Why Retirement Insurance can Ensure a Worry-Free Retirement for you

By ShareInvestor

Singaporeans have the third highest life expectancy in the world, according to a 2017 World Health Organisation (WHO) ranking. On average, Singaporeans live to 83.1 years now, about 10 years more than just three decades ago. And going by the same WHO report's healthy life expectancy, which is the number of years people live fully healthy, Singapore came in second, at 73.9 years.

Taken together, these statistics mean that people here spend more years in retirement and continue to lead an active life for most of that period. This translates to people needing more in retirement savings so that they can maintain their lifestyle without too much of a drop-off even after stopping work.

One source of retirement income is the Central Provident Fund (CPF), but surveys have found that Singaporeans generally do not think their CPF will be enough for them to live comfortably through their retirement.

Depending on how much an individual has in their retirement account at the age of 55, monthly CPF Life pay-outs currently range from $700 to $2,000. To get that maximum $2,000 amount for the rest of your life, a 55-year-old would need to have set aside $249,000 in their Enhanced Retirement Sum, based on 2017 figures.

This Enhanced Retirement Sum is set to increase by $7,500 every year, which means that someone who is 40 years old now can expect to need to have $361,500 in their Enhanced Retirement Sum to qualify for $2,000 a month on retirement. When considering that many Singaporeans use their CPF to pay for their property mortgage, such a large sum of money may not be feasible for most.

Another avenue is the Supplementary Retirement Scheme (SRS) which encourages you to save for your retirement by giving tax reliefs on amounts saved. But there are limits to what one can set aside every year in their SRS account. Currently, the limit is $15,300.

On top of that, 50 per cent of what you withdraw from your SRS upon retirement is subject to tax, which means that to avoid paying any tax when retired, you can withdraw only up to $40,000 a year. (The first $20,000 of an annual income is not taxed)

This works out to about $3,300 a month.

If you add the maximum CPF Life pay-out one can get, you are looking at $5,300 a month, which is just slightly above the median average income of $4,056 (including CPF contributions).

Alternative sources of retirement income

It is not surprising that Singaporeans are turning to other sources of retirement income.

One good way is to take up retirement insurance. Retirement plans generally work this way – a person pays the insurer a certain amount of money every year until they reach the age of 55. Thereafter, the insurers will pay the person a guaranteed monthly income for a specified number of years.

What makes a good retirement plan?

When it comes to retirement money, you do not want to be too risky with it.

So make sure you choose a plan which gives you guaranteed returns. The total returns you get from the plan should be more than the total amount you had put in, preferably by at least 3 per cent more. This is to factor in inflation by the time you retire. The average rate of inflation in Singapore from 1962 to 2017 is 2.63 per cent.

Also, choose plans which offer guaranteed monthly pay-outs. This ensures that even in severe economic downturns, you would still be getting the same amount. With economists predicting that economic downturns may be more frequent in the coming years, this is especially important to ensure your retirement years are not thrown into turmoil.

Thirdly, do not pick a plan which has loading or other conditions linked to it such as your health at the time of application. Retirement insurance should not be dependent on any pre-existing health conditions you might have.

Some retirement plans to consider

1. AXA Retire Happy Plus This retirement plan includes an inflation-adjusted income plan which allows your retirement income to grow at a rate of 3.5 per cent a year. This is almost 1 percentage point higher than the average inflation in Singapore over the last 55 years.

It promises up to 2.67 per cent guaranteed returns and an additional maximum of 4.79 per cent per year non-guaranteed returns on maturity.

You can opt to add a rider to the plan so that you will receive addition pay-outs in the event of total disability or critical illnesses.

This plan is also very flexible in that it allows you to choose between a wide variety of options – for example, you can choose between a flat pay-out rate each year or one that increases over the year; or you can opt to start your pay-outs at a later age; and even if you want a longer period of pay-out.

2. Tokio Marine Retirement Scheme Although this plan offers relatively lower returns of 2.2 per cent (guaranteed) and 4.4 per cent (non-guaranteed) on maturity, it does offer a chance to reinvest your monthly payouts at interest rates of 3.75 per cent (non-guaranteed).

So those who may not need the money in their earlier years of retirement can reinvest them for a bigger payout later down the road when it may come in handy.

3. Aviva MyRetirement Plus This plan also adjusts your retirement income to grow at 3.5 per cent a year to account for inflation.

Based on the illustration on the brochure, the guaranteed yield is a total of $339,356 over 20 years compared to $156,390 put in over a 10-year premium period.

However, this plan only allows a fixed payout period of 20 years.

If you decide that you rather have a lump sum at retirement than monthly payouts, this plan allows you to take out a full lump sum of guaranteed and non-guaranteed returns by a full surrender of the policy at the retirement age you chose.

4. Manulife RetireReady The best thing about this plan is you can opt for a payout for the rest of your life and not just for a certain period of time.

If you suffer from a loss of independence, you get double the guaranteed monthly payout.

And if you suffer from a permanent or total disability during the time you are still supposed to be paying your premiums, Manulife will waive your premium payment but the policy would still be effective.

It offers 2.57 per cent guaranteed returns and up to 4.43 per cent upon maturity.

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