New CPF Escalating Life Payout Plan – Our Early Thoughts
16/09/2016 at 9:14 am #553
The CPF Advisory Panel recently announced the proposal of a new CPF Life plan that Singaporeans can opt for. This new plan would allow members to opt for an escalating payout from CPF Life, with an annual increase of 2% per year.
Having an escalating payout for retirement is not a new concept by itself. There are annuity plans provided by private insurers such as the AXA Retire Happy, that give policyholders increasing payout each year during retirement.
The purpose of this increase in payout each year is to take into account inflation. Inflation eats away at our purchasing power. It’s the same reason why a plate of chicken rice that used to cost $2 20 years ago is now $3.50 today.
An annual increase in payout allow members to retain their purchasing power even as things in the country become more expensive.
Opting for this escalating payout is now a CPF Life option that would be available for CPF members.
Lower Monthly Payout From Day One, Higher Monthly Payout In The Future
By opting for this option, CPF members would have to start their monthly CPF Life payout from a lower amount. This payout would then increase by about 2% each year. This is in contrast to the current plans that provide a fixed monthly payout for life.
Kyith from Investment Moats has done a comprehensive breakdown of the differences between the new CPF Escalating plan and the current ones available. The benefit illustration below assumes that CPF members have the Basic Retirement Sum of $80,500, set aside at age 55, with withdrawal starting from 65.
Source: Investment Moats
Some quick observations based on the numbers.
The CPF Escalating Plan begins with a monthly payout of $560, compared to $640 and $720 for the Basic and Standard plans. However, there is a 2% annual increase each year.
The Crossover Point?
The logical question that Singaporeans would ask is when the Escalating plan starts paying more than the other plans. Based on the Maths done above, the Escalating Plan ($642) would start to pay more than the Basic Plan ($640) at age 72 . At age 78, the Escalating Plan ($724) would beat the Standard Plan ($720). Thereafter, it will still continue to increase by about 2% each year till members pass on.
Is It Worth Opting For?
This is the most common question that everyone would asked. Unfortunately, there is no real right answer here. It’s really an individual choice based on your own personal circumstances.
To begin, it’s worth remembering that a $1 today is worth more than a $1 tomorrow. Both the Basic and Standard plans give more money to members in the earlier years.
For example, an individual who is on the Standard plan ($720) would receive almost $2,000 more in the first year compared to another person who is on the Escalating plan. That’s money that can be spent, saved, or invested.
If having sufficient income upon retirement is an immediate worry that you have, It would be advisable to opt for either the Standard or Basic plan, since the Escalating plan would take multiple years before the monthly payout finally catches up.
Another way of looking at it is that after the age of 78, the Escalating Plan would be far more superior than both the Basic and Standard plans, providing a higher payout that is set to continue increasing in subsequent years.
For those who are in the early stages of retirement, it is possible that CPF Life payout may just be one source of income that they will be tapping on. They might have other sources of income such as rental or dividend payout. For such people, taking a little lesser at age 65 and then more during their later years could be a viable option.
As you grow older, it’s possible that your needs may increase. Perhaps you might have lost a source of income that you previously had. The Escalating plan would help provide a little more each year to cover for any additional needs required. Think of it as a mini insurance policy that you can rely on if you were fortunate enough to live past the age of 90.
Which Is Better?
All in all, it’s important to remember that the Escalating Plan, once introduced, will be an additional option that members can choose from. And that choice should be based on your own personal needs and circumstances, not those of others.
In our opinion, we think having an escalating payout does make sense from a financial planning point of view. Like it or not, inflation is real and things would become more expensive over time. An escalating payout would help us retain our purchasing power even during our retirement.
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