Thursday, February 18, 2016

CPF Life Plan - Choose Your Option Carefully

Shortly when Uncle Sanye turned 55, I received a letter from CPF Board with a form attached to choose my CPF Life option - Standard or Basic Plan.  Sanye knew that Basic Plan means one receives less monthly payout after reaching 65 and will leave more bequest to family and Standard Plan means the other way round. Without going into details and trusting that the 2 plans will somehow be quite "fair", I chose the standard plan, because I believe that by the time Uncle and Auntie Sanye leave the world, what we leave for our children is already quite enough for them and we should enjoy more of our hard earned money when we are still in this world.

I was shown a table published on Straitstimes telling people now has an option of enhancing their CPF Life by contributing money beyond the minimum sum. The table shows some details in the monthly payout and bequest of different options. When looking into the numbers and doing the sum, I made the shocking discovery.


Take the case of the Full Retirement Sum. Notice that at age 85,which is about our current life expectancy, there will be no more bequest for Standard Plan, whereas there is still 77~81K bequest when you choose Basic Plan. Now look at the money payout, between Standard and Basic Plan, the difference in monthy payout is $114~124. For the 20 years (65-85), the person who choose Standard Plan will receive $27,360 - $29,760 more than the one on Basic Plan.

The big question is, while you enjoy about 30K more on payout, how does this translate into $80K difference in bequest for the family? Does the compound interest effect of $124 justify the 80K in 20 years? I did a quick calculation. $124 per month, compounded over 20 years @4% comes to $44.3K which is far below the 80K difference.

For the other two options, the reader can do the sum yourself to verify that the result is similar.

Of course we can write to CPF and demand for an explanation. The point I want to make is, purely from the mathematics, Basic Plan is the better choice. And if you are one that does not really depend on the extra $124 to live in retirement, then it makes better sense to choose Basic Plan, as more money will be left to your family member.

Sanye called CPF and was told that once the choice is made, it can not be changed. So I made a bad choice because I didn't look into the details. I hope you will not make the same mistake.

7 comments:

Singapore Man of Leisure said...

Thank you brother Sanye!

Since I don't think I'll have any dependents by 85 (unless I do a Jim Rogers), naturally I'm partial to the Standard Plan.

Hmm...

Maybe I should consider the Basic Plan so I can leave something behind to a charitable or religious organization so they'll have an "incentive" to the recycling of my body? Cremate and scatter to the wind?

temperament said...

Hi Sanye,

i guess it's like this because CPF Life expects very few people will live to 85.

So alamak!
i chosed standard also.
i agree Basic is better if we don't need the little bit of extra $ at all.

But my wife doesn't have to be in CPF LIFE.
Based on the MS old scheme, she isn't allow to withdraw more money per month even if she started to withdraw at the age of 70 or 85. (If GOD permits).
Am i right?
It's O. K. as long as interest rate is at least 4% p/a., it can be considered as an "Emergency Fund".
Of course CPF may shift it's goal post then we have to react accordingly.
Hope it won't be too late.

Sanye ◎ 三页 said...

SMOL,

Never say never. The Miss Right may appear one day and the world losses a golden bachelor. Remember to invite me when that day comes. :)

Sanye ◎ 三页 said...

Hi Temperament,

I was a bit disappointed with CPF Board because they did not make the difference of the choices clear to its members. Most people will not bother to use the calculator provided by them to check the details, and hence will not make the informed choice for themselves.

K said...

Hi,

Thanks for sharing this observation.

Do you have any thoughts/views on whether one should go the the Basic, Full or Enhanced Retirement Sum?

Thanks.

Sanye ◎ 三页 said...

HI K,

Thanks for visiting my blog.

I think its up to individual to decide if he should go for Basic, Full or Enhanced Retirement sum. The choice should be made based on individual's financial situation, and if he can better manage his cash if it is not put into the retirement sum. I myself will not go for the enhanced sum, as I think I can invest the cash for better return.

Cheers!

K said...
This comment has been removed by the author.