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Choosing a steady retirement income

When you retire, you will usually need at least three things – a home, medical insurance and a monthly income. Since most people here will have a roof over their heads in their golden years and healthcare is generally affordable, monthly income is often the biggest concern.

When you retire, you will usually need at least three things – a home, medical insurance and a monthly income. Since most people here will have a roof over their heads in their golden years and healthcare is generally affordable, monthly income is often the biggest concern.

CPF Life can provide part of the income for most people for the rest of their life, with payments ranging from small amounts to more than $2,700 per month. For many people, however, CPF Life alone is not enough. It's important, then, to plan for a stable income that will last as long as you live. And with life expectancy having risen to more than 80 years for men and 85 years for women, planning for the longer-term is essential.

"Pre-retirees don't spend enough time planning," Stanford Centre on Longevity researcher Steve Vernon observed. "They just hope that life will turn out OK. Hope is not a good strategy! If you don't plan, you just get the life that shows up, which may not be the life that you want."

ANNUITIES PROVIDE STABLE INCOME

One easy option for that steady income is an annuity.

While many people may think that an annuity is an investment, it is not. Simply put, an annuity is a contract between you and an insurance company to give you a lifetime income. When you buy an annuity, you'll give a set amount to an insurance company in return for a promise that they will pay you a monthly or annual sum for a fixed period, sometimes as long as you live. The amount you receive depends on factors including how much you invest, current interest rates, your age and your gender.

Although they sound simple, annuities can be complicated. You can choose to pay with a single premium or over time, have a fixed or variable income or both, receive income starting now or later, have income for the rest of your life or for a fixed period such as 20 years, among a variety of options.

Despite the complexities, most people just focus on a simple choice between two types of annuities. One is an immediate annuity, where payments start right after your payment. The other is a deferred annuity, whereby you pay the insurance company in one lump sum or annually and start to receive payments later.

NTUC Income, Manulife and Tokio Marine all offer annuities here. Manulife RetireReady, for instance, gives you a guaranteed annual income equal to about 2.5 per cent of the amount you paid, twice that much if you face "loss of independence", and a potential bonus that can nearly double your annual payments.

A positive side of annuities is that you'll have income for a long time. The flip side is that the insurance company usually keeps your money when you die, leaving nothing for your heirs. You would need to look at it like home insurance, then, where you don't regret buying a policy if your house never burns down. Having a guaranteed income is important.

It's also important to realise that insurance companies charge a fee for managing your money, reducing the amount you receive.

The guarantee also depends on the strength of the insurance company and the details of the policy. If the insurance company goes bankrupt, your money is gone. And each policy can have small quirks that affect your payments. Be sure to read the policy carefully, and select a strong insurance company.

ALTERNATIVES TO AN ANNUITY

While annuities give the comfort of an annual income, there are alternatives.

One is to invest your savings and use them to pay yourself an annual income. Rather than putting S$100,000 into an annuity, for instance, you could invest in real estate investment trusts (REITs) and exchange-traded funds (ETFs). With some REITS and ETFs earning 4-to-5 per cent per year or more, you could pay yourself about S$400 per month. The risk is that your investment could lose value in a market downturn and your income could drop, so that you receive less or run out of money.

Another is to buy Singapore Savings Bonds (SSBs). If you put $100,000 into SSBs now, for instance, your annual payment would increase gradually from about $1,700 in the first year to about $3,400 in the 10th year. You would still have your $100,000 after ten years and could reinvest it to continue to receive an income. Although your income is lower and could drop in the future if interest rates fall, your money is guaranteed by the Singapore Government.

The advantage of these or other alternatives such as a portfolio of bonds is that you will keep your money and may receive more than with an annuity. On the other hand, you'll need to spend time managing the funds and there is a risk that your investment — and monthly payments — could drop.

MAKING THE RIGHT CHOICE

If you want a simple option for retirement income, an annuity is an easy way to receive a nearly-guaranteed payment. If you're willing to spend some time managing your money and take some risk, on the other hand, you could choose an investment that gives you a stable income and passes your money on to your heirs.

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