Buying Annuity

[Brian811]

Hi guys am thinking of getting an annuity and dont work forever may i know its it possible please? Private annuity earliest payout start at 40 yrs old?

 

[parallelyy]

Possible, but you must have huge lump sum first, also depend on what your targeted payout is?

 

[BBCWatcher]

There's no starting age limit for payouts, at least if you're willing to consider annuities sold overseas. So-called "immediate annuities" begin payouts immediately after you pay the premium. Hypothetically a 2 year old could buy an immediate annuity, at least from some annuity companies.

That said, as a general rule, I don't think it's a good idea to buy an annuity except to serve as longevity insurance, i.e. to assure a minimum income stream, for life (and ideally also for the life of your spouse -- what's called a "joint/survivor" lifetime annuity) so that you won't outlive your savings. That does NOT mean you have to start the annuity payouts on your retirement date. If you have savings/investments, you don't have to, and you probably shouldn't.

Sovereign administered annuities, such as CPF LIFE, are low risk. Private sector annuities vary in risk. In my view it's unwise to dump all your savings, or even most of your savings, into a single annuity. You should view it as longevity insurance and buy "enough," but not "too much." Beyond that, you save and invest, prudently, in at least a reasonably well diversified way, preferably via consistent, long-term dollar cost averaging into low cost index funds that have an age appropriate level of risk.

 

[Brian811]

There's no starting age limit for payouts, at least if you're willing to consider annuities sold overseas. So-called "immediate annuities" begin payouts immediately after you pay the premium. Hypothetically a 2 year old could buy an immediate annuity, at least from some annuity companies.

That said, as a general rule, I don't think it's a good idea to buy an annuity except to serve as longevity insurance, i.e. to assure a minimum income stream, for life (and ideally also for the life of your spouse -- what's called a "joint/survivor" lifetime annuity) so that you won't outlive your savings. That does NOT mean you have to start the annuity payouts on your retirement date. If you have savings/investments, you don't have to, and you probably shouldn't.

Sovereign administered annuities, such as CPF LIFE, are low risk. Private sector annuities vary in risk. In my view it's unwise to dump all your savings, or even most of your savings, into a single annuity. You should view it as longevity insurance and buy "enough," but not "too much." Beyond that, you save and invest, prudently, in at least a reasonably well diversified way, preferably via consistent, long-term dollar cost averaging into low cost index funds that have an age appropriate level of risk.

Hihi many thanks for your detailed reply may i know what is the overseas annuity plan called? Only know of local annuity. Overseas annuity is it trustable?

 

[Shiny Things]

Hihi many thanks for your detailed reply may i know what is the overseas annuity plan called? Only know of local annuity. Overseas annuity is it trustable?

I think you might have missed BBCW's point. His point is that you probably don't need, or want, an annuity, especially at your young age. The only reason to buy one is as insurance against outliving your cash.

I'll make it crystal clear: you are not going to be able to buy an annuity and go surfing for the rest of your life.

Let's run some numbers. I'm going to assume that you're a dude, and that you're aged about 30, since you were complaining about not being able to buy one that started immediately.

Anyway, if we pretend you live in California, and that you're investing USD, Schwab's annuity estimator tells me that a $100,000 lump sum investment gets you a fairly measly $376 a month. To get the median Singapore household income of $8846 a month, you'd have to invest about $2.3 million(!).

And that's not inflation-adjusted, either. $376 a month will be worth a lot less in 40 years' time when you're 70! If you want your monthly payments to go up in line with inflation, you'll only get $190 a month for your $100,000 investment—which would mean you'd need to have $4.6 million or so to make the median Singaporean household income off your annuity.

And really, if you're a 30-year-old with $4.6 million in the bank, there are plenty of better things you could do with the money.

Side note: observant readers will note that our inflation-adjusted example is sort of like investing in a diversified portfolio and taking a 2.3% withdrawal rate. Once you account for the insurance company's hefty profit margin, you end up with something that looks a lot like "invest it sensibly with a 3% withdrawal rate".

