How three couples may plan their annuities

LAST month, I wrote about using private annuities (PA) alongside CPF Life to build a safe retirement-income portfolio. That sparked active discussion on social media.

Some said that since CPF Life already offers the best payout-per-dollar premium in Singapore, you should simply top up your Retirement Account (RA) to the Enhanced Retirement Sum (ERS), so there is no need for a PA.

Others said that a substantial Ordinary Account (OA) balance could simply be drawn down over a fixed period, much like an annuity, to complement CPF Life.

In this article, I posit three retiree couples of different wealth levels to show how their portfolios could look like. I will focus only on retirees who want no market-risk exposure – just a stable, predictable income without the need to invest.

Here are the broad profiles for each couple:

• Couple A: Each spouse has S$250,000 each in OA and S$220,400 in RA. Total income-producing assets (including CPF, excluding residential properties): S$2 million
• Couple B: Each spouse has S$50,000 in OA and S$220,400 in RA. Total income-producing assets: S$1 million
• Couple C: Each spouse has S$25,000 in OA and S$110,200 in RA. Total income-producing assets: S$500,000

Option 1 is a CPF-only solution. All three couples top up their OA using the Voluntary Housing Refund (VHR). Couples A and B have also topped up their RAs to fulfil the Enhanced Retirement Sum (ERS).

• Couple A: Each has S$400,000 in OA; S$440,800 in RA. Remaining cash assets: S$318,400. Estimated monthly income between the ages of 65 and 84: total S$10,800 (from CPF Life: S$6,600, OA: S$4,200). From 85: S$6,600 from CPF Life only.
• Couple B: Each has S$59,200 in OA; S$440,800 in RA. Remaining cash assets: Nil. Estimated income, age 65 to 84: S$7,220 (from CPF Life: S$6,600, OA: 620). From 85: S$6,600 from CPF Life only.
• Couple C: Each has S$29,600 in OA; S$220,400 in RA. Remaining cash assets: Nil. Estimated income age 65 to 84: S$3,710 (S$3,400 from CPF Life, S$310 from OA). From 85: S$3,400 from CPF Life only.

Option 2 introduces private annuities. Each individual in Couple A buys an annuity of S$110,000 with cash at age 55. For Couple B, instead of topping up their RA to ERS, each used S$220,400 to buy a PA.

Couple C, given their limited resources, at least fulfilled the Full Retirement Sum (FRS) in their RA.

This is the impact on the total income for Couples A and B:

• Couple A: Total income, 65 to 84: S$12,026 (including PA income S$1,226). Income from 85 to 99: S$7,826 (CPF Life and PA income). From age 100: CPF Life only.
• Couple B: Total income, 65 to 84: S$6,520 (including PA income S$2,500). Income, 85 to 99: S$5,900 (CPF Life and PA income). From age 100: CPF Life only.

There are a few conclusions we can draw from here:

1. Adding a PA may lower the total income payout slightly, but it also lowers the rigidity ratio (CPF-RA as a percentage of total income-producing assets). This gives retirees more liquidity, flexibility and income continuity. They can terminate the PA if needed, or continue the same PA for the income to be received by a surviving spouse. This mitigates the impact from the loss of CPF Life payouts when one spouse dies.

2. Wealthier retirees can max out their RA to ERS and still stay flexible, since they have other income sources. Retirees with less resources should think twice before topping up to ERS as it locks up a large share of their assets with limited ways to unlock it.

3. Retirees like Couple C should keep to the Full Retirement Sum (FRS) and CPF Life.

While Providend serves mainly affluent clients, I am mindful that not everyone has extensive wealth. Maximising OA and RA balances may suit wealthier families as it does not compromise their flexibility or liquidity. Losing CPF Life income when one spouse dies also matters less when other income streams exist.

But for less-wealthy families, an optimised, diversified safe retirement-income portfolio that includes a PA may offer a better balance of income and its continuity, flexibility and liquidity for a surviving spouse.

The writer is chief executive officer in Providend.