we derive the annual interest rate of this insurance policy.

The following is a contribution from a Facebook reader. He is a rather shrewd investor so its not likely he will missed out much details. But this policy that he provided takes the cake. I don’t think we missed out much but this happens to be a money losing endowment!:

Name: Great Eastern S-Lion
Start Year: 1996
End Year: 2011
Duration: 15 Years
Premium Paid: $739.60 annually
End Value: $5155.92
The returns you get: -11.65% CAGR
Does the plan have any cash back or return: No cash back

A contribution from a Reader: The $5818 maturity value is similar to the guaranteed + non-guaranteed value on the policy Benefit Illustration. TM does live up to its reputation of meeting bonus forecasts.

Name: TM Asia EnRICH Plan
Start Year: 2008
End Year: 2013
Duration: 5 Years
Premium Paid: $5000 lump sum at start
End Value: $5818
The returns you get: 3.08% CAGR
Does the plan have any cash back or return: No cash back

This is a Facebook Reader with his father’s 20 year Endowment which just matured this year!

Name: Manulife
Start Year: 1994
End Year: 2014
Duration: 20 Years
Premium Paid: $2062 annually
End Value: $56,000
The returns you get: 3.11% CAGR
Does the plan have any cash back or return: No cash back

An email reader sends in an AIA endowment:

Name: AIA
Start Year: 1996
End Year: 2014
Duration: 18 Years
Premium Paid: $1226 annually
End Value: $29,135
The returns you get: 3.17% CAGR
Does the plan have any cash back or return: No cash back

A reader send in his 21 year AIA endowment with 2 years left to mature. The current surrender value is $45,000 From my calculation, which I hope to get it right, it seem to just break even! But the projected final amount will be around $60,000.

Name: AIA
Start Year: 1995
End Year: 2014
Duration: 19 Years
Premium Paid: $3,600 annually
End Value: $60,000
The returns you get: 3.07% CAGR (including 30k cash back)
Does the plan have any cash back or return: $5k cash back every 3 years, total $30,000

A reader send in his mum’s recently matured Great Eastern Endowment plan.

Name: Great Eastern 20 Year Endowment With Compound Revisionary Bonus
Start Year: 1994
End Year: 2014
Duration: 20 Years
Premium Paid: $1,081 annually
End Value: $27,127 received
The returns you get: 2.72% CAGR
Does the plan have any cash back or return: 3 withdrawals in 1999,2005,2010

The reader then provided me with another of his mum’s 9 year NTUC policy. The returns are good!:

Name: NTUC Living Policy
Start Year: 2005
End Year: 2014
Duration: 9 Years
Premium Paid: $9,000 lump sum with CPF OA
End Value: $12,865 received
The returns you get: 4.05% CAGR
Does the plan have any cash back or return: No

This reader sent in a 20 year NTUC policy. I am starting to think NTUC have the most lucrative historical policies.

Name: NTUC Income Anticipation
Start Year: 1992
End Year: 2011
Duration: 20 Years
Premium Paid: $661 per year
End Value: $19,173 received + $2,000 received at 3rd and 6th year (the rest of cash back reinvested)
The returns you get: 5.35% CAGR
Does the plan have any cash back or return: A $1k cash back every 3 years, first 2 years cash taken the next 4 reinvested

2015 July 08: A reader was kind enough to let us share 2 of his 25 year old endowment policies. These policies have matured.

Name: Great Eastern Lion Endowment Plan
Start Year: 1990
End Year: 2015
Duration: 25 Years
Premium Paid: $533.70 a year (sum assured $10,000) and $98.60 a year Living Assurance Rider
End Value: $14,842 received + $5,000 received at 5th,10th,15th and 20th year
The returns you get: 3.84% CAGR
Does the plan have any cash back or return: A $1k cash back every 5 years, last year $2k

Name: NTUC Special Endowment Plan
Start Year: 1987
End Year: 2012
Duration: 25 Years
Premium Paid: $576.00 a year
End Value: $22,403 received
The returns you get: 3.25% CAGR
Does the plan have any cash back or return: NA

Name: AIA Financial Guardian
Start Year: 1993
End Year: 2016
Duration: 24 Years
Premium Paid: $483.00 a year (the premiums paid for the endowment without the rider)
End Value: $21,971 received
The returns you get: 4.81% CAGR
Does the plan have any cash back or return: Yes but not taken

