We’re often spoilt for choice here in Singapore, but not all choices are equal. No one gives you a second look when you carry an iPhone or a Samsung device, but use any other brand and people look at you with concern and sympathy, as if you’re being forced to do so against your will. Or sometimes you have several choices, but some choices just don’t make sense. Like voting for an independent candidate in the last General Election.
Speaking of independent candidates that ran in the previous General Election, let’s talk about CPF. In particular, the CPF LIFE scheme, which gives you monthly payouts based on your remaining CPF accounts for the rest of your life. Now, CPF LIFE is compulsory for those who born in or after 1958. For us, there are currently two options, the Standard Plan and the Basic Plan.
But now, with new recommendations by the CPF Advisory Panel (the same people that brought us the Retirement Sums last year), we will have a third option for CPF LIFE.
Huh? A new third option? I didn’t even know what the two existing ones were!
Here’s a quick overview. The Standard Plan, which is the default option, gives you a higher payout each month, but leaves a smaller amount to your beneficiaries when you die. The Basic Plan, on the other hand, gives you a lower payout each month, but leaves a higher amount to your beneficiaries when you die.
So the main difference between the two is how much you get each month, and how much you leave to your beneficiaries. The reason why the Standard Plan is the default is because CPF is meant to be a retirement fund, so it doesn’t make sense to bequeath that money to others when it should be used to finance your retirement lifestyle.
The only problem is, both the Standard Plan and the Basic Plan give you the same monthly payout each month for the rest of your life (assuming, of course, that you have stopped contributing to CPF already). With Singaporeans expected to live past 85 years of age, there’s a high chance that you’ll be spending about 20 years in retirement.
And as anyone who’s lived through the 20 years between Pokemon Red and Pokemon Go will know, a lot can happen in 20 years. And what may seem like a decent monthly payout when you’re 65, may not be worth very much when you’re 85 thanks to inflation.
Just think about it – in 1996, 20 years ago, a Big Mac from McDonalds cost just $3. Today, it costs $5.95, or practically double the price.
So what’s this new option all about?
The newly recommended third option for CPF LIFE, is one with escalating payouts. While it will begin at a lower payout amount of 20% of the Standard Plan, but this amount will increase by 2% each year for the rest of your life.
Here’s a quick overview of how it works compared to the Standard and Basic Plan:
Let’s look at Ms Geetha, Ms Ling and Ms Hayati as an illustration. They all turn 55 this year and each has about $161,000 in her CPF Retirement Account. For simplicity’s sake, they all want to start their CPF LIFE payouts at 65.
Ms Geetha chooses the Standard Plan, which gives her about $1,267 a month when she turns 65 for the rest of her life but will not leave anything to her beneficiaries if she dies at age 85.
Ms Ling choose the Basic plan, which gives her about $1,215 for the rest of her life, but if she dies at 85, she will leave her beneficiaries about $85,118.
(All figures obtained using the CPF LIFE Payout Estimator – women get less each month compared to men because they’re expected to live longer)
Ms Hayati wants to choose the new option: the CPF LIFE plan with escalating payouts. She can expect to get about 20% of the Standard Plan, or $1,014 each month for the first year, then about $1,034 the following year, and so on.
So, which is better?
Since everything looks better in a chart, here goes:
So as you can see from the chart, for the first 10 years, Ms Hayati will receive less each year from her CPF Retirement Account compared to Ms Geetha and Ms Ling. When they turn 75, Ms Hayati’s payout will start to be more than Ms Ling’s. When they turn 77, 13 years after payouts have begun, Ms Hayati’s payout will be more than Ms Geetha’s as well.
At the age of 85, Ms Hayati can expect to receive about $1,506 a month from her CPF Retirement Account, about 18% more compared to the $1,267 that Ms Geetha gets, and about 24% more than the $1,215 that Ms Ling gets.
So the most important question seems to be – are you willing to accept a lower payout for 10 to 12 years if it means a higher payout after? But actually, there’s a more important question – which option gives you the most money overall?
That brings us to another chart:
If you notice, we’re just focusing on the total payout between the ages of 79 and 89 years, because this is where the cumulative payout for the CPF LIFE Plan with Escalating Payouts exceeds that of the Standard Plan and the Basic Plan.
From the chart, you can see it takes about 18 years (when they’re age 82) for Ms Hayati’s CPF LIFE Plan with Escalating Payouts to overtake Ms Ling’s Basic Plan in terms of cumulative payout. It takes about 23 years (when they’re age 87) for Ms Hayati’s CPF LIFE Plan with Escalating Payouts to overtake the Ms Geetha’s Standard Plan in terms of cumulative payout.
What does this all mean?
Putting it simply, if you start payouts at age 65, then you will only get more out of CPF LIFE if you live past 87 and choose the Plan with Escalating Payouts. Unfortunately (or fortunately, depending on how you want to see it), most of us aren’t expected to live that long. Yes, our life expectancy is on the rise, but living past 85 years of age is still only for the select few.
So why recommend a third option that may not be best for everyone?
Because everyone’s retirement situation is different, and there is no one size that fits all.
So if you don’t expect to be too reliant on your CPF LIFE payout during your retirement, then, like Ms Ling, you can select the Basic Plan which gives you a lower payout. Technically, it makes the most money overall but, crudely speaking, you’ll need to die so that others can enjoy it.
If you prefer a steady but slightly more substantial monthly payout from your CPF LIFE then, like Ms Geetha, you can select the Standard Plan. Just remember that while the monthly payout at 65 years is the same as the monthly payout at 85 years, your lifestyle will get more expensive due to 20 years of inflation.
If you’re able to live with a smaller monthly payout in the first ten years of retirement then, like Ms Hayati, you may want to select the upcoming CPF LIFE Plan with Escalating Payouts. The payouts increase to keep pace with inflation, so that you won’t need to change your lifestyle much as you grow older. Plus, as a bonus, if you live past 87 years of age, you will be receiving, cumulatively, more than your peers on the Standard Plan.
The best part about these choices is that, as of last year, you won’t need to decide which Plan you prefer until you’re ready to start your CPF LIFE monthly payouts. This allows you to literally wait till the last minute, then make your choice depending on your current lifestyle needs.
What do you think of the newly recommended CPF LIFE Plan with Escalating Payouts? Share your thoughts with us.