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Which CPF Life Plan for me? Basic, Standard or Escalating?

Monday, October 23, 2017

An annuity is supposed to help fund our retirement. So, I should be looking at getting a bigger payout, if possible, and not a smaller one.


So, my choice is the Standard Plan.

I know there are people who would like to leave more money behind for their children and they might say I think the way I do because I have none (or at least I think I have none).

OK, maybe so.





However, I do feel that children should take care of themselves once they are adults. 

Some might tell me that this is a Western idea. 

OK, then, how did this Chinese saying come about?

儿孙自有儿孙福,莫为儿孙作马牛。


Bad AK! Bad AK!

Now, for some numbers.





Following my last blog on annuity rates, if we were to choose the CPF Life Basic Plan in order to possibly leave more money behind when we die, the annuity rate is approximately 7.16% (i.e. $991 x 12 /$166,000).


If we were to choose the Standard Plan, the annuity rate is much higher at approximately 7.88% (i.e. $1,090 x 12 /$166,000).


I feel that when it comes to an annuity, the bequest should not be a primary consideration because leaving a legacy is not the purpose of an annuity.

An annuity is not a legacy planning tool. 


An annuity is a retirement funding tool.





What about the new CPF Life Escalating Plan?

I would probably stick to the Standard Plan as receiving a more meaningful sum of money right from the start and for many years after that is intuitively more attractive to me.


Intuition is fine but let me see if I can explain my choice mathematically.

The CPF Life Escalating Plan's annuity rate is roughly 6.3% and will escalate at 2% every year. Therefore, for the annuity rate to reach 7.88%, it would take about 11 years.

Only from the 12th year, the Escalating Plan's annuity rate would be higher than the Standard Plan's. This means its monthly payout would only become higher than the Standard Plan's then.






This seems attractive but in terms of total dollars received from the first payout, it would have lagged behind the Standard Plan and, logically, it would take many more years to catch up with the Standard Plan to make up for the "shortfall".

If we take into consideration the time value of money which says a dollar today is worth more than a dollar tomorrow, the difference in value spanning a period of years is probably quite stark.

I have never been very good at Math and, like with all my blogs, this is just me trying my best to make sense of things but maybe not doing a good job of it.

You have been warned.


So, why would I choose CPF Life Standard Plan?

You blur?

I also blur.





Please remember that I think this is right for me but it might or might not be for you.

Yes, you have been warned again.

---------
Lee Keh Yi:
CPF has updated their CPF Life Calculator.
It show much more details now

Related post:
1. CPF Life estimator.

25 comments:

AK71 said...

Reader:
Does the following 2 FAQ from the ST article raise any concerns? Cuz if it takes 25y for the escalating plan to break even with the standard plan, we would be 90 before we see any extra gains? So it’s a tossup against higher monthly down the the road vs more total payouts...

Q1) HOW LONG DOES IT TAKE FOR MY PAYOUT UNDER THE CPF LIFE ESCALATING PLAN TO REACH THE SAME PAYOUT LEVEL AS THE CPF LIFE BASIC AND STANDARD PLANS?

A For a male member who has an RA balance of $166,000 at the age of 55, and starts his payouts at age 65, the CPF Life Escalating Plan payout takes about nine years to reach the same payout level as the Basic Plan. It takes about 13 years to reach the same payout level as the Standard Plan.

Q2) HOW LONG DOES IT TAKE FOR THE TOTAL PAYOUTS RECEIVED UNDER THE CPF LIFE ESCALATING PLAN TO BREAK EVEN WITH THOSE OF THE STANDARD PLAN?

A It will take a member about 25 years under the Escalating Plan to receive the same amount of cumulative payouts compared to the Standard Plan.

Spur said...

The EP is pretty disappointing ... as usual govt erred too much on the side of kiasu kiasi for themselves .... thus too low of 2% escalation and too much of haircut from initial payout (-20% less).

As I said before, they have calculated actuarially that total payouts from both Escalating and Standard to be about the same. Which is a bit of a disservice to those selecting Escalating as the early penalty is supposed to reward them in their later years.

Doubly disappointing that the press didn't call govt out for it ... and sugar-coating it as a viable alternative. Good news is that most people aren't that dumb ... they may not be as astute as AK but they also got intuition! Hence people will still just decide between Standard or Basic. Hohoho!!!

But wait!!
You can have Standard Plus Escalating too... How haar?!?

Take 10% of your annuity payout & VC into CPF. Your MA needs to be maxed out so that all the VC goes into OA which pays 2.5%.

So initially you are only having 90% to spend .... but Escalating takes 6 years at 2% increase per annum to reach this 90% of Standard payout.

Hence from the 7th year, you start drawing out your initial CPF VC .... your effective payout will be much more than Escalating. All the while, you keep VC 10% into CPF while spending 90%.

OK some maths:
0.9 + 0.1(1.025)^6 = 1.016 .... versus the 0.9 that Escalating will pay at the start of the 7th year.

In the 8th year: 0.9 + 0.1(1.025)^7 = 1.019 versus 0.919

Hope my maths is correct!!! Kekeke!!!

