Saturday, May 12, 2018

Cancel my savings plan in pursuit of greater investment opportunities? (2)

This is a follow-up to my previous post on considering cancelling the savings plan (link here).

PruWealth's brochure can be found here.

I'm pretty appreciative for the different perspective, thoughts and response offered. I think the topic discussed also open up more things for me to write about. In this post, I'll clarify some details as well as explore some of the discussion from the comments.

1) 20-year plan
The plan matures at year 20, thereafter which there will not be contributions to the principal sum any longer. However, when I signed up for this, I was indeed going for the long haul (I don't see a need to draw down until I'm in my 50s at the earliest - see point 2 below)

2) Purpose of signing up for the policy
Long-term savings with a view of being able to do one or more of the following:
- Passing on of wealth to my next-of-kin or dependent(s) or hedging of wealth should something unfortunate happens to me (terminal or critical illness or death). It supplements my life insurance to this end.
- Accumulate a sum of money that can be used to support retirement at an old age (read 65+) or support my future child/children in their university year (by then I'll likely be somewhere between 51 - 55?).

4) Illustrated Returns of the plan - can high yield bank account of 1.5% beat it?
It was debated that the savings plan would already be outdone by high yield bank account - is this true? Let's take a look.

The previous post had a crop of my policy up to year 33 - this is the full screencap for the illustrative benefits.

I have also added a table with additional calculations of gain and loss and CAGR based off the given illustrative benefits table above.

Returns at year 20
First 20 years of my policy will see the equivalent of halving the amount of time than if one was able to put a lump sum at the start (assuming constant interest). In this period of time, my returns would be 39.58%, giving a CAGR of 1.98%. The base interest rate is somewhere about 3.38% before compounding.

At policy year 33
Between start of policy to year 33, this will generate a return of 132.16%, giving a CAGR of 4.01%. In consideration to the diluted compounding up to year 20, this should be about 3.73% interest rate before compounding.

Using year 20 as a base (no more contributing to the principal sum at this point), I would start out with indicative value of $68349. At the end of year 33, the sum would grow to indicative value of $113,668, a total indicative return of 66.3%, translating to 5.1% CAGR. This is about 3.99% per annum before compounding.

Comparison to 1.5% high yield bank account
I explore two scenarios here:
- Simulating monthly contribution of $204 up till year 20.
- Simulating starting off with lump sum of $48960 from year 1.

In either cases, using the compounding formula, one will still get a significantly lower amount. In fact, rule of 72 will approximate that it will take 48 years just to double the principle amount alone.

In both scenarios, it would fall short of  the illustrated benefits. That leaves whether Prudential is able to achieve or outdo the illustrated benefit.

5) Selling the policy instead?
Apparently it is possible to sell existing policies and this may give you back more money than just surrendering the policy - even if it has zero cash value. This is an option I'm exploring and will let everyone know how it turns out.

In closing, I think the discussion is very fruitful and we all stand to learn from it, be it doing homework, being clear on the objective of buying into the savings plan, and the upside/downside relative to using the money for other purposes.

Thanks for reading. :)

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