 

[BBCWatcher]

The only reason to buy one is as insurance against outliving your cash.

Well, not the only reason, but it's the general one. Here are some rare exceptions to that generalization, in no particular order:

1. For tax reasons in certain countries, such as with "charitable remainder trusts" (CRTs). For example, if you want to donate a substantial amount to a U.S. university, and if you are a U.S. person, you can donate in-kind assets in a CRT arrangement. You receive an income stream, for life (and joint/survivor if you like), and you enjoy lots of tax savings. The university gets a donation -- and also might name a building or professorship in your honor. Twenty-five year old Silicon Valley titans can do this and occasionally have.

2. As another example of tax motivations, if you're receiving a big windfall that would be substantially taxed in the highest tax brackets, the tax authorities might let you receive that windfall in the form of an annuity, to drop you down into lower tax brackets on that income. That's called "income smoothing," or at least that's what I call it.

3. In certain divorce settlements, including some with pre-nuptual agreements, there might be a requirement to set up a lifetime annuity as part of the settlement.

4. More generally than divorces, if for some reason you don't have full confidence that the recipient will manage his/her finances well, you can set up a lifetime annuity. (See "trust fund baby" or "trust fund child" for the basic idea.)

5. Corporations will sometimes buy annuities for top executives, for a variety of reasons including tax optimization, retention objectives (e.g. with escalating vesting), for ex-executive "expenses" (secretarial assistance, for example), and to keep former executives "on side" for life. (The continued payment of the annuity might be contingent on the executive not commenting on the company and otherwise not interfering with the company.)

6. Some universities, particularly public university systems, offer pre-paid tuition plans, arguably a type of fixed term annuity. Let's suppose you have a newborn (or newborn grandchild), and you're concerned about escalating tuition and other university education costs. In these programs usually you pay the current tuition rate for a 4 year degree, up front, and lock in that price. (Sometimes with a discount.) Your child/grandchild will then be able to attend that university, or university within that public system, without any additional payment. (Some of these prepaid programs even have a prepaid room and board option.) And, if the child doesn't attend that particular university or system, the funds can be spent elsewhere or retrieved, albeit with a mediocre return (usually).

7. Royalty, long-term leasing (such as mineral rights), and patent licensing arrangements might sometimes require purchase of fixed term annuities.

8. People and organizations doing business with poor credit risk people/organizations might require purchase of an annuity.

9. Annuities are useful in certain jurisdictions for asset protection reasons. One of the interesting aspects of CPF, including CPF LIFE, is that it's well protected against most judgements and creditors, worldwide.

10. Lottery winnings are often paid out in fixed term annuities, occasionally lifetime annuities. The basic reason is that the lottery promoter can advertise a compelling "$1 Million Prize" with lots of exclamation points then, in the fine print, disclose that the winner actually receives $25,000/year for 40 years.

11. Sometimes purchasing an annuity makes sense as a currency hedge, at least in part.

12. For the care and upkeep of pets, burial sites, cryogenically preserved body parts (or whole bodies), gametes, embryos, surviving domestic workers, girlfriends, boyfriends, memorials, flags, libraries, scholarships, etc., etc. In these cases the annuity payout is often perpetual.

....Anyway, none of these fairly exotic exceptions apply in this case, I assume.

Fun Fact: The Dutch government is still paying interest on perpetual bonds (a.k.a. consols) that were issued in the early 1600s. Yale University is holding one of those bonds, issued in 1648, and is receiving interest payments. These are government issued perpetual annuities. The Dutch government issued them to fund (what else?) construction of dikes, canals, and other water management-related infrastructure.

 

[Brian811]

How about reits? Can we survive on it? Have a portfolio of trust and i think no matter what reits must pay dividends yah?

