Retirement Planning Part 7: Case Study 2

Christopher Tan

This is the final segment of our 7-parts Retirement Planning Series.

Learn how you can meet your retirement goals as we a second case study. Watch in detail as he shares what retirement means for us.

You can find the link to the other parts here:

This event was conducted on 5th of May 2016 by Christopher Tan, CEO of Providend.

So, Mr Tan, he’s thinking of whether he could possibly retire. How to create an income stream for retirement? He intends to continue working but he likes to be able to slow down soon. Now Mr Tan, a typical man on the street. He has got half a million of which cash is $350,000 and $150,000 in CPF. Quite typical. He has been working for many years already.

Hopes to spend at least $2,000 per month when he fully retires. He doesn’t like investments but he doesn’t mind investing a small amount. He likes to withdraw a small portion of money on top of the retirement payout of $2,000 for once a while, like gifting, travelling, you know and all that. And he said that if it is possible if he dies, he would like to pass some money for his loved ones.

So that’s really Mr Tan. In short, what Mr Tan wants, ok there are a lot of words here, he has half a million. He wants to slow down his work from 55 onwards and fully retires at age 65. That’s what he wants. Every month about $2,000. Now, obviously, with $500,000 we cannot do what we did just now with the bucket. We can’t because there are so many buckets, it will spread too thin. You can’t do it. So, it has to be done a lot simpler.

But it still can achieve the same effect. So, one possibility. This is not the only way to do it. But one possibility is a combination of using CPF LIFE, insurance annuity and some investments.

Now, you realize that in both examples, we try and make use of whatever available like CPF schemes. We try to make use of various instruments. We try not to focus on just insurance because the returns are very low. We try not to put a lot of money on investments because the volatility is too high. So, we realise that for the two plans, the monies are spread across different instruments.

Same for this. So, you have CPF LIFE scheme, insurance annuity, investments. Allocation is 30%, 30%, 30%, 10%. So the half a million is spread like that- $150,000 , $150,000, $150,000, $50,000. Now, he’s going to work until age 65 to coincide with the CPF LIFE commencement.

I’m going to skip this and show you the graph straight away. So, this is what he’s gonna get. At age 55 years old, he is going to get about $500 per month. This comes from the immediate annuity that he paid, that he has bought $150,000.

So, he’s going to get about $500 for five years. At age 60 years old, this deferred annuity-like kind of insurance will start to pay. And so, he is going to get a $1,000. So, this is the immediate annuity, this is the other annuity that he has bought. He’s going to get a bit more so $1,000.

At age 65, what is going to be paid out? CPF LIFE. So he’s going to get a jump of about $2,400. And then this will slowly go up. Because one of the insurance annuity actually grows with inflation. So it will go up.

So, this plan, we have not touched this investment at all. The monthly payout is purely from CPF life annuity and another annuity. This is untouched. This one is just purely the annuity. The investment is untouched. And the investment is a medium return portfolio, targetting maybe about 5% thereabout.

And if the market goes down, it doesn’t affect him because he doesn’t have to touch this. But if this is growing nicely in a good market, he can take out some money from there to go for travel. Or gifting. Or whatever. But if the markets are bad then he just lives with the $2,400 per month. He actually only target $2000 but he has slightly more.

Now take a look at the table. And I’m almost done. Now, total income received and cash legacy. So, if based on this combination, again, let me emphasize, this is not the only combination, this is one combination based on what the client wants.

Now, but at age 60, if he goes on this combination. If he dies at age 60, he would have received $500 a month so it’s about $6,000 a year. Times five years, he would have gotten about $30,000 when he’s alive.

Now, unfortunately, he passes away at age 65, the unpaid annuities plus CPF LIFE legacy will return him about $560,000 plus his investments. So, return him $560,000. So, if you add up together, he still gets a bit more than what he actually put it, which is half a million.

Now, if he dies later at age 75, he would have collected $389,000 in payout. The legacy or the bequest from unused annuities would be about $330,000 plus the investments. If he dies at age 85, he would have collected $698,000. Bequest $347,000. So, about $1 Million.

The moral of the story is this: The longer he lives, the better it is. Has to be like that right? Cannot be the earlier I die, the better.

But even if he dies in 5 years, he still doesn’t lose out. But the thing that motivates Mr Tan to keep on living is when he looks at this number, “WOW! A lot!” He everyday exercise then he will live a long, long life.

Because it’s an annuity. That’s the thing about annuity right?. The longer you live, the insurance companies are crying, “Why you so long?” Because they have to keep paying you until you die. An annuity works opposite of insurance, right? The longer you leave, the more they pay.

