Every month, a portion of your salary goes into CPF. It's only natural that you'd want to get back as much as possible.
You now have 3 CPF LIFE payout options to choose from. How do you know which will give you the MOST returns?
I will break down your options in this article:
CPF LIFE Payout Options
As of 1st Jan 2018, Singapore citizens and PR have 3 CPF LIFE payout options to choose from. Here's an overview:
Every retiree has different needs and should opt for a payout option most suited for yourself.
At the same time, we also want to achieve the highest possible return from our CPF.
Which of these three plans offer the highest return? Read on to find out.
What is CPF LIFE?
Before we jump into the plan with the best return, here's a quick introduction to CPF LIFE.
When you turn age 55, a Retirement account will be created with savings from your Special Account (SA) and Ordinary Account (OA).
You need to set aside a retirement sum ($181k based on Year 2020) in your Retirement Account. This retirement sum is then used to participate in the CPF LIFE, which will pay out a monthly income for life from age 65.
For more information on CPF LIFE and new changes, please refer to CPF website.
The CPF LIFE Escalating Plan
The CPF LIFE Escalating Plan was launched on 1 Jan 2018.
The initial payout from this plan will be lower as compared to the other two plans. However, the monthly payouts will increase by 2% per year.
This new addition increases the number of CPF LIFE payout options from two to three.
It is mandatory for CPF account holders who have the minimum amount in their Retirement Account to join the scheme*.
*If you have an existing annuity policy, you may be exempted. Read more about Retirement Account exemptions here.
Which CPF LIFE Plan Pays The Most?
Now, let's get down to the juicy part - which plan gives you the most.
You can use CPF LIFE Payout estimator to calculate the projected payout for each plan.
However, the CPF LIFE payout estimator does not show the return in percentage.
As the payout structure for all three plans are different, we will need to compare the returns in percentage to know which is the plan with the highest return.
Potential Returns Across Different CPF LIFE Plans
The comparison was done using the IRR method for males and females at age, 55.
Some assumptions made for the comparison...
For comparison purposes, I use the Internal Rate of Return (IRR) method. This method of calculation takes into account the cash inflow and outflow.
As part of this comparison, there are 2 main variables involved:
- As CPF LIFE pays out a monthly income for as long as the person lives, the return from CPF LIFE is highly dependent on a person’s life span.
- If the person has no dependents, the eventual bequest may become meaningless.
I have included both cases into the comparison in the above table.
Also note: The CPF LIFE payout is just a projection, based on 3.75% and 4.25% return from LIFE Fund. To simplify the calculations, I am using the average payout of 3.75% and 4.25% from the CPF LIFE Payout estimator.
Which CPF LIFE Payout Option Should You Choose?
1) Standard Plan
For a person who believes that he or she can live beyond age 85, the Standard Plan will give a better return.
2) Basic Plan
Basic Plan gives highest return for a person who passes away before 85 years old.
3) Escalating Plan
Returns from Escalating Plan is the lowest unless the person can live beyond age 95.
The Escalating Plan will be better only for people who are not disciplined to save, as there will be more payout in the future.
According to the Department of Statistics, 1 in 3 will live to 90. And hence, you have a good chance for a long life and will need enough cash flow to last through your retirement years.
Should You Put Everything Into CPF LIFE?
Now that we have compared the returns of all 3 CPF LIFE payout options, let's take a look at other aspect of CPF and if you should be putting all your CPF monies into CPF LIFE only.
*These are my opinion, you should do your own due diligence. I've included a list of resources below for you to learn more about CPF, and your options.
- For cases where CPF LIFE generate less than 4% returns, it is better to keep the CPF savings in the retirement account which generates 4% return rather than participating in CPF LIFE
- CPF LIFE is an annuity plan. The premium is paid from CPF savings to participate in LIFE fund which pools all CPF LIFE participants’ premiums. People who live longer benefit more because they will receive more payouts.
Also, CPF LIFE return is higher for a person who participates only with the basic retirement sum. When you double your CPF LIFE participation amount from 90.5k to 181k, your payout range is not doubled ( $1,390 is less than 2 x $750 ).
This can be easily seen from the projection by CPF below:
In my opinion, you need to understand the return in percentages rather than just the payout amount to determine which is the best plan to choose.
This is the same for any investments. We should focus on the percentage and not just the absolute amount.
Which Plan Would I Pick For Myself?
I still have some years before reaching 55 but if I have to choose right now, I will pick the Basic Plan.
On top of that, I will pledge my property to reduce my participation in CPF LIFE to fulfill only the basic retirement sum (90.5k). This is because I can still get 4% from RA or SA.
Plus, I am confident of achieving higher returns from investing.
There is no "best plan" for every individual.
Each of us has different financial circumstances. You should consult the CPF board or a professional advisor to work out a proper retirement plan before making the decision.
More Resources on CPF
Or, you can read up and learn more about CPF and CPF LIFE via these resources:
Louis Koay is a dual-licensed representative at a top financial firm. He graduated from the National University of Singapore with First Class Honours and he is a CFA charterholder as well as a Certified Financial Planner. He is currently managing a team of 6 advisors and servicing more than 1,000 clients with asset under advisory of more than $20 million. As a trainer at Dr Wealth, Louis developed the Personal Finance Mastery Course and he is a key trainer in the Intelligent Investors Immersive Program. He has trained more than 10,000 retail investors in analysing stocks and on personal financial planning.