Selena is currently 55 years old and aims to retire at 65 years old. To maintain a fulfilling lifestyle, Selena has outlined her financial needs and goals for the next few decades. Her retirement plan includes provisions for essential expenses and ensures financial stability throughout her golden years.
Retirement Income Needs
Upon retirement at 65 years old, Selena plans essential monthly spending of $4,000 for the first 10 years. To keep this case-study simple for illustration, let us assume that Selena is looking at $4,000 monthly spending to be level. This amount covers non-negotiable expenses such as food, transportation, bills, and insurance premiums. Additionally, Selena wishes to allocate some of this budget for travel.
At age 75, Selena intends to slow down her lifestyle. As a result, she projects her monthly spending will reduce to $2,500 for the next 15 years, until she reaches 90 years old.
Thereafter, Selena is comfortable relying on her CPF LIFE payouts and drawing down her savings.
Current CPF Balances
To plan for a reliable income stream, Selena has the following CPF balances:
• Ordinary Account: $323,462
• Retirement Account: $220,400
• MediSave Account: $79,000
Additionally, she has cash savings of $500,000.
Retirement Income Gap Analysis
With $220,400 in her Retirement Account, Selena could receive a monthly payout of $1,640 from CPF LIFE starting at age 65. However, she still needs additional income to meet her spending requirements:
From Age 65 to 75: $4,000 – $1,640 = $2,360 shortfall per month
From Age 75 to 90: $2,500 – $1,640 = $860 shortfall per month
Evaluating Financial Instruments
To address these shortfalls, Selena can consider various financial instruments, such as:
| Financial Instruments | Fixed Deposit | Singapore Savings Bond (SSB) | Insurance Annuity | Investment |
|---|---|---|---|---|
| Tenure | Typically less than 1 year | Up to 10 years, though the funds can be redeemed at any time | Can be adjusted to fit into your retirement income needs (e.g. for a period of 10, 20 years or even lifetime) | No fixed tenure |
| Return | Low, stable, and guaranteed | Low to moderate, the return increases over time | Moderate, with guaranteed and non-guaranteed components | Potentially higher but could also lose money, subject to market volatility |
| Advantages | Low risk, capital guaranteed upon maturity | Capital guaranteed, flexible withdrawal, low risk, and tends to have a higher return than a fixed deposit | Provides a reliable stream of income, comprising guaranteed income. It can also be surrendered for liquidity if needed. | Potentially higher return in the long run |
| Risk | Reinvestment risk after the fixed deposit matures, and the return may not beat inflation | Reinvestment risk after the SSB matures, limited monthly allocation | The non-guaranteed portion may be lower than expected. | Sequence of returns risk, no guaranteed return, requires knowledge and active fund management |
Choosing the Right Strategy
Both fixed deposits and Singapore Savings Bonds carry reinvestment risk, making them less ideal for covering essential spending over a long-time horizon. Given that the purpose of this plan is to cover essential spending, investments are unsuitable because of market uncertainties and because Selena wants to spend her retirement funds regardless of market performance.
To ensure certainty in her retirement income, Selena can also top up her CPF Retirement Account. For instance, if Selena tops up her Retirement Account to the current year’s Enhanced Retirement Sum of $440,800 in 2025, she could receive a higher CPF LIFE payout of approximately $3,310 a month.
However, Selena is mindful the risks and restrictions of topping up CPF, e.g. the lack of liquidity (CPF LIFE cannot be surrendered), the inflexibility to customise, the absence of a death benefit (after the CPF LIFE premiums are fully depleted), and potential policy risks.
Based on these considerations, insurance annuities emerge as a suitable option. An insurance annuity plan provides a stable and reliable stream of income, ensuring financial security even in an unpredictable market. Moreover, Selena can choose a plan that offers the liquidity and control she desires, along with a death benefit payout for her family.
Implementation Plan with Insurance Annuity
To address Selena’s income gap, she can structure her annuity contributions in two phases.
Phase 1: Age 65 to Age 75 (To cover the monthly shortfall of $2,360)
Selena can contribute a single premium of $195k towards an insurance annuity. Thereafter, when she reaches 65 years old, she will receive a monthly payout of about $2,400 over 10 years.
Summing up, Selena can expect to receive a total payout of about $288k over the 10-year period.
Phase 2: Age 75 to Age 90 (To cover the monthly shortfall of $860)
Selena can contribute a single premium of $64k towards an insurance annuity. Thereafter, she could receive a monthly payout of approximately $897 from age 75 to age 90.
Summing up, she could receive a total payout of around $161k over the 15-year period.
Final Thoughts
By allocating $259k (being $195k + $64k) into suitable insurance annuity plans, Selena secures a total payout of $449k throughout her retirement. Through this approach, we are able to create a reliable stream of income to meet Selena’s essential spending needs. By doing so, it frees up some of her resources, allowing her to enjoy a fulfilling retirement, knowing that her financial needs are well taken care of.
This is an original article written by our team at Havend.
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