So for this plan, there’s a slight hedge against inflation, it’s not as good as David’s one because David’s one has a lot more equities so it hedges better. This one, because there are mainly annuities. As you know, annuities return is so so. It’s no big deal. So, it hedges slightly against inflation. There is still a minimum income floor to increase reliability because he is getting at least $2,000 plus because they are all annuities. Reduce market volatility.

Because only 10% of his money is into the stock market. 90% actually is into very safe instruments. So he’s not really impacted by market volatility. Hedges against longevity risk because there’re annuities inside like CPF LIFE. So, if Mr Tan lives very long, better actually. Better for him.

Withdrawal risk. He wants to withdraw more also cannot because there is a fixed amount being paid every month. And it is integrated with CPF LIFE, insurance, and investments. As I mentioned, it’s a cross instrument. That’s very, very important.

I always insist that in every retiree’s portfolio, you must have an annuity. You must. And the best annuity is CPF LIFE. It’s the safest annuity. You must because we never know how long we live. That’s why we MUST always have an annuity in the portfolio.

This is a lot easier to implement as compared to David. Life is like that. The more money you have, the more complicated your life is. But this is easy to implement. Half a million, you know, is quite simple.

I just want to end this portion with a video clip. I’ve played this video clip to my staff many, many times. Some of you may have watched it before. But even if you have, I ask you to sit back, relax, watch this video, because oftentimes I am reminded that retirement planning is not just about money. Isn’t it true?

Sometimes we over focus. We focus too much on money. But retirement planning really is not just about money. It’s also about health. I mean, because you have no health, you have no retirement. But it’s also beyond health. I mean, what is retirement if you have got money and you have health, but you have absolutely nothing to do? And no one to do it with you? And you don’t have a purpose, it’s a wasted life.

Retirement, it’s going to be a disaster. Even if you have money and health. So, sometimes I think when we plan, we think too much on the money part and the health part. But we forget the purpose part. You know the things that I want to do it and who do I do with part? Which is important and I don’t have time. Otherwise, I’ll spend another two/three hours talking about this whole thing about how do you plan with a life purpose and all that.

But I just want to show you this closing video just to hit home the point. All right. So, enjoy the video. By the way, this is a true story. But it is done by a bank as an advertisement. But the story is real. It is in Mandarin. However, for those of us who do not understand Mandarin, there are English subtitles.

We were all young before right? Some of us here are still quite young. Some of us younger.

But I mean, this video speaks to all of us in so many different ways. I don’t know how it speaks to you. But for me, at 45 years old, it speaks to me that, you know, I want to live my purpose. And not just when I reached the age. I want to do it now.

But for those of us who are planning retirement, into retirement, as I mentioned, money is not the only thing. We all have dreams and all. But along with careers, the busyness of our lives, children, you know and all that, we somehow lose sight of actually our dreams.

And in retirement, if you have not fulfilled that dream yet and you are planning your retirement, this is the chance to do it. This is the chance. This is the last chance to do it. We don’t have to do it until we reach that stage whereby life is shortened. We have a terminal disease, you know and all that. All right. It’s about 9.15pm. I shall not open this time for Q&A, but I’ll still be here if you have any questions.

In the near two decades that we have worked with retirees, we understand one thing: Reliability of income is more important than return on investment at this phase of your life. As such, we have developed a proprietary methodology called RetireWell®, that can help you draw down strategically from your retirement nest egg.

Our Retirewell® methodology was featured in The Business Times every month for almost a year in 2017 and has 11 parts to it, namely:

• Part 1: Drawing Down Retirement Money
 Part 2: Offering Retirees Security and Peace of Mind
• Part 3: Low Cost, Consistent Results
• Part 4: Counting on low-cost Index Funds
• Part 5: Investment Philosophy for a Retiree Client
• Part 6: Ensuring a ‘Safe Retirement Income Floor’
• Part 7: Remain Invested Over the Long Haul
• Part 8: Purpose-Driven Retirement Planning
• Part 9: A Tale of Two Retirees And Their Fortunes
• Part 10: Stock Markets Always Rise Over The Long Term
• Part 11: Retirement – It’s About The Kind Of Life You Want To Lead

With Retirewell®, we will design a plan that will give you a safe and reliable stream of income for the rest of your life, with provisions for legacy in the event of demise, so that you can live up your retirement with peace of mind.

We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current investment portfolio, financial and/or retirement plan, make an appointment with us today.

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