CPF Life is touted as the long term protection plan in place of the Minimum Sum scheme. How much returns do we get from it though? In this article, we shall use the CPF Life estimator to do some calculations on the actual returns we receive.
The old Minimum Sum scheme works on a drawdown basis where you keep drawing down on it until it becomes zero. The problem though is that eventually it becomes empty while the person is still living. Now CPF Life is a new annuity that helps to take care of this issue by giving consistent monthly income until the passing away. So that’s great, but what’s the catch?
The Truth About CPF Life Premiums
While the scheme is great and all, there is always a cost behind every annuity scheme. CPF Life is no different, otherwise it wouldn’t be sustainable. The question is how much do the CPF Life Premiums cost? So to dig out this premium numbers, we had to do a bit of reverse engineering on the CPF Life Estimates.
First we have to use the CPF Life estimator calculator to calculate the payouts and bequests.
Most of the variables are set out in the above table, we use the rough average of the ranges of both the bequest and monthly payout provided to do the calculations. Take note that the chart below is based on the LIFE Standard Plan.
As you can see from the chart, the blended returns (in blue) from CPF Life hovers around 1.3% to about 2.5% between age 60 and 80. That is far lower than the CPF RA rate of 4% which we get. The reason that is so much lower is that the premiums are significant reducing returns by approximately 2%.
Plugging the numbers in the model to derive a figure, assuming level premiums from 55 to 65, we arrive at approximately $3,300 per year in premium costs. After which, it is expected to rise significantly as the person ages. Based on our model, the CPF RA account reaches zero by about age of 77, after which the returns go up dramatically.
Breakeven Point With CPF RA?
So basically, the longer you live, the higher the returns from CPF Life for you. The interesting thing is that you have to wait until about 90 years old before the compounded annual returns reach the same as CPF RA 4%!
So I guess if you live past 90, CPF Life would give you a better return. However, if you do not, then your returns will not be fantastic. So, it is probably a good idea to go pledge your property and reduce the CPF Life quantum by half.
Transparency With Premiums
While CPF Life is a good idea, they should probably be more transparent with the CPF premiums instead of quietly putting it in as just a footnote. Also, given that mortality rates are generally about 83 to 85, they should consider adjusting the premiums downwards as well to let it break even earlier with the CPF RA.