CPF by default will pay out only at age 70, though you can write in to indicate you want the payout to be earlier at age 65. Many people thought the default payout is at 65, and recently there was some argument over this.
But if you are still working at 65, you don’t need the money. Why not defer it to a later age, and receive a higher payout, make sense right?
Well, we will need to look at the numbers to decide. Assuming you are now 55 and have the FRS of $186k in your CPF, the payout at 65 will be $1,500/month (Standard Plan). The payout at age 70 will be $2,000, quite a bit more! Now let’s do some simple analysis. For $500 more a month, it is worthwhile to defer the payout for another 5 years? That’s the total loss of $1,500*12months*5years = $90,000 immediately to start. With an additional $500, it will take 15 years to break even, meaning, you will need to live to age 85 just to breakeven. You decide if this is worth it.
FRS (Full Retirement Scheme) currently is $186k, but CPF allows you to participate up to a maximum of ERS (Enhanced Retirement Scheme), currently at $279k, with payout of $2,250. That’s an additional payout of $753 per month. If you live to a very old age of 100, this will be a very good plan.
So is the ERS a good deal? Let’s do another analysis. The difference between ERS and FRS is $264k-$176k = $93k. Assuming you live slightly higher than the average life expectancy, to 85, you will receive an additional of $753*12*20years = $180k. Using a financial calculator, that will translate to an annualized return of 7.3%pa. Not bad.
The default plan is the Standard plan. Based on FRS of $186k, the monthly payout is for Standard Plan. $1,500. If you select Basic plan, the monthly payout is $1,400, $100 less. You select this if you want a bigger bequest at death, meaning, you want to leave more for your beneficiary.
Assuming you pass on at age 80, the total additional monthly collected will be $100*12*15 = $$18,000. But the loss in bequest is $150,000 (see diagram above). So if you don’t live to very old (80 isn’t exactly young either), then you are giving away $150k for $18k. Is it worth it?
This one is easy. The CPF website already has the numbers, just that most people are not looking… With Escalating Plan, your starting pay is $1,200/month, and it increases slowly over the years.
The monthly payout will exceed the Standard plan around age 78. But the total payout of the Escalating plan will only exceed the Standard Plan at age 89! Will you choose the Escalating plan?
I hope you benefit from these 4 important points shared. Want to know more about designing a customised retirement plan building on top of CPF Life? Message me.
Here’s one more important tip! As most people know, your SA earns an interest of 4%pa, whereas OA earns 2.5%pa. But do you know that upon turning 55, CPF will sweep all your money in SA in the new RA account, before they sweep your money in OA? For example, if you have $180k in your SA and OA respectively, almost all your money in your SA will be used to fulfill the FRS (currently at $176k in 2019), with your money in OA untouched! Not a good idea right?
So is there a way to make CPF sweep the FRS from your OA first instead of SA? As it turns out, yes! Before you turn 55, invest all your CPF SA into a CPF SA approved investment instrument, hopefully at a very low cost, zero preferrably. Then after the sweep into RA happens, you can redeem your investment back into your CPF SA. Make sure you are using a very low-cost investment product, else you might end up losing more money doing this.
Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
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