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.