Name: GE Maxsave Enhanced
Start Year: 2006
End Year: 2016
Duration: 10 Years
Premium Paid: $20,000.00 a year (5 years)
End Value: $132,000
The returns you get: 3.51% CAGR
Does the plan have any cash back or return: No

Name: AVIVA MoneySmart (RP) – Ladies
Start Year: 2008
End Year: 2018
Duration: 10 Years
Premium Paid: $1,210.20 a year (10 years)
End Value: $13,992
The returns you get: 2.62% CAGR
Does the plan have any cash back or return: No

Name: NTUC Income CAPITAL PLUS (CPN32)
Start Year: 2016
End Year: 2018
Duration: 2 Years
Premium Paid: $150,000 Single Premium
End Value: $155,693
The returns you get: 1.88% CAGR
Does the plan have any cash back or return: No

In 2019, some readers sent me more policies.

This kind lady sent me an NTUC insurance endowment she bought for her child when the child was 2. Now the child has some education fund.

Name: NTUC Education Plann
Start Year: 1999
End Year: 2018
Duration: 19 Years
Premium Paid: $126.25/mth
End Value: $43,665
The returns you get: 4.01% CAGR
Does the plan have any cash back or return: No

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often.

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The AXA Retire Happy Plus Increasing Payout Retirement Plan

December 9, 2018 by Kyith 7 Comments

I am going to cover some of these insurance retirement plans, since I have the resources to do so.

I am doing this in order to let readers see it from my perspective.

This is so that, if you met up with an adviser and this is put in front of you, you got another way of looking at it.

Since I written a whole section on retirement planning & financial independence, it does make sense for me to view these plans, putting those considerations in mind.

AXA Retire Happy Plus belongs to a class of limited payout retirement plans.

However, specific for AXA Retire Happy Plus, there is an option to accept payout over the lifetime (till age 99 years)

The general idea is:

they are an accumulating plan then during a predefined age, it starts paying out cash flow till the assured passed away or when the end of the tenure has reached
the cash flow payout contains a guaranteed component and a non guaranteed component
the non guaranteed component will depend on the investment performance of a participating fund
both the guaranteed and non guaranteed cash flow payout increases over time, at 3.5% per annum to combat inflation
there is minimal death benefit since this is not the overall goal of the plan. Should the assured passed away, the death benefit is 101% of the premiums paid
a total permanent disability multiple rider that pays out in lump sum additional 5 times of your first selected retirement income upon diagnosis of TPD. Like all TPD policies, it is in effect till 65 years old
premium waiver riders can be attached to the plan (read what are premium waivers)
you can choose to keep the cash flow payout with them, and you will earn a non guaranteed interest rate, benchmark against a basket of fixed deposits

The following illustration from the brochure explains things better:

Sam choose to contribute premiums over 25 years and chose to payout 5 years later at age 61.

Sam can choose different duration of premium payments from 5, 10, 15, 20, or 25 years or a Single Premium (one lump sum).

Sam can choose when the retirement payout starts provided it is 5 years away from the last premium payment.

In this illustration, Sam chose to pay out all his accumulated assets over 15 years as cash flow. Same has a choice of 15, 20 years or lifetime.

At this point I think AXA Retire Happy is a rather flexible plan. A lot of plans leave me wanting because you cannot contribute a lump sum or that you cannot space out the distribution over the lifetime.

Regular Contribution, with 20 year payout starting at 65 years old

For some future comparison, we generate for a 40 year old (close to what I am going through), paying 10 years of $50,000/yr premium, and starting our cash flow distribution at age 65, for 20 years:

You notice that both the payout starts low before increasing over time.

Some retirees will like this because they see the 3.5% escalation as protecting their purchasing power over time.

But how do we measure the performance?

Measuring the Internal Rate of Return of the Plan

The rate of return that you will get, depends on the performance of the participating fund.

When you purchase a cash value insurance policy like this one, you are transferring the investment management to the insurance company.

I usually use the above diagram to illustrate how you should look upon your wealth management. The same concept is applicable to your insurance policy that has a cash value.

You feed your policy by paying the premiums through your disposable income. The insurance company takes your premiums and deploys it into equity, bonds and cash. The income earn from equity and bonds is fed back within the fund itself.

The manager determines how much cash back it gives back to you.

The table shows the rate of return of the participating fund for AXA Retire Happy Plus. In some years it is positive, and in some years it can be negative.

I want you to note the average performance over the past 3, 5 and 10 years.

