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Retirement planning in singapore has traditionally involved #annuity plans. However, with low interest rates, many are buying annuity plans with leverage from banks. This is life insurance premium financing.
In this tutorial, you’ll hear on why it is appealing now.
And what are risk to be aware of before buying a #leveragedannuityplans
where there are guaranteed returns and non guaranteed returns from PAR funds.
Chapter
0:00 : Introduction and disclaimer
0:51 : What I’m doing a breakdown of leveraged annuity how does it work
1:26 : Picture description of how it works with guaranteed and non guaranteed components
2:30 : How non guaranteed performance from PAR plans
3:50 : Leverage from banks and how it changes the projected yield to possibly 10%
7:18 : Understanding Sibor trends and how it can affect returns
8:36 : Summary table of leveraged annuity plan vs property investment. Edit “Loan to value” better description than “Leverage factor” in table
11:05 : Mistakes of understanding this plan with special attention to risk and pitfalls
13:41 : My approach to retirement planning
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We do not make any recommendations on whether a security is a buy/sell as every investor has different investment goals and risk profiles. The presentation of ideas from Josh Tan and TheAstuteParent are strictly for education purposes. You are advised to perform independent research yourself or seek a qualified financial adviser. We will not be liable for any losses directly or indirectly from the material. Some of the referral links in the video summary are products and services personally used by Josh Tan and they may pay an affiliate commission or referral bonus. It is not an endorsement of the product unless explicitly stated and we will not be liable for any losses. The content in this video and any promotions mentioned is accurate as of the posting date.
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About Josh:
Josh holds a degree in Accounting from NTU.
In 2016, he co-founded the financial education website TheAstuteParent to provide detailed insurance plan analysis and financial planning tips to help you kickstart your journey towards financial freedom.
As a ChFC Charterholder, Josh has agreed to be bounded by the ChFC®/S Code of Ethics. This includes, among others, acting in a professional manner when it comes to conducting due diligence on primary and secondary sources of investment-related data, and articulating his investment opinions based on his research and beliefs. Based on his research and analysis, he highlighted his beliefs and opinions, and illustrated the concept of time value of money, as of the time of the video.
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Leveraged Annuity Plans: How They Work and What Risks to Watch Out For!
In the world of financial planning, annuities have long been a popular choice for individuals looking to secure a stable income stream during retirement. However, some investors have taken this concept one step further by exploring leveraged annuity plans. These plans, although potentially rewarding, come with their own set of risks. In this article, we will delve into how leveraged annuity plans work and discuss the risks investors need to be aware of.
A leveraged annuity plan involves borrowing money to purchase an annuity contract. The borrowed funds, usually obtained through a loan, are then invested in the annuity. The hope behind this strategy is to generate a greater return on investment compared to the interest paid on the loan. By leveraging their investments, individuals aim to amplify their gains and potentially enjoy a more comfortable retirement.
The appeal of leveraged annuity plans lies in their potential for accelerated growth. With the borrowed funds working alongside the principal investment, investors can take advantage of market upswings and potentially magnify their returns. The amplified gains may also provide the added benefit of increased retirement income, allowing individuals to maintain a desired standard of living.
However, along with the potential for higher returns, leveraged annuity plans come with inherent risks. The primary risk revolves around the borrowed funds and their associated interest rates. If the return on investment from the annuity falls short of the interest paid on the loan, the investor faces the consequences of negative returns. In such a scenario, not only does the investor lose out on potential gains, but they may also struggle to meet loan repayment obligations. This can lead to financial distress and a significant dent in their retirement savings.
Additionally, leveraged annuity plans are highly dependent on market conditions. If the market experiences a downturn, the invested funds could significantly decrease in value. This can hinder the investor’s ability to generate enough income for their retirement and cause a chain reaction of financial difficulties.
Another risk factor to watch out for is the complexity of leveraged annuity plans. These plans require a meticulous understanding of the intricacies involved in leveraging borrowed funds. Investors must carefully evaluate the potential returns and weigh them against the repayment obligations to ensure they are financially equipped to handle worst-case scenarios.
It is crucial for investors to assess their risk tolerance and financial capabilities before venturing into leveraged annuity plans. Consulting with a trusted financial advisor can help individuals better understand the risks involved and make informed decisions based on their individual circumstances.
In conclusion, leveraged annuity plans can provide the potential for increased returns and enhanced retirement income. However, these plans carry inherent risks that should not be taken lightly. Investors must thoroughly comprehend the complexities of leveraging borrowed funds, evaluate market conditions, and assess their financial capabilities before embarking on such plans. By being aware of the risks and seeking professional guidance, individuals can make well-informed decisions and safeguard their financial future.
Thanks for the video! Is it right to say that it's not a good idea to invest in leveraged annuity in today's environment? The interest rate is obviously high now, but what's your view on where it's going?
Although some may feel sg COE is insane. But I have learnt over decades that actually, the citizens accept it. This is good for nation building by supporting an efficient govt strongly.
Thanks for this video. Now the interest rates at 3%. Would you recommend to redeem the loan or what should be the game plan ? 🙂
Hi Josh, Now with high interest rate environment, leverage annuity has high chance of losses for those who cannot redeem the loan, right? Maybe you can do an updated video base on current rates. Thanks
Hi Josh, would appreciate if you can do an update for those who bought a leveraged annuity plan last year. With interest rates going up so fast, what would be possible courses of action based on current rates and future rates which could hit 5% some time next year. Thank you!
