Investment Moats

Comparing Money-Weighted Returns Versus Time-Weighted Returns

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MWRR/XIRR is a different way of measuring your returns compared to the traditional TWRR/CAGR. Both have their strengths and each has its weaknesses.

There are usually a few prevalent ways to see if your portfolio or net wealth is performing well, versus others.

But the most common debate has been Time-Weighted Rate of Return (TWRR) and Money-Weighted Rate of Return (MWRR).

Another name for MWRR is also the Extended Internal Rate of Return (XIRR). TWRR is also known as Compounded Average Growth Rate (CAGR).

The performance difference between TWRR and MWRR is based on what has a heavier weight

  • TWRR/CAGR: Weighted more heavy to time. So those transactions that are older, their performance will matter more than those transactions that are younger
  • MWRR/XIRR: Weighted more heavy to money. So those transactions that are larger in value, their performance will matter more than those transactions that are smaller in value

So which one is better?

The answer is that each has its own advantages

  1. TWRR/CAGR is good if you wish to show the returns over different time frames, with no bias towards the investment actions of the investor/fund manager
  2. MWRR/XIRR is more applicable if you wish to show the quality of the investor/manager
  3. TWRR/CAGR typically shows the performance of the investment/stock/REIT/bond you wish or bought into. MWRR/XIRR shows the investment decision you made.

Let us go through some examples hopefully, I can explain well.

TWRR/CAGR is Great to Show a Model Portfolio’s Performance Returns

Dimensional Emerging Markets Large Cap Index 2000 to 2019 (19 years)

The chart above shows the growth of wealth of $1 invested at the start of 1st Jan 2000 into a Dimensional Emerging Markets Large Cap Index and your wealth at the end 20 years later.

Your $1 becomes $6.48. That is seriously good returns!

If we use TWRR/CAGR to measure the returns is 9.8% a year. If you ask most investor they will be happy with this return. TWRR is great at showing model portfolio returns.

Factsheet of iShares Core MSCI World UCITS ETF

TWRR/CAGR is what you will see in all your unit trust, hedge funds factsheets.

In the above factsheet, it shows the annualized performance. If you hold the ETF for this long, say 3 years, your CAGR is 12.42% a year. If you look at the label of the chart, it says a growth of $10,000 USD since inception.

In other words, there is a starting point to this measurement.

If there were No Uneven Cash Flows in Your Portfolio, your MWRR/XIRR will be Equal to your TWRR/CAGR

Now, if we do not factor in when you invest your money, all these returns will be the same.

XIRR calculator computing the same Dimensional Emerging Market Large Index from 2000 to 2019

The table above is an XIRR calculator I have created in Google Sheets. It basically computes a stream of net cash flow (column E) and a series of corresponding cash flow date (column B) and throws out the result.

If you like to try out this XIRR spreadsheet, you can make a copy of my XIRR calculator here and go to the Manual XIRR tab.

In Excel or Google Sheets there is this XIRR formula that you can use.

So I contribute $1 into the portfolio on 1st Jan 2000 and I sell everything on 30th Nov 2019 and get back $6.48.

You can see the XIRR is 9.83%, which is the same as the TWRR/CAGR returns of 9.8% a year.

If you have invested at the start and there are very little cash flow movements, then your returns should be pretty close to the model portfolio in the spreadsheet. However, this is near impossible.

Usually, the fund is incepted in 2003 but you only got to know the fund in 2015. You could still measure the TWRR from 2015 to 2019 to see your compounded return in the past 5 years.

MWRR/XIRR Allows You to Know the Quality of Fund Manager or Your Own Investment and Capital Allocation Decision Making

Suppose for the same $1 we put it in the hands of the investor.

The Investor decides to put in $0.50 at the start in 2000 and $0.25 near one of the lowest points in Feb 2009 and the rest of $0.25 in 2014 after he grew so impatient that his money is not compounding.

The XIRR when we split the money into 3 batches.

