What did I do with my savings plan in the end?

A long time ago, I wrote a couple of posts on thinking if I should be cancelling my savings plan on the belief that investing the money that I can get back, as well as the remaining premiums to be paid up till maturity, will pay off greater returns.

These received substantial comments - a mixture of advice, encouragement and critique.

You can access the articles here if you wish:

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

Today, I will revisit as I have gotten some more recent questions. I think it will also be a great idea to write on this and then update the older posts so as to offer closures. Of course, I will be more than happy to continue entertaining any future questions or comments.

Okay, here we go!

Daniel asked:

Hi, did you surrender this policy eventually?

Anon asked:

"Just came across your post about this and am currently in the same position you were- should i surrender/sell policy to third party to take the loss and Invest it myself? Or just let it ride..

I chose a 5 year payment for myself but quite a big annual premium with 2 more to go.

Could I ask where you stand on this now a year later? And why did you choose a 20 year payment instead of 5 or 10 years of premiums?"

I have commented to follow up on the post, then the idea of putting these in writing gave an opportunity to expand on my answers when compared to the original comments.

On trying to sell the policy but not succeeding, and then mulling choice between surrender or keep
Initially, I tried to get a quote for my policy, but I did not receive any replies. This boils down to the choice of surrendering or keeping.

Overall, with how my investing journey on the stock market was lacklustre for the past 18 months, it could be good to have a backup in case of investing FUBAR.

In the end, I have chosen to let it ride, and probably intend to leave it till maturity and beyond. But that's not all I had done to the plan.

Changing the rate of premium payment
But what else have I done?

I changed my premiums payment from monthly payment to yearly.

I am not so sure about the other savings plan out there, but in my case, one has to pay more for monthly premium charges - close to 2% - presumably some sort of administrative charges - which does not contribute to any returns. If you are giving your premiums monthly for other savings plan, do check with your financial planner.

Basically whatever returns I am meant to get for each year gets reduced 2% p.a if I kept the monthly premium up.

The length of the plan till maturity
The choice of 20 years instead of 5 or 10 years was a bit of an uneducated choice. I started on this plan before I started educating myself financially - primarily failing to appreciate how to better exploit the effect of compounding interest and not yet learning about other investment mediums.

A long time ago, I wrote a couple short posts on the effects of compounding interests:

• Effect of Compounding on Principle Amount (and Ongoing Fund Injection)
• Effect of Compounding Part 2 - Early Repayment for a HDB Housing Loan

If I were to go back to the decision point, I would want to change to a 5 year plan (t then I can just start another plan if I wanted to).

Let's run some numbers, shall we? We shall explore 2 conditions for the 5-year, 10-year and 20-year plan:

• Same amount of yearly premiums (pay 2400 yearly till maturity)
• Same amount of total premiums paid, spread over the period of the plan (48000 total sum)

I'm assuming the following for simplicity (in reality, where got so good, right? haha):

• 3% annual returns before compounding 
• Continuing to hold until policy year 30 without withdrawals or surrendering.

Scenario 1 - Same amount of yearly premium (2400 per year) until maturity

The first scenario, minus looking in-depth into the compounding effect, was what I had in mind when I bought the plan, looking at only enforcing myself saving up via the plan.

Based on the above, the Compounded Annual Growth Rate (CAGR) of this at the 30th policy year will be:

• 4.18% for the 5-year plan
• 3.65% for the 10-year plan
• 2.69% for the 20-year plan

Unsurprisingly, the CAGR of the 20-year plan and, to a lesser extent, the 10-year plan, falls behind the 5-year plan; the premiums given in the latter years have had less time to work their magic. The only reason why you have saved more via the plan is that it is being enforced. Whether that accomplishes your intended objective, that is another question.

But what about the second scenario?

Scenario 2 - Same amount of total premium (48000), spread over the period of the plan

The second scenario - that is, same amount of total premium, was what I failed to consider at the time when I decided to buy my savings plan. The CAGR from the first example applies, but the principal sum for the 5-year plan, and to a lesser extent, the 10-year plan is now working much harder than the 20-year plan as the total premium was given earlier.

So Anon, if you are reading this, while it is up to your discretion based on your preference or risk appetite, I feel it should be fine to keep the savings plan. For your own info-gathering though, it is also no harm in trying to get a quote for the sale of your savings plan. You may garner some interest as it is more than half-way through your plan anyway, unlike myself.

Readers, do you have any savings plan or any experience to share regarding it? What are your thoughts about your savings plan?

Thanks for reading.

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.


Conclusion
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. :)

Update 3/1/2020:

Over a year later, in the end, I have decided to continue holding the plan - do read my latest post on this matter here!

Cancel my savings plan in pursuit of greater investment opportunities?

Back in 2015, I signed up for PruWealth, a savings plan that also allows you to nominate someone else to take over (hence hand over the wealth accumulated to the next generation). This was several months before I stepped foot into the stock market.

I currently contribute $204 for this plan on a monthly basis and having opted for the 20-year plan, this will go on until I turn 47. Currently I have not included the idea

More than that, I have added crisis waiver component as well.

The idea of crisis waiver - not needing to contribute to the savings if I do (touchwood) become critically or terminally ill, prudential will continue to contribute to it - appealed to me.

But after achieving the returns from holding and divesting CMT, Cache and FLT, I feel I can outperform this savings plan investing into the stock market. In fact, I think STI ETF can outdo this plan and still give dividends to boot.

I have it in my mind to pump all these towards a solid idea of a stock and am confident it will at least double by the end of this year, followed by multibagging in subsequent years to come.

The downside if I do this?

Referring to the above indicative values, I have currently just hit my 3rd year in the policy - contributing a total principal sum of $7344.

If I were to surrender the policy, this will give me a guaranteed return of $3181 and a non-guaranteed return of $71. This totals $3252. I will end up losing 55.8% of the money I have put into.

And if my investment idea fails? That then becomes a catastrophic (but survivable) loss.

That said, I had definitely benefitted from this - it becomes a warchest, part of my retirement plan or my contingency should my investment (touchwood again) fails.

Am I getting complacent and overconfident? Or am I being too conservative and limiting my gains?

Update 3/1/2020:
Hi guys! Just so you know, shortly after this post, I decided to elaborate a bit more on the savings plan matter here.

Over a year later, in the end, I have decided to continue holding the plan - do read my latest post on this matter here!