Going into negative cash flow is one thing, but can the LTV be reduced by the bank? Or worse, can the financing be suddenly taken away? Is there a surrender value close to par, say at the 6th year? It is unwise to do leveraged investment when returns are not fixed and with so much constraints. We are now in a rising interest rate situation, those who bought such plans, can feedback how it is performing?
Can you stack annuity loans on top of this?
Who is the owner of the policy if we use leveraged. Me or the bank.. if we take 20% bank own 80% can the monthly pay out be use to buy the bank portion?
Can anyone point me to like dummies guide? I watched twice, still don't quite understand the material
My understanding is that CPF Life can’t be withdrawn as and when you want.
Will the principal be garaunteed for the annuity plans?
if the interest rate fluctuates, does that mean the 151.xx/mth will also fluctuate? So your cash flow becomes unstable?
Would it make sense to call these endowment plans annuity plans? If these are really annuity plans, a retiree should be able to buy this and choose not to commit to CPF LIFE.
Josh can these annuity plan fit into CPF's stringent definition of annuity?
I think some of your numbers are high.
The initial unleverage yields on the policies that I reviewed are rather low. For projected 4.75% return, the initial yield is closer to 3.5% and for the projected 3.25%, the initial yield s 2.4%.
Also, does the income goes up with inflation over time?
Finally, I think people need to have some perspective regarding what is considered stable income.
Most who are attracted to this are thinking of leveraging, and with leveraging this means that the interest expense year on year is going to be very variable. If so, the income would also be rather variable.
While you have illustrated a great 10% initial yield, that gets cut to 6% if interest rate move up.
A person thinking of retiring needing $12,000 a year in income, would plan to put in $120,000 downpayment on a leverage endowment such as this. If interest expense moves up, and their income gets cut, the person will be underfunded for his retirement
Josh can you share some theoretical scenarios of how leveraged annuities are helpful and when they are not? Noted on interest rates impact but can you share some illustrations? Even if theoretical? Also if interest spikes where it’s no longer favourable, can you evaluate what options ? Do we pay off more principal in the loan? Or do we cash out the annuity ? Hope you can help shed some light. Btw your videos are really insightful.
Great transparent sharing! Very helpful Josh!
I like your video, very clear and informative. I have 100k in cash,I'm a low risk person, should I top up CPF SA for my only child or should I buy one more annuity plan for her ,my child have 5 annuity plan,added up to be comfortable for her retirement,but she is a freelance,not much CPF,my agent suggest insurance can surrender anytime but CPF pay per month,and is little too,I need your advice, thank you
Thank you for sharing this, this has benefited and given us all better insights
The regular cash flow is only after 5 years. But the interest on the leaverage borrowing is immediate, so still need to pay interest for 5 years first? Unless the interest charged by bank starts computing n payment upon commencement of regular cash flow.
High Josh, bought the plan in end 2019. 3 factors influenced my decision. (a) Negotiated with the bank & got a deal much better than the 1% + 1 month SIBOR you cited. In fact, lower than the lowest housing loan currently available in the market. See this as a supplement to CPF RSS & an alternative to property investment (only downside is zero capital appreciation). (b) If SIBOR increases, chances is that return of the Plan is increased (must be a very poor fund manager to have 3.5% return when 1 month SIBOR is at 3%). Due to the low borrowing cost, there is a sizeable margin of safety (see this safer than property investment) (c) May cash out if necessary
Hi Josh, thanks for the informative video. Can you share how the 4.75% illustrated IRR translate to 2.06% returns pa, likewise for 3.25% to 1.04%.
Thanks for the vid Josh! Definitely shed light on a product I'm not familiar with. I hadn't thought of it's comparison versus properties!
I ever at least thrice explained this leveraged investment (insurance & equities) vs property investment. But often get a strong rebuke from those who solely believe property prices has a one way direction to the moon.
So i am sure you will have such back lash as well. Good luck buddy.
Basically is a bet on Insurance company investment returns using the fund we borrow on our risk to feed them with fees and maybe additional cut if they do well plus earning interest cost. If one is able to recall back the loan, then he is idling his fund somewhere. … on lower returns. Which makes no sense. Sorry if i sound crude.
Dam good to give info on insurance stuff. Please do more!!! I find it very useful
hi Josh… your calculation was based on ONLY Paying the Interest portion of the $140K Loan… what about the principal ? When will it ever be repaid ?
If you factor in the principal as well, wouldn't this always be a Negative Cashflow ?
Thanks for your informative Video.
Annuities are an overpriced high commission product. Run when you here the word annuity
Hi Josh, thanks for the detailed video. You mentioned that the loan is on a revolving credit basis and you only pay interest? What happened to the principal? It’s forever there and you still need to pay it off when you are gone? Another question is whether it is possible to structure it to pay down some principal?
Free Money out of thin Air…. hmmmm.
What kind of goods it produces?
Hi josh, good explaination. however some questions
1) the first 5 years of paying the interest without getting any payouts, how should we factor in towards the "10% yield"
2)does taking premium financing affect TDSR? it could affect the credit power of potential condo buyers
Good balance sharing on this topic as not much info on this around. Some banks offer loans in other ccy like EUR or USD which have smaller interest but fx risk or upside.
I guess you highlight the most important is that this should only be a layer to the retirement plan and I like the comparison to property when I was assessing the same when i did such an option. Thanks for this
Good video except no one can predict interest rate consistently