We get an MWRR/XIRR of 9.7%. This is not too bad. Firstly, instead of $6.48 the money only grew to $4.26 because a lot of the money was put into work much, much later. The money did not have time to compound.

You can think of this 9.7% as the “interest rate a year” you earn for this stream of uneven cash flow over 20 years.

The MWRR/XIRR return is pretty close to the TWRR/CAGR because this investor made some good decision to only invest at a rather low price.

Now let us switch the investments around. This time let us see the return if the 2008 amount is more.

More invested in 2009 compared to the other 2 period

The XIRR is higher at 9.76%. Surprisingly, even a better decision to

  1. Wait until the market crash into the deepest part
  2. Putting in the majority of the money at that point

Didn’t earn you a better return. In fact, if we reviewed on Nov 2019, your absolute cash you get back was lower ($3.38 vs $4.26 or $6.48).

We missed out on a lot of the compounding.

More invested in 2014 compared to the other 2 periods

Finally, 2014 was not the best time to invest. In 2015, emerging markets were not doing too well and the investor’s money went into a tailspin.

Still, the XIRR is 9.26%. It definitely suffered compare to the previous 2 but not by a lot. In absolute money terms, $2.93 is lower than all the previous one but not too different if you time it well versus the one where you invested most in 2008.

I hope through this small exercise, you can see that if you break up the cash flows up, your returns will differ.

I think the most important part of this exercise might not be the difference between MWRR vs TWRR but if you invest and let time do its magic.

MWRR/XIRR allows you to factor in the Cash Drag in Your Portfolio and Your Discretionary Fund Manager’s Underperformance

When you read what people posted online about your returns, you got to ask what goes into the computation. If someone factors in all the idle cash in their portfolio, then it tells a different story from one that did not.

So let us go back to the Dimensional Emerging Market example where we invest $1 at the start in 2000.

Suppose I am scared to invest and decide to keep another $1 on the side. The purpose of this $1 is to build towards my financial independence but I was afraid of the volatility and in general, I just started out my investing journey so I do not know what I was getting myself into.

So for this $1 I put in average savings yielding 1% a year.

If you factor in this, your returns will look like:

Factors in $1 more kept in cash at 1% a year interest for 20 years

The MWRR/XIRR gets reduced overall to 7.00%.

The MWRR/XIRR reflects the wealth-building abilities of an individual or an entity better than TWRR/CAGR.

It is also myopic to tell people “Hey, I have invested in a fund that grew from $1 to $6.48!” when this is just 10% of your money, while the rest is earning 2% a year.

Your returns will look like:

$1 invested in Dimensional Emerging Market $9 invested in a 2% a year instrument

If you factor in the rest of the assets that were too conservative or are losing money, the overall portfolio MWRR/XIRR goes down to 3.5%.

A lot of the time, your overall compounded rate of return is determined by your asset allocation. You may have assets performing very well but largely speaking, most of your money is not doing too well.

MWRR/XIRR Allows You to Measure a Portfolio Made Up of Different Assets with Cash Flows of Different Timing

A lot of times, we received comments from readers or clients that our returns are not good enough.

There may be some truth to that.

However, I would also question them back: How do you measure the performance of your ENTIRE portfolio against what we put your money into?

Our solutions are very transparent and simple. If you need a 60% equity, 30% bonds, 10% cash, we put all your $5 million split into these allocation. End of each year, we can compute your returns based on exactly how much you put in when you put in.

For some folks, their “portfolio” can make up of things like this. Trust me, I am simplifying things sometimes. I have not added to the number of cash-value policies people usually have.

When you are managing this yourself, you are the investment manager and possibly the financial planner all rolled into one.

In order to compute the returns, you got to keep track of the cash inflow and outflow for each of these assets. When is the transaction and how much flowed in and out?

For most people, you cannot be the investment manager because life is already busy as it is. I wonder how many investment managers or financial planners help you with this.

As a firm, we cannot evaluate past returns well because of incomplete transaction records.

However, there is a bare minimum you could do if you arrange your assets well.

