● Income security in the form of life time income;
● Professional management of my retirement savings, EPF and others; and
● Health security plan.
While EPF and regular savings prepares us for the day, it does little in ensuring these requirements are met adequately.
In fact, surveys show that most contributors spend almost all their savings within the first three to five years of withdrawal.
Let us take Vanessa Carlos for example, who is 45 years of age and earns RM5,000 a month.
She would like to have RM2,000 as disposable income in her retirement age commencing 55 into the foreseeable future (perpetuity) as one option or at least 25 years until the age to 80, as option 2.
How much would she need to save up at the age of 55?
The table summarises the savings requirements (at the age of 55), for a fixed RM2,000 income stream, listed in 3 different return brackets, for a fixed 25-year period as well as for perpetuity.
A Retirement Annuity Plan is basically a contract whereby an insurance or an investment fund agrees to provide a stream of income during the retirement years.
The payout stream can either be for a fixed period or for perpetuity.
The format is actually the reversal of a life insurance policy, whereby for the annuity, a lump sum is paid initially by the retiree, for an income stream moving forward, thus removing the uncertainty and problems faced should one outlive the financial resources.
The funds are usually invested in low-risk instruments but would generally provide better returns as compared to bank fixed deposits.
These plans can also be linked to health coverage, similar to what Annuity Malaysia offers today, which will also then cover health risks.
To acquire a Retirement Annuity Plan, one can either make a lump sum premium at the retirement age, or by means of periodic smaller premiums from now until the retirement age.
The two types of annuities are listed as follows:
● Immediate Annuity – this is meant for those who are about to retire, whereby the annuity purchase represents a lump sum payment, whereby the income stream commences within 12 months from purchase.
● Deferred Annuity – this is for those who are still well within their working lives, and want to plan for retirement.
The investment method can either be via lump sum payment from start or in the form of monthly premiums leading up to retirement age.
It is therefore advisable to start saving early during our working years to be able to avail the Deferred Annuity, as not many of us can afford the Immediate Annuity cost of purchase.
That being said, instead of buying a Deferred Annuity, one should opt for better returns investment schemes such as Unit Trust or other means, where the returns are higher, and thereafter upon accumulation to invest in a Immediate Annuity.
Based on the Average Savings table (see table), let us calculate the savings that Vanessa needs to accumulate to achieve her retirement objective.
Vanessa has decided to take the limited period 25 years income stream, and after much searching, the best annuity found ONLY provides a return of 3% (actual rates are usually lower, when considering payouts less than 25 years).
Therefore she needs to have RM418,000 at her retirement age in order to purchase the plan.
She has checked her EPF account which has a balance of RM70,000 and going by an average EPF dividend ratio of 6% and accumulation of salary deductions for the next 10 years, her EPF balance as at 55 years old, would stand at about RM275,000.
Needing a savings total of RM418,000, therefore she will need to come up with a savings plan to top up the remaining RM143,000.
Scouting around for an investment that will give an average annual return of 5%, Vanessa Carlos will need to save RM910 a month for the next 10 years, which will work up to RM144,000.
Vanessa can also select a Participating Annuity instead of a Flat Annuity – whereby under the former, Vanessa can enjoy certain upsides from the insurer’s profits, forming part of the payout stream, and therefore part-hedging against inflation.
Lastly, the following represents the different types of benefit options that can be selected from:
● Level Annuity without guaranteed period – fixed regular payout as long as you live.
● Level Annuity with a guaranteed period - fixed regular payout but for a defined period.
● Increasing Annuity – payout stream that increases each year at a specified rate, to hedge against inflation.
● Joint-Life Annuity – payout stream for the rest of your life, and thereon continues to pay a beneficiary after the insurer’s demise.
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