Investment Options for Monthly Regular Income

2018-06-06T04:37:00+08:00By |Estate Planning, FD, Investing, Q&A, Retirement|

A generous & loving older retired couple approached me to discuss options to look at for investing. They had recently received a sizable inheritance gift & wanted to receive regular monthly income & upon passing to pass on the wealth to their children.

We first looked at various investment options including equities, bonds & properties. However, they were not interested in looking at the share market & properties due to previous bad experiences.

This left us with 2 main strong options of either Fixed Deposits and/or an endowment to provide income.

Option A: 100% in Fixed Deposit (FD)

A FD provides regular income & can be customized for the interest to be paid out monthly. The rates are influenced by the Overnight Policy Rate (OPR) in Malaysia but determined individually by the bank. Occasionally there are promotions by banks but to be careful of banks marketing high FD rates requiring a Current Account/Savings Account (CASA) that gives much lower returns – thus your actual rate of return is much lower.

Returns (Based on 500k investment)

  • At 4% FD rate, this would return 1,660 monthly from interest only (without touching the capital).
  • At 5% FD rate, this would increase to 2,000 monthly from interest only.
  • Note: Highest listed FD 12-month rate ~3.7% (with lower returns if interest paid out monthly)
  • Note: FD rates may fluctuate up & down over time with rates historically trending downwards

Pros

  • Rates are 100% guaranteed for the investment period
  • Funds protection from PIDM (Protection of Insurance and Deposits Malaysia) especially if from a PIDF-Approved bank
  • Higher flexibility of withdrawing cash amounts as necessary

Cons

  • An additional consideration would be that FD rates in Malaysia (and other developing/developed countries) are historically on a downtrend. (Remember when FD rates used to be 7-8% in Malaysia?!)
  • While Malaysia no longer has estate tax since 1991, there are estate & legal fees applicable (~2% of 500k = 10k)

Option B: 100% in an Endowment

An endowment plans characteristic is for an investment for a certain number of years (5-10yrs) & for returns to be given every year until maturity (20-25yrs). The majority of the endowments returns are guaranteed making it a lower-risk investment.

Returns (Based on 500k investment)

  • The best endowment plans in the market have an Internal Rate of Return (IRR) of 4.5% (25yrs maturity) & 4.2% (20yrs maturity)
  • At 4.5% returns (25yrs maturity), on average works out to 22.5k p.a. (1,875 mthly)
  • At 4.2% returns (20yrs maturity), on average works out to 21k p.a. (1,750 mthly)

Pros

  • Funds protection from PIDM (Protection of Insurance and Deposits Malaysia) especially if from a PIDF-Approved bank
  • Good rate of returns without worries of FD rates going down over time.
  • Low-risk investment with regular income given out
  • An endowment comes with a small sum of Life/Total and Permanent Disability coverage (and qualifies for life assurance tax benefits)
  • Endowment is stated with a nominee & there is no estate legal duty & stamp fees

Cons

  • Cash bonuses would be made on an annual basis. It can be structured to be given out quarterly/monthly but is more complex.
  • An endowment is locked in until maturity. Although you can withdraw the bonus. If you have to cancel the endowment early (<10yrs), you may lose money or just break even.

Option C: A Combination of Endowment & FD

A best of both worlds scenario can be obtained with a combination of endowment & FD.

Firstly, one would decide what would be a good amount that one would want to leave to the next generation. For example from the initial 500k investment, one may decide to leave 400k, 500k or even more (600k++) to the next generation.

You can then place that amount in an endowment investment resting secure that the returns are there upon the maturity period of 20-25yrs. And you can spend the remaining amount (keeping the balance in FD when unused to generate returns).

Returns

  • An advantage of an endowment is with compounding on your side, the returns from an endowment bonus generate further compounding interest (+ ~5%) above the regular annual returns (~4%). This results in significant returns of ~2x FD returns. (E.g. Endowment IRR 7.5% vs 3.7% for FD)
  • IRR 7.5% (25yrs maturity)
  • IRR 6.8% (20yrs maturity)
  • Monthly amount withdrawn adjustable based on amount required (1,500 – 2,000 mthly)
  • Total funds available after maturity known (300k – 700k)

Pros

  • Reduces the impact of FD rates declining over time with a fixed rate of return
  • High flexibility to withdraw any/part of the FD savings
  • PIDM-protection
  • Savings of Estate Legal Fees & Stamp Duty on passing: ~2% (10k savings for 500k)

Cons

  • The concern of initial investment funds locked-in until maturity is mitigated as you have the entire pool of funds in FD to withdraw & spend from without worrying that you will run out of funds after 20/25yrs

FAQ

  • Q: Does this investment meet my primary goal of providing monthly income & secondary goal of leaving an inheritance for my children?
    A: Yes. You put aside the sum that you would like to have available for self (or children) in maturity period. You can then spend any amount that you want each month with no worries. (Balance placed in a FD to generate additional interest income)
  • Q: Why do I need to get additional insurance coverage in an endowment?
    A: For almost all investments, it is recommended that you keep your investments with purpose of generating income separate from insurance which is for risk protection. The only exception to this would be endowments (in the Malaysian & Singaporean environment) which although fall under an insurance category, are actually secure low-risk investment vehicles. The amount of coverage in insurance should be minimal in an endowment & can be viewed as a bonus.
    This qualifies endowments for tax rebates (up to 6k) in Malaysia. An endowment is also provided through an insurance company to ensure that your funds are actually safe then in a bank or most other investments. This is as insurance companies actually need to provide double the capital requirements with the funds kept by Bank Negara as payout to clients in case anything happens. Also check on the strength of cash assets in your insurance company.
  • Q: What would be a recommendation for Option C: FD + Endowment? Give an actual scenario with numbers.
    A: For example if planning to have 20k for spending each year (1,650 monthly), you would have sufficient funds for 25years (equivalent/at 4% FD returns). At the end of 25years, you would also have 548k funds available (~10% more then initial 500k funds).Total Spending/Funds available:-

    • 25yrs spending 1650 monthly: 495,000
    • Cash balance: 14,000
    • Endowment returns: 548,000
    • Total Returns: 1,057,000
    • Other: Estate Legal Fees & Stamp Duty Savings: 11,000
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