In the diagram above, we can arrange how we flow our cash through 2 accounts. The DBS account would be like an “Investment Cash” account. when you receive your pay or income from your business, it flows to your OCBC account.

You can periodically fund your portfolio by transferring your money from the OCBC account to the DBS account. When your investments need funding, the funding will come only from the DBS account. Could you have more than 1 savings account in your Portfolio (other than the DBS Account)? Yes, you can. You would just need to compartmentalize the roles of these accounts well.

The beauty of this is that you only need to take note of

  1. When you transfer from OCBC to DBS and how much
  2. When you transfer from DBS to OCBC and how much

You do not have to take note of a lot of the cash flows between each of the assets inside your portfolio. Just those 2 mention before. This makes it much more livable to keep track.

To compute your MWRR/XIRR, you record down the current value of your properties (net of mortgage), all your managed accounts, deposits and treat it as you will sell them.

So if you have consistently contribute $50,000 a year for 20 years, you can tally against the cash flow received from the DBS account into your OCBC. The XIRR/MWRR of 4.64% shows the level of your wealth management expertise.

Summary

The biggest problem we faced are usually miscommunication.

Why are returns so low? Perhaps, it is due to what goes into the calculation of the returns. Often it is due to lack of awareness of the time period.

If not it is what we are comparing against. Exclude all the poor performing assets or the assets that you cannot remember, but a prospective investment against the best performing fund you owned.

This miscommunication is the most prevalent among the property investing crowd. I got so many comments saying my property post is overly optimistic, too pessimistic at the same time.

Each individual property is unique. What is the net of downpayment, renovation, furnishing, constant maintenance capital expenditure, paying agents, collecting rental, property taxes, air-con servicing, seller stamp duty, buyer stamp duty, insurance?

MWRR/XIRR is not perfect but it allows you to measure the returns of apples and oranges.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. 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
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Singapore Savings Bonds SSB February 2020 Issue Yields 1.75% for 10 Year and 1.54% for 1 Year

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Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The February 2020’s SSB bonds yield an interest rate of 1.75%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 1.54%/yr.

$10,000 will grow to $11,772 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 1.76%/yr for 10 years and 1.52%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds, is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. 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
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Changes to the Bonus Interest of DBS Multiplier. 1 Good 2 Bad

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On the first day of 2020 and I have already got my first negative news.

Last year May 2019, I wrote about how you can have greater interest in more of your savings if you fulfill one additional criteria for your DBS Multiplier Account. (Read Why I continue to save with the Boosted DBS Multiplier)

It seems there is some bad news on the horizon, at least for myself.

So here are the changes to DBS Multiplier

Changes to the DBS Multiplier Account

Update: There were some clarifications done on DBS’s Facebook Group the Burrow. I will paste the clarifications here:

If I were to convert to English, it means that dividends from your local stocks, bonds, and Singapore Savings Bonds held in your CDP will be under the income category now.

The second thing is that if you have only fulfilled the salary credit plus 1 category of transactions, the interest is applied on only $25,000 instead of $50,000.

If you manage to satisfy 2 spending category and above, the bonus interest is applied on $50,000 still.

To make it easy, you read what I have written against this infographic in the last article.

DBS Multiplier Bonus Interest Rate 3
Ignore the “This is New”. That was in May 2019 and not valid anymore.

Here is Roughly the Impact

  1. If you just satisfy the minimum of salary credit and 1 more category of transactions, the amount you can earn interest on is halved. This is NOT GOOD.
  2. For those that previously do not qualify for salary credit, the interest from your Singapore Savings Bond Ladder (refer to my past DBS Multiplier article) or if you have consistent almost monthly dividend income, DBS Multiplier is unlocked for you. This is because, at the minimum, you have to credit salary into any DBS/POSB account. The dividends/interest income now qualifies on top of your work income. This is GOOD.
  3. If you qualify for the current Investment category because you get consistent monthly dividend income or do the Singapore Savings Bond Ladder, you lost one category. You will qualify for Investment if you purchase their product. This is NOT GOOD.
  4. Your effective interest might be reduced. This is a bit vague because they did not say what happens if you satisfy salary credit + more than 1 category of transaction? Do you earn a different bonus interest on the first $25,000 and the next $25,000 or the same bonus interest on $50,000?