Your rate of return, is determined by the rate of return for the participating fund.

In the benefits illustration, you will see the rate of return.

The illustrated yield at maturity, is equivalent to the internal rate of return I usually compute.

What it means is that if your participating fund achieves a rate of return of 4.75%, your internal rate of return over this period (40 years old to 84 years old, 44 years) is 3.75%/yr.

This 3.45% includes the 3.5% inflation escalation.

If the participating fund yields 3.25%, then the rate of return is 1.92%.

Think of internal rate of return as the “interest rate” you earned for contributing your money over this 44 years, and what you get per year.

With this you can compare it against your Singapore savings bonds or Singapore government securities.

The 10 year yield of the latest Jan 2019 Singapore Savings Bond is 2.45%.

What this means is that potentially the Singapore Savings Bond would yield more than this AXA Retire Happy Plus.

Based on the historical returns of the participating funds, it might not hit the illustrated 3.75%/yr. Of course, we won’t know about the returns of the future but we can reference from the past.

What if we only compute the internal rate of return of the guaranteed portion?

We computed the internal rate of return of the guaranteed portion and it is 1.29%.

This means that if you contribute and withdraw from this policy and it only earns the guaranteed amount, its like earning only a 1.29% interest per year.

I think your returns should sit somewhere between 1.92% to 3.75%.

The Expenses and Costs to the Policy Holder

Based on the illustration, the policy holder will pay a premium of about $499,973 in total over 10 years.

The total distribution cost, which is the cost from the premiums that are used to pay for advice, commissions to your adviser and the firm, is $53,617.

That is about 10.72% of the premiums.

The total expense ratio shows the expense incurred from managing the participating fund. At an average of 10% for the past 3 to 5 years, that looks rather high, compared to some of the other participating funds.

What about a Lump Sum Premium, Life time Distribution?

Due to its flexibility, I thought it is appealing for me to have the following permutation:

Lump Sum Single Premium Contribution
Distributing Cash Flow for Lifetime

So I got my friend to come up with a single premium quote for $200,000 in premium at 40 years old and start taking annual cash flow from age 50 to age 99.

In all honesty, after getting this, I thought it would be better to pay a single premium at age 45 years old and then take distribution 5 years later at 50.

In that case, it would make this really look like an annuity. But I shall not trouble my friend to do this.

From the income schedule, at 50 years old I could get an annual income of $3,361 to $6,771.

This will increase overtime to a range of $18k to $36k at age 99. I think I will struggle to think what I can do with $300/mth

The internal rate of return, depending on the investment rate of return, is higher at 2.02% to 4.05%.

It is higher compared to the previous regular premium quotation.

I think what made it lower was the escalating nature. Usually, if a policy have this feature, they will start the income distribution at a lower base. This is the same for the CPF Life with Escalating feature.

The yield on the single premium Retire Happy Plus looks far lower than contributing to the CPF Life annuity.

I believe the main reason is, unlike the Retire Happy Plus, CPF Life pools the people’s resources together and thus you will receive mortality credits, which boost the return.

The distribution cost on this single premiums is $11,647. Against a policy cost of around $200,000, the distribution cost is 5.8% of the premiums paid, much lower than the 11% for the previous regular premium policy.

Suffice to say, I feel compelled to contribute to CPF Enhanced Retirement Sum then this policy.

Summary

While on paper, I like the flexibility of contribution and distribution, the internal rate of return, when compared against similar retirement insurance plans, are not the highest.

You could be mistaken that the escalating payout feature is a major advantage.

The internal rate of return of the policy based on guaranteed, non guaranteed returns tell us that if we compared against a non inflated payout product, the non inflated payout product might give you more cash flow over time.

This policy could be modeled as a single premium annuity, but it does not give you that return.

The upside of a retirement plan is that, for an annuity, if the assured passes away, you might only get a smaller bequest.

For such a retirement policy, should the assured passes away, the remain death benefit or cash flow, would be passed to the next generation.

I will probably profile another similar retirement plan next week, then we see how that plan measures up to this one.

A plan like Retire Happy Plus is meant more for retirement distribution.

Whether it is suitable for you or not, it will depend a lot on your overall plan. From my experience, plans like this do not work on its own, but as part of a retirement strategy.

If you are unsure such a plan fits into your overall strategy or not, yet you would like someone that is competent, trustworthy enough to review your retirement strategy, let me know.

I can put you through to my friends who have integrity, and may be able to help.

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