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Annuities

>> Saturday, November 28, 2009

With the increasing discussion of CPF Life, it led me to consider if there is an alternative. And it struck me that property investment could be viable.

Why?

By paying a huge lump sum to CPF/insurer, in return receiving a monthly payout. It is similar to purchasing a property and collecting rental every month. The key is for the property to generate positive cash flow.

Of course, I hear the naysayers with all the potential problems.
1. Insufficient down payment, resulting in mortgage payment higher than rental.
2. Mortgage for older age will have shorter duration.
3. Loss of income during rental gaps/change over.
4. Depreciation of property value.
5. Property management as landlord.
6. Various fees like taxes, legal, maintenance, renovation, repairs, insurance, agents, etc.
7. Interest rate fluctuations.
And the list goes on...

However, consider the advantages.
1. If you are placing $300k in an annuity, it could well afford a HDB 3-room flat or at least a down payment for a $500k condo. The rental most likely will be more than the mortgage (if any).
2. When you pass on, the property can be sold as a gift to your surviving loved ones. Or they can continue to enjoy the passive income. Annuity normally only give back a small portion of the remainder, if any at all.
3. Property is considered a good hedge against inflation. Most annuity do not increase the pay out with inflation.

As with all investments, property investing also carries risk. However, risk can be reduced with knowledge. I am not saying that annuities are useless, just jump into properties. But I am recommending that it is a possibly better alternative after considering the advantages and disadvantages, and the risk are properly managed.

Annuities would still be better for the risk adverse and do not want to learn about property investing. However, there is also risk (a major one in fact), and that is inflation. And with CPF Life, investment fluctuations are also transferred back, i.e. the low pay out is not even fixed, it can go lower when inflation goes up!

It is important to keep an open mind and explore alternatives so that we are aware of the options we have before making the decision which will affect the rest of our retirement years.

2 comments:

Freedom Achiever December 5, 2009 at 6:21 AM  

1)I believe most people have already own their own flats, so buying another HDB flat is not a option. Renting out their existing flat is an option to increase their income.

2)When you are old, you should not take too much risk in buying another property where you need to take a lot of loan. Unless you can pay out full amount, if not, buying a property is not a good option too.

Lau December 5, 2009 at 11:54 AM  

Hi FA,

Yes, the points you mention are the important factors/considerations if it is suitable for one or not.

1) Children move out, do not need the 4/5 room flat. Possibility is to rent out the entire place and rent a 3 room flat and pocket the difference.

2) Possible to pool funds together with others your age like siblings to pay the full amount.

Everything has its pros and cons. Just that I find many are stuck in the box. Exploring other options outside, does not mean you have to do them eventually.

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