There is some good news for you, and yet for some, this is not good news.

If you have a home loan mortgage with DBS, insurance or investment, plus credit card spend with them but do not have salary credit, you could have a way to engineer the income with the Singapore Savings Bond ladder.

You can now earn higher interest on $25,000 to $100,000 of your money.

However, if you are like me, who qualifies for the Investment category due to dividends and interest income, you just lost one category. This means that DBS Multiplier will still work but the interest is applied only on $50,000 instead of $100,000.

My sensing is that this move would push me to try and qualify for one more category that is tougher.

These categories would either be home loans, investment (the Manulife products kind) and insurance (the Manulife products kind). It pushes us to their higher-value products.

If this is too much for you, its time to look for some alternatives. Personally I am disappointed with the change in my situation and the timing of it.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. 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
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

Supplementing Your CPF Life’s Income with the RetireWise Bundle

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When we cross over the age of 40, we think about certain aspects of our lives more compared to when we are 30.

Adequate savings for kid’s education is something that is on your mind as you watch your kids grow older. The adequacy of your retirement is another aspect.

And of course, whether you are able to live long enough to earn the money that is required for both.

The Top Things We Think About in Retirement Income Planning

Advisory firm MoneyOwl had these conversations with those who are looking to secure their retirement pretty frequently.

They often tell MoneyOwl these are some of their top concerns:

  1. They need certainty of income
  2. Wish to see that their capital to be intact
  3. When they are in retirement, their medical risks are addressed

Do you agree with these concerns raised by those planning for retirement?

In my experience, listening in on the experiences shared by the advisers at my workplace, settling on these 3 concerns rest pretty high on the priority list.

The solution to their problem is very simple: Put their wealth into assets that grow over time, then spend a reasonable smalle percentage of their wealth.

If you have $10 mil in wealth and you need $100,000 a year in income, a lot of the products out there will work for you. This is because you will likely only spend 1% of your wealth. If you deploy your wealth in assets that grow greater than that, the problem is solved.

However, for many of us, it will be quite challenging to build up $10 mil or 1% is too low of a percentage to hit by the time we retire.

The biggest problem will be what do you put your wealth assets into that will keep your capital intact and provide income.

Integrating Public Retirement Schemes with Private Retirement Schemes

The most appropriate solution for the vast number of people is a combination of making good use of government schemes and deploying your wealth into appropriate financial solutions.

MoneyOwl designed some pretty great bundles for

  1. Children Protection
  2. Children Education
  3. Young Working Adult Protection

These bundles are made up of insurance products from various insurance companies. If you do not know how much you should be insured for as a young adult, or for your newborn, MoneyOwl’s bundles have provided a good baseline for you to ensure that you can secure adequate protection.

This time around, MoneyOwl attempt to tackle your retirement needs with their RetireWise Bundle.

In this post, I will try my best to deconstruct this RetireWise bundle.

How Does RetireWise Work?

 Retirees have to tackle 5 main challenges:

  1. Longevity risk – The risk of running out of money versus your life
  2. Inflation risk –  The risk of decreasing your purchasing power
  3. Market risk –  The risk of not having the adequate amount you need, due to market volatility
  4. Withdrawal risk – The risk of overspending in your retirement years
  5. Healthcare risk – The risk that you will not be able to afford the medical care that you require

Notice that what retirees have identified as key concerns (in the top things they think about section above) in retirement is very different from this list.

They are looking for solutions that address all 5 risk areas when in reality, retirement solutions usually tackle longevity, inflation, market risk to varying degrees. #4 Withdrawal risk is address by financial planning and coaching. #5 Healthcare risk is address by having adequate healthcare coverage.

To address #1 to 3, a retiree requires income in retirement.

The main bulk of this income would come from your CPF Life.

