Last updated on April 2nd, 2018 at 11:51 pm
Recently, CPF announced recommendations for a new CPF LIFE with escalating payouts. The scheme provides buffer against inflation in exchange for lower or delayed initial payouts. Of course, there are cynics suggesting that it is a ploy to delay us from getting our CPF money. In this post, I will share my personal interpretation and why I believe this is a superior option for you. *Thumbs up to the advisory panel for coming up with this recommendation.
We are providing more choices to give you more control over your retirement plan,” said panel chairman Tan Chorh Chuan.
You are likely to live longer than you had originally expected
In financial planning, I often use living to the age of 85 for males and age of 88 for females when calculating for the retirement shortfall. This figure will have to be continuously revised upwards as medical advancement has made living longer an undeniable trend. In fact, renowned scientists believe that the first person to live to 150years old is already alive (i.e. born already!). Check out this cool prediction! If you would like a reputable system to figure out how long you will live to, you may use this life expectancy calculator by ABARIS. It’s developed by professions at the University of Pennsylvania. I did mine and wow, I’m actually expected to live to age of 94. There’s also a 75% chance that I will live older than age85!!
Choose CPF LIFE with escalating payout!
The trade off for choosing escalating payout vs level payout (standard or basic plan) is that you will receive less in the initial years. The illustration (which is based on payouts per month) shows Mr Eng choosing the escalating payout plan and he starts off with 20% less than Mr De Souza who chooses the level payout plan. Mr Eng’s payout amount gradually rises at 2% and by the age of 87, he will actually be getting 20% more than Mr De Souza. This advantage gets larger with each passing year!
The proposal has 2 ways for you to avoid getting a lesser initial payout if you choose the escalating payout plan rather than the level payout plan. They are to
- Defer the payout period by 5years
- Top up 30% extra into the starting CPF life amount
Personally, I think its ok to ignore these options.
Now drawing back to the point of you likely to live longer than you had expected…. There is a strong probability that you will be living past age87. Thus, the escalating payout plan will likely pay more in total. It is hard to predict the pace of medical advancement. What if you happen to live to age120 or age150? Wouldn’t an escalating payout be the safer option to choose today?
Are there other solutions with escalating payouts?
There are endowment plans designed for retirement (with escalating payouts) in the market to combat inflation in retirement years. AXA Retire Happy and AVIVA Myretirement Plus are 2 suitable solutions currently available. However, they pay benefits ONLY for 15 or 20years. This is unlike CPF LIFE which is lifetime escalating benefits! Perhaps such a promise is only possible to underwrite through CPF.
In a separate post, I’ll share some strategies how these plans can value add to your retirement. The recommendations have also mentioned new CPF investment schemes that will be available soon. I’ll check it out and keep you updated!