 

[Perisher]

How about reits? Can we survive on it? Have a portfolio of trust and i think no matter what reits must pay dividends yah?

Your thread is about annuity, stick to it. You already have a reits thread.

 

[BBCWatcher]

Your thread is about annuity, stick to it. You already have a reits thread.

Yes, and they are completely different concepts. An annuity is an assured payment stream. (We can quibble about the quality of that assurance, and that's important, but there is an assurance.) There's absolutely no assurance that a REIT will pay anything in particular, or even anything at all.

 

[genie47]

The other thing about annuities, they are expensive. Just buy enough.

 

[Brian811]

The other thing about annuities, they are expensive. Just buy enough.

Am single, 36, this year and i think min $500 would be enough may i know total how much i have to put in please?

 

[Battery Operator]

I would like to know in event, although 'unlikely', if an insurer in Singapore goes down (bankrupt), to what extent will Policy owners (for annuities) be protected? I was told by an IFA that the maximum amount is $400,000, but I am unable to verify this from the SDIC webpage.

Appreciate your inputs, thanks!

 

[BBCWatcher]

I would like to know in event, although 'unlikely', if an insurer in Singapore goes down (bankrupt), to what extent will Policy owners (for annuities) be protected?

According to this information, S$100,000. That's about equivalent to CPF LIFE at the 2017 Basic Retirement Sum (BRS) level, if you want a comparison. (CPF is a better value annuity than the private sector annuities in Singapore, so that comparison is at least pretty close to the mark.)

It's not much.

For comparison, New York State residents (and some others) buying annuities from any insurance company licensed to do business in New York State enjoy US$500,000 of insurance coverage, per insurer, from the Life Insurance Company Guaranty Corporation of New York (the not-for-profit state guarantee fund). Connecticut has the same limit. A few U.S. states have US$100,000 limits; that's the lowest figure in that particular country, still higher than the SDIC limit. There are also more insurers and a more competitive annuity market, so you can split larger annuities across multiple, high quality insurance companies in order to stay at or near the guarantee fund limit.

 

[BBCWatcher]

To some extent you can work around this SDIC limit if you do the following (or something similar):

(a) Max out CPF LIFE first, and for your spouse, to the Enhanced Retirement Sum (ERS) level. That's the best value Singapore dollar annuity, assuming you can wait until age 65 to start payouts.

(b) Buy (for example) S$125,000 (lump sum premium) annuities for you and your spouse from NTUC Income and Tokio Marine Singapore, for a total of S$500,000 (4 individual policies).

In the event NTUC Income and/or Tokio Marine have financial problems, you and your spouse might lose some annuity value, but you'll still be pretty well defended. You'll recover $400,000 of annuity value, i.e. you should recover a minimum of 80% in this scenario. If payouts have already started, then you might not lose anything.

Assuming "normal" parameters (age 60+ payment start dates), I don't think there are many people that ought to be buying more than S$500,000 of lifetime annuities, plus CPF LIFE ERS. For the whole household that's about S$1,000,000 worth of annuities, total, and that'll generate a rather nice annuity income stream. That should be adequate longevity insurance, or more than adequate.

If you then want something conservative and safe beyond these insured annuities, still Singapore dollar denominated, then you can buy AAA rated Singapore government bonds at auction and hold them to maturity. Laddering the 10 year bonds would be a reasonable approach. They should keep up with inflation or maybe do slightly better than that.

I'm not necessarily recommending this approach. In particular, I'd hedge my bets and have some non-Singapore assets, to defend against nation level risks. But I just wanted to point out that it's possible to stretch the SIDC limit, to some extent.

 

[parallelyy]

I would like to know in event, although 'unlikely', if an insurer in Singapore goes down (bankrupt), to what extent will Policy owners (for annuities) be protected? I was told by an IFA that the maximum amount is $400,000, but I am unable to verify this from the SDIC webpage.

Appreciate your inputs, thanks!

It varies for different policies, best to check with the insurer instead