Your CPF Life is an annuity that provides you an income as long as you are alive. We contribute to our CPF so that in the future, the income stream from this annuity will pay for our essential expenses.

But for a lot of us, the income from CPF is not enough. We require more income for our other expenses on top of the essentials.

In RetireWise, MoneyOwl augment your income from CPF life with an insurance solution that provides an income for 20 years.

  1. The majority of this income is guaranteed with the other portion non-guaranteed. In this way, you can have reliable income for 20 years.
  2. After the 20 years of income, there will be a lump sum at maturity. This sum is forecast to be greater than your premiums committed. This lump sum should provide you with income for another 12 years.
  3. Your premiums will go towards a long term disability care insurance that augments the existing CareShield Life in the event you cannot carry out 3 of the 6 activities of daily living (ADL).
  4. It is made up of a retirement endowment product, an investment fund, and a long term disability care insurance

This does sound very confusing so let use a case study to explain how all the cash flows will flow.

Let us take a look at how RetireWise can aid Mr. Tan in planning for his retirement.

Mr. Tan’s Case Study

Mr. Tan is currently 45 years old and he has this inking to retire at 60 years old. He decides to work with MoneyOwl by purchasing the RetireWise bundle.

Mr. Tan saves $600 a month for 10 years. His total premium paid is $72,000. After these 10 years of premium payment, Mr. Tan waits for 5 years before receiving his first pay-out.

illustration of the cash flows that Mr. Tan will pay and the cash flows that Mr. Tan will get
The cash outflow in premiums that Mr. Tan will pay and the cash inflow that Mr. Tan will get.

At 60 years old, Mr. Tan received a lump sum of $8,000. This is non-guaranteed. He will also start receiving $500 a month from age 60 to age 80 (20 years). Out of this $500 a month, $400 is guaranteed and $100 is non-guaranteed.

At 65 years old, Mr. Tan will start receiving his CPF Life annuity pay-out. The amount of pay-out will depend on which plan he selects from Basic, Standard, and Escalating.

At age 80, his $500 a month pay-out will stop, he will still have his CPF Life annuity income, and RetireWise bundle will give him $86,000 in one lump sum. This is non-guaranteed.

Now let us see how the cash flow works in detail.

How long would Mr. Tan pay for the Premiums and have to wait before getting the income

For most policies, there will be a period where you will not receive a pay-out.

I called this the Gestation period.

You will have to fund RetireWise for a period of time. (you can vary the tenure of this payment at the start)
You will have to fund RetireWise for a period of time. (you can vary the tenure of this payment at the start)

In the timeline above, Mr. Tan contributed $600 a month, or $7,200 a year in premiums for 10 years.  If you prefer to contribute a lump sum instead, it is also possible. However, the projection will run a little different.

Within the first 3 years, MoneyOwl will rebate the customer an estimated $1000.

This $1000 comes from the commission rebate of the insurance product that MoneyOwl uses for the retirement recommendation. For most insurance products, MoneyOwl rebates 50% of the commissions after expenses.

Thus, you can see it as Mr. Tan is getting cash flow immediately.

There will be a period of 5 years where Mr. Tan will not contribute any money and no money will be paid out.

Mr. Tan’s Annual income and the lump sum cash inflow he will get

After the Gestation period, Mr. Tan will start to receive his income.

Income for 20 years, in-between 2 lump-sum payouts

There will be a guaranteed cash income of $400 a month or $4,800 a year plus a non-guaranteed income of $1,200 a year.

This guaranteed and non-guaranteed income would last for 20 years. Mr. Tan has the option to change the monthly income pay-out to 5, 10 or 15 years instead of 20 years.

When Mr. Tan turned 60, he will receive a lump sum pay-out of $8,000. He can choose to see what he wishes to do with the money. The returns of this $8,000 is not guaranteed and it will depend on the investment returns.

At the end of the 20 years’ pay-out period, Mr. Tan will have received a lump sum. This lump sum will depend on the projected return of the underlying fund. The returns of this $86,000 is not guaranteed and it will depend on the investment returns.

