2 of my clients had parents pass away in the last month, and one of them had a girlfriend die.
As a result, seeing FI-35 online somewhat lamenting his mortality has hit home a bit more for me recently.
FI-35 is a guy (no clue who he is, nor am particularly interested) who achieved Financial Independence in one of the most bittersweet ways possible – through surviving cancer and claiming a tremendous amount on Critical Illness Insurance policies.
He seems to be going through some kind of rough patch that has made him question his mortality, and subsequently – his cash flow or legacy in the future.
There’s not been a time in my life since my grandmother’s death – and right now, that I’ve seriously, seriously contemplated my own mortality.
This is something that began to leak out from his writing.
And I kind of felt bad.
As a writer myself, even though I primarily took the position of a critic on some of his poorer writings, you can typically sense some of the emotions involved when putting out an article.
This is why I am often more critical on Financial Bloggers where their bias begins to show.
I thought I would help illustrate to FI-35 the nature of his problem as well as how he can solve it, though he already seems on track for it.
But First - Private Annuity or Endowment Income?
When FI-35 discusses the Private Annuity where his family would still get the principal sum upon his death above, he is talking about Endowment Plans which pay out an income coupon, typically for a lifetime.
This is different from CPF as an Annuity, where CPF will pay you out Capital + Interest until it hits zero (runs out).
For the sake of this article, let’s just call it a ‘Private Annuity’ then.
Additionally, as a disclaimer – none of this article is Financial Advice directly to FI-35 or anyone else. It is simply a factual analysis and opinion – a gift of knowledge, if you will.
As FI-35 suddenly found himself with hundreds of thousands, even a million (?) – after his claims, he entered the tip of the High-Net Worth space.
Most insurance companies have a ‘Private Annuity’ of their own for people in his category who have a fairly significant amount of wealth, usually at least $100,000 cash minimum.
These plans typically pay a coupon monthly – for life [typically assumed to Age 120] after accumulating for 5 years [there are minor variations, but this is the most common].
For example, one plan I like personally is a plan that aims to pay out a 4.27% coupon (Guaranteed + Non-Guaranteed) till Age 120 while the capital appreciates.
Since this plan is paying out coupons perpetually, the principal remains untouched, as FI pointed out. The principal may even appreciate at the same time.
This means that unlike CPF where they pay you out until your capital becomes zero and you have no money left, you may actually leave behind EVEN MORE MONEY after you die than your original investment amount.
Imagine being able to get an income paid out to you for life, and then still leaving even more after you die. Sounds pretty good, no?
Are 'Private Annuity' Plans Superior to CPF Plans?
Without further ado, let’s answer the question.
Despite the sentence I just said, the typical answer is that it would be comparing apples to oranges. They’re fruits, but they’re not the same.
The idea of a direct comparison to decide on superiority based on a general set of factors (e.g. without having any idea of someone’s circumstances or needs) is not a good idea.
But we can illustrate the two options better, especially the former – since the comments somewhat indicate that very few people understood what he was talking about.
Let’s look at such a Private Annuity against CPF.
Like I said, Apples and Oranges.
You can see that while CPF Life has a much higher Monthly Payout, there are many potential and flexible benefits to Private Annuity A.
In particular, Sellable + Capital Appreciation – While you can make withdrawals from your CPF RA, only a Private Annuity will allow you to sell the entire thing.
You could have inserted $350,000 at age 55, received payouts for 10 years and sold off the whole thing for more than $350,000 at age 70 if you wanted the full sum. It’s a better deal than most property investments, with both ‘rental income’ and ‘capital appreciation’.
Speaking of Property – no matter how many perks you add to Private Annuity A, the fact remains that CPF pays out at least DOUBLE the payouts.
Thus, like Property – we can use Leverage to improve this significant difference in income.
This is what FI-35 was referring to (insert article here), and what banks are propositioning him with.
Better Question -Are (Leveraged) Private Annuity Plans Superior to CPF Plans?
Someone as rich as FI would qualify easily (unless he has mountains of debt that I am unaware of) for the maximum leverage that the bank would offer.
This means that the bank would loan him money to purchase a larger Private Annuity from an Insurance Company.
You may ask, “Hey Money Maverick, why would I do that? I’m trying to get MONTHLY INCOME, not CREATE MORE DEBT.”
To quote the notorious Robert Kiyosaki, the rich know how to USE debt.
Let me show you how.
The primary criteria of this debt are that the loan must be interest-only serviceable.
I repeat. INTEREST ONLY. If you want to know why banks would offer such a thing, read this article. I denote how Financial Institutions use your money to get rich.
There are many forms available, but no matter which the bank offers – this idea only works if you pay INTEREST ONLY. This makes the plan go from very questionable to potentially sustainable. (I really have to emphasize this in case some idiot tries to suggest that I am encouraging people to go into debt)
Such loans are usually attached to some kind of benchmark that fluctuates, e.g. SIBOR.
As a result, interest rates can be dangerously high…or sickeningly low. Especially when you have as much as $350,000. If we understand that GROSS INCOME – EXPENSES/INTEREST = NET INCOME, we can make a potentially huge amount from leverage.
The primary risks to such leverage is the interest. It creates a range, or even a risk of a margin call. Let’s say the interest is at Jan’s rate instead.
This makes a rise of EXPENSES/INTEREST to 22941. Which reduces your net income to $2536/mth instead. If this interest shoots up a lot further and the projected pay-outs are reduced, this net income gets reduced to the point of creating a serious liability.
On the other hand, if the interest is something like July’s rate…(0.254%)
This makes a drop of EXPENSES/INTEREST to $9486/yr, which increases net income to a whooping $3657/mth.
Of course, both results are on the assumption that the interest rates will stay that low or high. Which they won’t.
The End result looks a bit like this:
By leveraging the policy effectively, FI-35s numbers look a lot better. He can get similar or larger payouts sooner while potentially gaining capital as well.
As of the time that I write this conclusion, it’s a bit late. FI-35 has already taken the plunge and purchased the Leveraged Private Annuity.
Even though I was late to publishing it, I hope it was useful. Not just to you, but friends and fans of FI-35 who may have been concerned about said decision.
I have so many sources for this article that I have to put it in a separate article. You can view it here. It contains all the assumptions for the numbers. I was actually hopeful I would get to be the good guy here (I rarely get such a chance) and publish this BEFORE the purchase. FI-35 is a privileged banking client, so such an analysis is free and I don’t profit from it.
Was it a good decision? Well, I’m much more inclined to think so, seeing the numbers that I’ve presented above.
Any good risk manager worth their salt (and any bank who’s profit-intelligent) would make sure that he’s in extremely good hands and taking home a sizeable amount every month, while growing his capital to pass on instead of having it deplete.
He also gets to have it started much earlier.
But you can decide for yourself.
I hope that now that FI-35 has some peace of mind, he won’t speak so morbidly.
In any case, if you have any questions about this, or if you’re interested in such a structure yourself, you can always ask Money Maverick.
I’d be happy to help.
As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.
If you have any such questions about the articles and how it may apply to your finances, you can feel free to leave a comment, or drop a message through any preferred medium (if you prefer privacy).
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Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.
The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.
Here are some of my resources on:
3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)
4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)
5) Job Assessment: A Case Study on How a $6k/mth Girl makes MUCH more money than a $10k/mth Guy
6) Financial Optimisation: How I Avoid the Largest 'Fees' of All
Investments are also available using CPF (Ordinary Account), SRS (Supplementary Retirement Scheme) and Cash.
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