Interesting Article about CPF Life from Dr Wealth

I came across an interesting article from Dr Wealth website today. Dr Wealth (http://www.drwealth.com/) is an online platform managed by a team that provides financial advisory ranging from personal finance, insurance, retirement to investment education. 

The article (How Much Returns Do You Really Get From CPF Life? The Truth About CPF Life Premiums - dated 25 Aug 2014) articulates the returns from CPF Life hovers around 1.3% to about 2.5% between the age of 60 and 80. This is lower than than the CPF Retirement Account rate of 4%. Based on their calculation and estimate, the premiums we pay for CPF Life significantly reduces returns by approximately 2%. Dr Wealth further explained that based on their model, the CPF Retirement Account reaches zero by about age of 77, and that is when the returns from CPF Life go up dramatically. In short, the longer you live, the higher the returns from CPF Life (duh!). Another interesting conclusion pointed out in the article was that you have to wait until about 90 years old before the compounded annual returns reach 4%. 

Is CPF Life good then?

This is an interesting take about CPF Life based from an investment returns' perspective. From an investment return point of view, the premiums are "force eating" into the returns which makes it less attractive. From a retiree's - that needs a monthly income to sustain - perspective, CPF Life is probably a good idea. A retiree is probably not interested in the CPF returns, especially when there is no opting out from CPF Life. He just want his monthly payout.

So should you pledge your property and half the Minimum Sum?

The current Minimum Sum is S$155,000. By pledging your property, you will only need half the Minimum Sum (S$77,500) in cash held in CPF. This will half your monthly payout to approximately S$600. So, again, from an investment return point of view, it is probably a good idea to pledge your property as advised by Dr Wealth. This will reduce the CPF Life quantum by half. However, at age 60+, how risk adverse are you? With S$77,500 in your hands, are you willing to get a higher return investment? If you have never started investing before, what are the chances that the money will just be deposited in the bank?

With No Plans, pledging your property will be worst than the Old Minimum Sum Scheme!

So pledging your property is an individual call and it is based on many individual factors. With no plans in mind, it will be worst than the old Minimum Sum scheme that works on a draw-down basis. The paltry interest rate from the bank is far lower than the old Minimum Sum scheme. And with no discipline, the S$77,500 will be spend sooner.

If you did not plan when you are Younger, you will probably have no plans at 55 years old?

It pains to imagine someone receiving a sum of money from CPF and being clueless about what he/she should do with it. The most important aspect at that age, I presume, is to have financial stability and independence. This means a regular monthly income (that does not deplete) which is more than the monthly spending.

The most-last-minute plan is probably...

Buying another annuity. So if that is the case, should people, with no clue, still pledge their property? 

Let us just look at NTUC Income's Guaranteed Life Annuity. The following is an extract illustration that is based on male aged 55 who invested S$100,000 on the Annuity plan with payout starting at age 65:

It seems that CPF Life is a better option without the Non-guaranteed portion (S$77,500 that pays out approximately S$600). The Non-guaranteed portion is always a projection. If fulfilled, the NTUC Income's Guaranteed Life Annuity might give you a better monthly annuity payout as you age. It is difficult to do a detailed comparison. It will be better to contact your Insurance Agent for more clarification and do your calculations from there. Any Private insurance company will be willing to explain their products that is similar to NTUC Income's.

Retirement should be something you can look forward to..

And financial stability is something you must have to maintain your retirement lifestyle. I have always emphasize to start your retirement planning early. A retirement plan that gives you a monthly income with no limits to the withdrawal period.

Start Young and do not be clueless at 55 years old...

If you have been actively building your retirement next, my best guess is that you will be happy to pledge half your property. 

Read:
1. CPF Explained
2. S$2000 (monthly), Enough for Basic Living?
3. PM Lee National Day Rally 2014 - Assurance in Retirement?