Once all the income is paid out, the RetireWell Policy will end.

In total, Mr. Tan would have put in $72,000 in premiums and received $101,799 in guaranteed income or lump sum cash inflow plus $94,000 in non-guaranteed lump sum cash inflow.

How RetireWise will work well together with the Government Income System for Mr. Tan

To meet Mr. Tan’s income needs, most of the time, he cannot just depend on what RetireWise provides (unless he has a lot of wealth and contributed much more).

He will need to come up with a Sustainable Spending Plan (SSP). A Sustainable Spending Plan is one that incorporates all the available cash inflows that you have to come up with a plan to meet your spending needs. In such a plan, Mr. Tan’s spending is prioritized.

Mr. Tan will have cash inflows from various insurance products, managed investments, self-managed investments and government income stream that he would have to resolve.

The CPF Life is one income stream that Mr. Tan should see upon turning 65 years old. When he turns 65 years old, the money in his CPF Retirement Account will be used to purchase one of the three CPF Life Plans.

How Mr. Tan's income will look like when we factor in CPF Life's annuity income
How Mr. Tan’s income will look like when we factor in CPF Life’s annuity income

The client advisers at MoneyOwl can navigate with Mr. Tan in choosing out of the three CPF Life plans, which one is most suitable for his situation.

They can also advise him whether he should top-up using cash or the rest of his money in CPF OA and SA to the Enhanced Retirement Sum (ERS) to enjoy a greater income stream.

For example, if Mr. Tan chooses not to top-up, and he has the equivalent of his Full Retirement Sum (FRS) in his CPF RA, and he has chosen the CPF Basic Plan, he would receive an estimated income of $11,760 a year or $980 a month for the rest of his life. (Actual amount varies, and you can work with MoneyOwl, who would use their Proprietary CPF Analyzer to help you figure this out)

Mr. Tan’s income stream from 60 to 65 years old could reach $6,000 a year.

From 65 to 80, his income stream could reach $17,760 a year.

From 80 years onwards, his total income stream is $11,760 a year but he could supplement the $86,000 he received at age 80. This is equivalent to 12 years of the normal $6,000 a year income payment. With this lump sum, Mr. Tan could extend the income for a few more years.

Taking care of Mr. Tan’s Potential Long Term Care Needs

One of the healthcare risk that gain greater prominence is the risk that we might not be able to take care of ourselves. We might need external help in the form of care-givers or nursing facilities.

Here are some Morningstar long term care statistics:

  1. 52%: Percentage of people turning age 65 who will need some type of long-term care services in their lifetimes
  2. 47%: Estimated percentage of men 65 and older who will need long-term care during their lifetimes.
  3. 58%: Estimated percentage of women 65 and older who will need long-term care during their lifetimes.
  4. 2.5 years: Average number of years’ women will need long-term care.
  5. 1.5 years: Average number of years’ men will need long-term care.
  6. 14%: Percentage of people who will need long-term care for longer than five years.
  7. 22%: Percentage of individuals over 65 in the highest income quintile who will have a long-term care need of two years or longer.
  8. 31%: Percentage of individuals over 65 in the lowest income quintile who will have a long-term care need of two years or longer.
  9. 45%: Percentage of people requiring significant long-term care help (assistance with two or more activities of daily living) who are under age 65.
  10. 11%: Estimated percentage of individuals age 65 today who will incur out-of-pocket long-term care costs of between US$50,000 and US$150,000 during their lifetimes.
  11. 4%: Estimated percentage of individuals age 65 today who will incur out-of-pocket long-term care costs of between US$150,000 and US$250,000 during their lifetimes.
  12. 9%: Estimated percentage of individuals age 65 today who will incur out-of-pocket long-term care costs of more than US$250,000 during their lifetimes.
  13. US$350,174: Estimated lifetime cost of care for someone with dementia

From the statistics, the loss of independence is something we ought to be worried about.

RetireWise sought to help Mr. Tan address that risk.

