Fewer Singaporeans are meeting their retirement goals. If you are turning 55 by July 2015, you should have $161,000 in your retirement account, according to the Central Provident Fund Board. How close are you? Below, we look at popular insurance retirement plans and how they can help you fill any retirement savings gap.

Before you start reviewing your options, you should first know where you are at in your retirement savings plan. From January 2016, an Enhanced Retirement Sum will be added to the options of Basic and Full Retirement Sum CPF retirement accounts.  To see how much retirement savings you will need at 55 and the amount of the corresponding monthly payout you will receive at 65, see the CPF Basic, Full and Enhanced Retirement Sum table.

Use our Retirement Calculator to find out how much you need.

Let’s look at a base case. You have saved for retirement under the Enhanced Retirement Sum (ERS). You have $241,500 in your savings account at age 55. Your monthly payout at age 65 will be between $1,770 and $1,920. Today, you live comfortably on $2,500 a month and you want to retain your current consumption level when you retire. You will also have to account for inflation, which will erode the value of your savings in today’s dollars. The CPF Retirement Estimator can help you figure out how much you will need for retirement.

How will you fill the gap? To meet your retirement goal, you will require a savings plan that provides a higher rate of return than inflation. Below are some options.

Insurance Retirement Savings Plans

A wide range of retirement savings plans is available to suit your needs. Which plan you choose will depend on your monthly income requirements in retirement, the time horizon until you retire and your risk profile.

  • Savings Plan – An insurance policy that places your premiums in a savings plan is your safest bet. Because it is low risk, the insurer is able to guarantee the capital, returns and your retirement income. In exchange for low risk, you will receive lower returns in the 2-3% range. While conservative, these plans can still be flexible. Aviva’s MyRetirement plan pays out guaranteed retirement income for 10 years within a month of the holder reaching retirement age. You choose the premium payment term, from age 50 – 75. The guaranteed return is 2.38%.
  • Annuity – Annuities are one of the most popular options for retirement savings. Annuity premiums are paid as a lump sum or through periodic payments, typically monthly, for a predetermined period of time. At retirement age, they begin to pay a monthly income stream. An annuity may be paid out for life, or for a specific period of time, say, 10 years. Annuities are commonly combined with term life insurance policies.

Immediate annuity – An immediate annuity begins to pay monthly income within a month of the lump sum payment.

Deferred annuity – A deferred annuity starts making monthly income payments at some point in the future. Payment terms are typically at least 10 years, or more.

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Like endowments, discussed below, the policyholder may choose to take on low or higher risk depending on the structure of the insurance instrument. Under a non-participating annuity, the benefits are fully guaranteed by the insurer. Under a participating annuity, the benefits may be guaranteed or non-guaranteed. In a non-guaranteed investment, your return is based on the performance of the underlying fund.

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  • Endowment Policy An endowment policy is a life insurance policy with a maturity of 10 to 20 years that pays a lump sum upon death or maturity.  A with-profits endowment pays periodic bonuses that are vested back into the policy. These guaranteed bonuses are determined by the performance of the underlying fund the premiums are paid into. The return of the endowment is linked to market performance, and therefore the value of the fund could decline.

In a unitised fund, the premium is invested in units of a fund. If the fund value increases, so do the value of your units, and this increase can be used to pay for future monthly premiums. If the value of the fund decreases, your units may not be able to cover the premium and you will be required to pay them out of pocket.

Endowments allow you ample flexibility to design a solution for your retirement needs. The DBS MyIncomePlus endowment, for example, allows you to choose a guaranteed monthly income or partial or full lump period at the end of your chosen accumulation period.  An endowment does introduce some downside risk but you could earn a return of 5%-6%, or more.

Annuity vs Endowment

How do these products differ? An annuity is a savings plan whereas an endowment is an insurance policy with a cash value. As an insurance policy, the annuity pays out a death benefit. Even upon your death, the beneficiaries of the life insurance policy will continue to receive regular payments for the term of the policy.

Upon death, the heirs of an annuity will receive the cash value of the annuity. An annuity’s value can grow at a faster rate as a savings vehicle that benefits from compound interest.

An endowment requires a premium be paid monthly, which then may be allocated between the insurance policy and an investment-linked fund. Unlike with a savings account, the endowment holder could be exposed to market risk. The policyholder could potentially invest in a high growth fund that enjoys high returns. Or the returns could be dismal and the fund loses its value. When calculating future returns, note that the endowment does not benefit from compound but accumulated interest.

Once you have determined your risk profile and how much you need to save for retirement, the choice of retirement savings plan will become obvious.

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