Anything wrong or illogical, please correct .... Kamsiah!!

Dennis Ng said...

Hi Ak,
This is how i compute the annuity rate based on one can start the drawdown at age 65.
Let's say I use 2.5% as the yearly compounded rate for ten years, 166000 would become 212494 in ten years later.
The annuity rate for Basic Plan = 5.60% (i.e. 991×12/212494)
The annuity rate for Standard Plan = 6.16% (i.e. 1090×12/212494)
Did I miss something? Please let me know coz I failed my maths badly during school days ;-)

Laurence said...

I can imagine this hypothetical news headlines one day:

"Singaporeans overwhelmingly select CPF Life's Standard Plan after reading analysis by popular blogger AK71. All other plans will be retired due to the poor take-up rate"

AK71 said...

Hi Spur,

I like CPF Life Spur-Escalating Plan! LOL. ;)

Even now, in retirement, I am doing VC to my CPF account.

Unless interest rates go much higher, I will continue to do this even when I turn 55.

I am pretty disappointed with the Escalating Plan myself.

When I blogged about it earlier this year, I didn't have the full details:

CPF Life Escalating Plan.

I have since updated the blog.

The idea is attractive but the actual math isn't.

To be fair, the Escalating Plan will benefit more those who live to be much older than 90 years old. So, if we have longevity genes, maybe, it is worth a bet. ;p

AK71 said...

Hi Dennis,

I calculated the annuity rate based on the premium paid which is the money I paid at age 55 (i.e. $166,000 goes into the CPF-RA).

From age 55 to 65 is the accumulation phase as the government works hard to grow my retirement money. I wouldn't be making any personal contribution. So, I think of the premium as only $166,000.

Having said this, I see your reasoning and as I am not trained in this area, I think you could be right. :)

AK71 said...

Hi Laurence,

I hope my blog doesn't get gazetted. -.-"

Singapore Man of Leisure said...

AK,

You single, I single.

You no children, I no children.

Yet we both have the same opinion parents shouldn't coddle their children.

Pause.

LOL!



Standard Plan?

It suits your bleeding heart.

I'll go for the Basic Plan ;)

No, I have no out-of-wedlock children to speak of.

But I have siblings ;)


No. 1 reason is I very cheena - its family first. If I should go sell salted eggs early, I would like that my surviving siblings would benefit from it!

No. 2 reason is I don't like big daddy take my money and do the Robin Hood thing. Excuse me, I can do it myself. Thank you very much!



Some numerate and smart persons in big daddy must have discovered if Singaporean live longer than what they have forecasted, big daddy is 100% on hook for it.

But if they can get enough Singaporeans to "subsidise" other Singaporeans, then the risks can be spread out...

Of course this can only work if enough Singaporeans choose the Standard Plan.

Wait.

What's the default plan?

Never underestimate the power of inertia!

LOL!



P.S. But if we 100% sure we can live till 95 and beyond, the math says the new Escalating Plan will be for the win!

Who knew chosing our CPF Life Plans can become a speculative bet on how long we would live?

Lucky I got buy Toto. Making speculative bets are not new to me!









Laurence said...

Quote
AK71 said "I hope my blog doesn't get gazetted. -.-"
Unquote

Not gazetted. But CPFB might find it more effective and efficient to redirect their FAQ page to ASSI blog instead.

I've been visiting CPFB website for decades and always find their "small prints" difficult to uncover. So even now, I continue to discover new things from their site.

AK71 said...

Hi SMOL,

Do not coddle children but coddle siblings is OK? ;p

I think my siblings should take care of themselves too. ;)

Jokes aside, I will be leaving other assets behind when I die. So, it is not as if I am not leaving any bequest. Bad AK! Bad AK!

An annuity should, I believe, do what an annuity is supposed to do best. So, I will use a spade like how a spade should be used. :)

Alamak. I have not bought my BIG SWEEP ticket for next month yet. Thanks for the reminder. ;p

AK71 said...

Hi Laurence,

I have been using bigger fonts in my blog for many months now as I developed presbyopia. -.-"

Spur said...

Hi guys & gals,

Not sure if you are aware that you don't need to select a Plan at 55. You can keep all your BRS / FRS / ERS in your RA and let it accumulate at 4+%.

If you play around with the CPF Life Payout Calculator, you will discover that the payouts are much higher if you wait until 65 before deciding on a Plan --- especially for Standard & Escalating.

Why??

It would appear that CPF Life Fund internally allocates a lower rate of return to your premium payment compared to the 4+% in your RA. The typical govt kiasuism & kiasism at work again!!
Officially CPF Life Fund targets returns between 3.75% to 4.25%.

I give 2 scenarios below .... both using CPF Life Payout Calculator:

1. Select Standard plan at 55 yrs old ... $166K put into CPF Life Fund as single premium payment ... at 65 get $1,253 - $1,375

2. At 55 continue to keep $166K in RA ... grow at 4% to $245,720 (I ignore the extra 2% and 1%) ... at 65 select the Standard plan ... $245,720 gets put into CPF Life Fund ... next month start getting payout $1,796 - $1,976

Moral of the story?? Don't choose your plan at 55 .... Wait until 65!! Hohoho!!!