The long term care risk is offset with the help of

  1. Our public universal long term care plan called CareShield Life. Careshield Life provides an income for life if Mr. Tan is not able to carry out 3 out of 6 different types of Activities of Daily Living (ADL). This income starts at $600 a month and will go up depending on when Mr. Tan first needs to claim CareShield
  2.  A Private Long Term Care Plan in Aviva MyCare. MyCare provides $600 a month in income for life if Mr. Tan is not able to carry out 3 out of 6 different types of ADL. The premiums for MyCare can be paid by CPF Medisave
  3. The insurance plan in RetireWise will pay an income per month equal to the guaranteed monthly income for 20 years if Mr. Tan is unable to carry out 3 out of 6 different types of ADL. This is on top of the standard guaranteed income paid out by the plan. In this case, Mr. Tan will be paid $400 a month for 20 years.

Thus in total, should Mr. Tan not be able to do 3 out of 6 ADL, he would get an income of $1,600 a month more or $19,200 a year.

After the age of 60, should Mr. Tan be disabled, he can live off his RetireWise income plus $19,200 a year

In a way, with RetireWise, there is a potential for the plan to pay-out nearly $36,960 a year in income. This should help offset some healthcare and retirement goals.

The Forecasted Returns Expectations

We have gone through how much Mr. Tan will need to pay, when he needs to pay and for how long he needs to pay and when he will get the cash inflow, and how they will coincide with Mr. Tan’s other cash inflow.

I will have to remind you that not all the income is guaranteed, and part of the income is non-guaranteed.

Whether Mr. Tan would be able to get the $100 a month pay-out from the insurance product and the $8,000 and $86,000 would have to depend on the performance of the insurance product and the fund.

If you are looking at how well the RetireWise bundle measures up to the products out there, you can assess the XIRR.

The XIRR is also the Illustrated Yield that you normally see in your endowment and whole life’s benefit illustration.

The XIRR allows us to measure RetireWise against the return performance of different savings deposits, portfolio, properties.

This is basically the “compounded interest rate per year” that you get for putting your money in this stream of cash inflow and outflow.

Based on an investment return projection of 4.75% and 3.25%, the respective “compounded interest rate per year” for this stream of RetireWise cash flow is 5.32%, 3.64%.

This is based on my own calculation and not MoneyOwl’s. It includes both the guaranteed and non-guaranteed cash flow.

XIRR Compilation of past Retirement Plans Reviewed vs RetireWise Bundle Projection

As I always say, these are projections. Other than the guaranteed part that I talked about, all these returns projections depend on the investment performances. Whether it is stocks, bonds, unit trust, or these plans, no one can be guaranteed all the returns that you will get going forward.

What if You Need Some Variation from Mr. Tan?

Your situation may be rather different from Mr. Tan. That is understandable.

And in fact, that is the way you should think about retirement plans on the market.

Financial companies try their best to come up with products that fit a certain segment of consumers that demand for things like this.

However, within these segments, not everyone is the same. Some of you

  1. do not wish to retire at 60 years old
  2. wish to retire at 55
  3. do not need the $8000 lump sum at 60 years old
  4. want an income that lasts longer than 80 years old.

The problem I heard often are folks buying all these products but at the end of the day, they have no idea:

  1. How much do they need to spend in retirement
  2. Whether they have built up adequately build up enough to retire at this point
  3. How they add up versus their CPF Life AND the excess in CPF SA and OA above the full retirement sum

You have a lot of financial widgets, but no overall retirement plans that you can depend on.

When you get a plan like RetireWise, you do not just get access to the product but the planning abilities of MoneyOwl’s salaried advisers. They are driven by helping you craft a good retirement plan.

The RetireWise Bundle is available today.

You can find out more and make an inquiry here.

This is a Sponsored post for MoneyOwl.

Kyith works for Providend Ltd. He does not work for MoneyOwl. Providend Ltd holds a 40% stake in MoneyOwl. He receives no affiliate income from any of the links above. Nor does he receives any commission income from any RetireWise bundle sold.