Do not buy insurance savings plan to save for retirement. Save 300k by reading this!

There are many endowment plans and single premium plan marketed by insurance companies. One of them works this way.

You pay $1M upfront and 5 years (60 months) later, you will receive income for life. The income is about 42k a year. After 5 years, your principal is guaranteed. Apparently, it is selling like hot cakes as people like guaranteed products.

To me it is plain silly because there are like a billion alternative investments equally safe and more liquid.

For example, you can buy a portfolio of Unit Trust. First State Dividend Advantage, Schroder Asian Income, First State Bridge, Schroder Asian Income etc. They are not the best but surely can generate 5% pa or more and pays you dividend straight away upon investing.

Or simply invest in infinity series world equity funds. Expense ratio of 0.4% only. 

You can buy 4 different bonds of different tenure. For example SPH 3.2 2030, Wingtai 3.68 2030. Or today's IPO Shangril 3.5% 2030 bond. 

If you still think it is risky, then buy STI ETF! It pays you at least 3% a year of dividends! I do not think the 3 banks + Singtel will go belly up in 10 years since they form majority of the STI ETF.

After 10 years, the insurance plan would have paid you 42k x 5 years = 210k + 1M capital.

STI returns assuming 3% dividend and 2% capital gains (cash out) would have become 1.5M after 10 years. Similar so for your Unit Trust portfolio, assuming 5% dividends and 0 capital appreciation.

Your SPH + Wingtai + Shangrila bond portfolio would have become 1.35M assuming your coupons are reinvested at 0%. I am not even talking about decent perps (since your insurance is in perpetuity right?!) like SPH 4.5 perp, UBS 4.85 perp, Ascott 3.88 perp, Mapletree 3.95 perp, wingtai 4.48 perp, FPL 4.38 perp.

Why buy something, receive guaranteed negative returns for first 5 years, poor liquidity, pay interest for 5 years with no cash flow return (banks provide financing) and then get sub par returns thereafter?

If you are supporting your insurance agent, relationship managers, IFAs because of their excellent service, then give them money directly instead of compromising your returns! 

Effectively, you are foregoing almost 300k or 30% of your returns over 10 years!

Are their service and advice worth 300k? They probably make 10k commission from your 1M only. If they are from banks, the revenue works out to be 2k commission to them. Please, give them 11k from your pocket instead. Everyone will be happier.

Miles or cash back? An opportunity cost perspective

I used to be a 100% cash back credit card chaser as it is hassle free and cash is always better than a captive currency like miles.

Recently, I have been reading quite a bit on miles blogs. Apparently, there is strong interest in chasing the miles to redeem for premium flights. But do they actually make sense? The value per miles as advocated by some blogs is 1.9 cents per mile. Hence even paying 2% admin fees to buy miles make sense for some.

I would probably value it at no more than ~1.57 cents, which I will illustrate simply below, base on my personal circumstance.

As I spend 3k per month, I usually split up 2k on UOB one card (5%) cash back and 1k on OCBC 365 cash back card (averages 3.5% or so). For simplicity, the cash back I get back is roughly $135 per month. This works out to be 4.5% blended spending cash back.

If I were to spend it on miles, I probably would apportion my spending on 3 cards: $1k UOB Visa pay wave (4 miles), Maybank horizon (3.2 miles) $1k, miscellaneous $1k spending on UOB privi miles card @ 1.4 miles/dollar earn rate. I can earn approximately 8600 miles monthly.  

Hence the opportunity cost to earn the miles is to give up cash back of $135 which works out to be 1.57 cents per miles. The true opportunity cost should be even higher since cash is paid frequently  to offset bills and miles can expire (or even devalued).  

The attractive part of miles redemption is that business class tickets actually cost roughly only 30%-70% of outright purchase price when redeemed using miles. It is almost similar to earning a premium flight ticket discount coupon by using miles card.

For instance Sin-HCM-Sin business class ticket costs $1075 or 43k miles (opportunity cost $675 cash back from spending. 37% discount on ticket).

Business class ticket Sin-HK-Sin route costs $1800 but or 61,000 miles (opportunity cost $958 cash back, 46% discount on ticket).

The further the distance, the more value is derived from miles. Sin-Auk-Sin cost $5800 or 124,000 miles (opportunity cost $1947 cash back, 66.4% discount on ticket).   

It is actually uncomfortable for me to abandon cash back card altogether and earn delay gratification on business class travel. However, given that I am unwilling to pay for business class tickets, I would probably give miles cards a try.

Signs up are probably much faster to earn then spending. Hence, I am likely keeping my UOB one card for the 5% cash back but earning miles sign up bonuses to kick start the discounted business class travels.

Hence I applied for the SCB X card 100k miles for a start. That actually costs me $700 annual fee + $300 opportunity cost of using 5% cash back card = 1k. Hence my miles cost me 1 cent/mile.

In summary, it means that miles should be valued base on the cash back you give up (opportunity costs) and not on the advertised rates on blogs (base on the cost of business class travel – you wouldn’t spend cash on the tickets anyway).

Redeem miles on business class travel make some sense otherwise just stick to cash back cards to earn the cash and pay for economy class tickets.

It is possible to stick to 1 card for cash back (eg if spending is around $900/mth stick to OCBC/Citi cash back; $2,000/mth stick to UOB one card).

For miles chasers, a lot more planning is required on which card to use in order to stretch the miles rate.

You shouldn’t accumulate miles on your own and your partner should preferably share your obsession in chasing miles.  

A hybrid approach will stretch your dollars more; using miles card that earn 3.2-4 miles per dollar targeted spend; general spending to earn 3%-5% cash back is preferred over 1.4-1.5 general spending miles.  

It makes life a bit more fun, brains a lot more thinking to use a miles card!