Investment tips for retirees

I write this article to help retirees, who are not savvy in investing, to decide on how to invest their savings to get a monthly income for a lifetime and leave behind some balance for their children and grand children. Should they buy a life annuity? If not, how should they invest their money?

Calculate the total amount of your assets, excluding the flat or house that you now live in. Estimate the monthly income that you need to live comfortably. If your total assets is more than 300 times of your monthly income, you are quite comfortable. For example, if you need $1,000 a month, you need more than $300,000 in savings (i.e. personal savings and CPF).

Another way to look at this matter is to take your total assets and divide by 300 to get the monthly income. Will this be sufficient to meet your living expenses?

If you have more than this ratio of assets that can be invested, you can manage your own investments. The best choice is to invest in a low cost investment fund, such as the STI exchange traded fund that is available from the Singapore Exchange (SGX). This fund is invested in the top 30 shares listed in SGX. It is well diversified and has a low expense ratio of less than 0.5% per annum.  It will earn a market rate of return, which is likely to average more than 5% over the long term, net of expenses.

If you invest all of your savings in the ETF, you can sell 1,000 shares to realize money to spend at regular intervals. If you need $1,500 a month, the sale of 1,000 shares will provide about $2,800 which can last nearly two months.

If your  ratio of assets to monthly income is less than 300 times, you may have to consider investing in a life annuity. The best annuity is provided by CPF Life. It provides an investment yield of about 4% and has low expense ratio. It operates on a mutual basis and shares the actual experience of the fund fairly among all the annuitants, i.e. it is not taken away as profits for shareholders.

Some people are uncertain about the choice of the four options. Look at the amount that you will get under each option and choose the option that suits your need. Do not try to calculate which option gives you the best value, as you really do not know how long your future lifespan is.

If your health is poor, relative to your age, you should avoid CPF Life and keep your money under the Retirement Account to be withdrawn monthly.  If you are in fairly good health for your age,  you can choose any of the option under CPF Life and leave the worry about future life expectancy and investments to CPF, instead of trying to manage the money yourself.

If you have to buy a life annuity from an insurance company, you have to consider the following - how much of the annuity payout is guaranteed and how much is variable? What is the amount taken away by the insurance company to pay its expenses, distribution cost and profit for shareholders?  If the answers to these questions are vague, or if the amount that is taken away is more than 0.2% per annum of your invested sum,  the annuity is likely to give poor value.

There is a chapter on selecting a life annuity in my book, Practical Guide on Financial Planning. It is available in the major bookstores and can be ordered online here.

Tan Kin Lian