Advice to a retiree on investing your savings

1. What is the best way to invest my savings, after my retirement?

You should use a capital sum to buy a life annuity of about 30% to 40% of your income prior to retirement. You should find this sum to be adequate, if you own a home which is fully paid. If you are still paying for the education of your children, it should be funded separately.

You have to pay between 200 to 250 times of your monthly annuity, depending on your age and the type of annuity that you buy. For example, if you want an annuity of $1,000 a month, you should be paying between $200,000 to $250,000.

If you buy a capital protected annuity (which refunds the balance of your capital sum, without interest, on early death), you have to pay about 20% more than a non-protected annuity. Most people prefer the capital protected annuity, but this trend may change in the future.

Let me explain why 30% to 40% is adequate for a retiree. When we are working, we have to spend about 50% of our earnings to pay for a home, raise a family, tax and expenses of working. We have to set aside 10% to 20% for our savings. These items are usually not necessary after retirement, i.e. the home is fully paid and the children have grown up.

The annuity guarantees a payment for life. If you buy a participating annuity, you will enjoy an annual bonus (added to the annuity) that depends on the investment yield in each year. This will help to offset the increase in cost of living.

2. How should I invest the remainder of my savings

I recommend that it be invested in a large, well-diversified, low charge fund. You should select a fund with 50% to 100% invested in equity. This investment is likely to give you an attractive return, 5% or more, over a period of 10 to 30 years (but this is not guaranteed).

Although equity has risk, you can minimise it by investing for the long term (ie average out the good and bad years) and choosing a large fund (to reduce the risk of loss of a few individual investments).

You must choose a fund that have an annual charge of 1% or less. You should avoid a fund that has an expense ratio of 2% or more, as it takes away too much of your yield.

3. Is it better for a young person to save at an early age?

A young person should save 10% to 20% of the earnings for their retirement. You should invest in a large, well diversified, low charge fund that can give an average return of 5% or more over 10 to 30 years.

You should avoid taking an investment plan that have a high upfront charge that is used to pay the distributor (ie the insurance or financial adviser). The current upfront charges in the market (about 18 months of savings) are too high. NTUC Income charges about 6 months only.

By investing in a fund, you will get a higher yield compared to a traditional endowment or whole life policy. The difference in yield can be between 1% to 2% per year. Over a saving period of 30 years, the difference can be 50% or more. If you get $100,000 from a traditional product, you can get an additional $50,000 from a good investment.

It is important to choose the right type of investment for the future.

Note: The figures quoted above are estimates and do not represent any guarantee of the actual return for the future. Investment has risk. But, if you manage the risk well, you can get a better yield.