Cory said...

CPF thing is like a fall back plan for oneself. So is all about oneself. The whole CPF thing is about funding oneself. Get it ?!

Anyleft behind on my non-CPF assets, is theirs since I cannot bring to grave. Surely I won't be able to time my death to finish every non-cpf cents. And I do expect to leave quite an amount when i ... So I agreed fully that CPF is all about oneself since my children and sibling and whatever will get all my non-cpf things .... which is no small sum. Right, AK ? :)




foolishchameleon said...

SMOL,

for BP, dont u need to pledge your ptty?
does it mean, tat when you kick the bucket, the ptty goes to the govt?
isnt that worse?

VK said...

Hi AK,

RA pays 4% annually. So, by age 65 the amount will be 50% more (compound interest) than the original i.e. $249,000.00

The annuity rate for:
Basic Plan = 4.78% (991×12/249,000)
Standard Plan = 5.25% (1090×12/249,000)

VK

AK71 said...

Hi Spur,

Good point but we must remember to make a choice on which CPF Life Plan we want latest by age 65 or else monthly payment will start by default at age 70 under the Standard Plan (which is not a bad thing, I feel). :)

AK71 said...

Hi Cory,

I share your sentiments. :)

CPF is about the government helping us to help ourselves and CPF Life is about funding our retirement.

We should know what a tool is supposed to do. ;)

AK71 said...

Hi fc,

When we pledge a property, the property doesn't go to the government when we pass on. It will still go to our beneficiaries. Don't worry.

But pledging complicates things when we are still alive and if we decide to sell the property. I believe we would have to top up the BRS to the FRS in such a case.

AK71 said...

Hi VK,

Yes, I get what you mean. Similar to what Dennis said earlier. :)

Singapore Man of Leisure said...

foolishchameleon,


1. You are mixing it up. At 55, how much money we want to TAKE OUT or LEAVE IN CPF may depend on whether we qualify/choose under: Basic Retirement Sum (must pledge property), Full Retirement Sum, or Enhanced Retirement Sum.

In laymen terms, its how much CPF money we want to use to buy this CPF Life Annuity.

Since this CPF Life Annuity is forced upon me (mandatory), and not something I wanted in the first place, the least damage to me is to pledge my HDB 3 room under BRS and get as much CPF money OUT as possible.

I have enough. I don't need a "good to have" $1-2K per month security blanket to sleep better at night.

For those who need an annuity plan after retirement, then 100% agree with AK CPF Life is the best plan in Singapore!

But how many of you woke up one day and decided you wanted an annuity plan during retirement?

LOL! (Sorry, can't resist the poke)



2. As for which plans are better, may I suggest you visit this excellent site:


https://www.ifa.sg/cpf-life-standard-is-the-worst/


The example used is for a person who maxed out CPF Life using ERS.

For the measly extra $100-200 extra per month, you can see how much of your CPF money you are leaving behind to subsidise other Singaporeans you don't know.

If we live beyond 95, then any of the 3 plans are same same. But WHEN we die has a big meaningful impact! Have fun shocking yourself!

One silbing is richer than me; the other I don't think would mind the extra funds. In the event I go sell salted eggs earlier than 95 (I use lao lee and nathan as my benchmark), I rather leave the money (which is not a lot since I've chosen BRS remember?) to them.

I'm not a bleeding heart ;)



3. Just like AK, I need to stress my situation and everyone else are different. You have to understand your's.

If someone says they can't live without an extra $100-200 per month, then there's no "choice" to speak off... It would be like giving the choice of chosing any colours we want just as long its blacl :(

Yes, I am making a speculative bet that I won't live beyond 95. If I did, then all 3 plans are the same to me ;)

So its heads my siblings win; tails I win too! (Keeping all within the family, I cheena or what?)

LOL!


zaxfam said...

When I was at 55 my RA account was 124k (FRS). I will be 65 in 3yrs time.
I have the option to opt in or out of CPF life.
Which is the better option? Anyone can help. Thank You

Zainal

Laurence said...

Spur,

Do you have the link to the CPF Life Payout Calculator mentioned in your earlier comment? I can't find it anywhere in the web.
The only one I found is the CPF LIFE Payout Estimator in the CPF website below. But it doesn't have the fields and options mentioned in your comments.

https://www.cpf.gov.sg/eSvc/Web/Schemes/LifePayoutEstimator/LifePayoutEstimator

AK71 said...

Hi zaxfam,

If you believe in having an annuity that provides a monthly income for life, then, go with CPF Life. If you do not believe in this, then, avoid. Quite simple. ;)

Laurence said...

Heaping legacy and fortune on grown-up children and descendents?
Below is what happens thereafter. And it's not the first case in the news and neither will it be the last:

Widow, 89, takes three sons to court

AK71 said...

Hi Laurence,

People never learn. :P

See:
http://singaporeanstocksinvestor.blogspot.sg/2014/05/what-is-our-attitude-towards-having.html

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