Transcription
Okay, to use CPF as a withdrawal tool, it's very important that we talk about this thing called CPF Life. I believe most of us are familiar with CPF Life, so I'll go a bit more in-depth on CPF Life.
But before we talk about CPF Life, I want to bring us to a time when CPF Life was not around yet. Last time, it was called the Minimum Sum Scheme, which was subsequently renamed to the Retirement Sum Scheme in 2016.
So, just imagine along with me how this Minimum Sum Scheme works. What you see here is a line. Imagine that this line is a person's lifeline. This person is now below age 55. As we have learned earlier, this person continues to work and will contribute to his CPF. In his different CPF accounts, they will gain interest that we have gone through earlier.
Yes, he continues to work, and at 55 years old, let's assume that this person has saved up to a total of $200,000. This $200,000 includes his Ordinary and Special Account balance. I didn't factor in Medisave because, as I said earlier, we can't take out that money, right?
So, this person at 55 years old has $200,000 in his CPF OA and SA balance. Then, at 55 years old, CPF will try to take out the Retirement Sum from this CPF balance. So, how much will they take out? They will take out the Retirement Sum. This year, based on the Full Retirement Sum, it's actually $198,800. Let's assume that this was the sum that was used to calculate.
CPF wants to take out this $198,800 to form the Retirement Account. What that means is that after you take $200,000 minus $198,800, you realize that this person can only draw out a grand total of $1,200. This is because we are only able to draw out any amount above our Full Retirement Sum. So, this is the amount that this person can draw out.
You can imagine that some people feel, "Wow, I fought so hard for so many years, and at 55 years old, just when I can smell this $200,000, I can only take out a grand total of $1,200." Of course, some people might not be happy about this, and actually, CPF allows a way out of this.
So, why is this way out? This Full Retirement Sum of $198,800. Let's say if this person has a property, he can actually use his property to pledge up to 50% of the sum. What that means is that instead of now putting this full $198,800 into your RA, now only $99,400 needs to be put into your Retirement Account.
So, this $99,400 goes into your RA. Basically, what that means is that the remaining amount in your CPF that you can draw out is now $106,600. This is a lot more than what we started with just now. Earlier, we mentioned that we could only take out $1,200, but now this person can draw out $106,600.
Let's just assume that this person did that. He put in that $99,400 into his RA. What can this money inside your RA be used for? There are three things you can use the money in your RA for.
Number one, you can just leave the money inside your Retirement Account to earn the interest rate mentioned to you.
Number two, you can actually use the money inside the Retirement Account to buy a fixed deposit. However, if you look across time, most of the time, fixed deposit returns are much lower compared to what the Retirement Account is giving us, so nobody really does that. They don't really use money in their Retirement Account to buy a fixed deposit.
The third thing you can do is use the money inside your Retirement Account to buy an annuity. But if you look at the available insurance products or insurance annuity plans in the market, you realize that none of them actually give better returns or higher returns than CPF. Because of that, nobody really puts their money to buy annuities. So, most of the time, by default, people just leave their money inside this RA.
Let's say this person continues to leave his money in the RA. It grows and grows. At 62 years old, what happens is that CPF will then pay out this RA balance along with the accrued interest to him as a monthly income. How much will be paid out? It is estimated to be about $900 a month.
It will just keep paying until the money inside your Retirement Account and the interest has completely been depleted. How long does it take for this amount to be depleted? It takes about an estimated 20 years, or until about age 82 years old. At that point, this person's RA account would have been completely depleted. There would be no money left after that.
But increasingly, people are living longer and longer. The expected life expectancy age in Singapore is about 85 years old. So, you realize that the CPF payout has stopped at 82 years old, but we are living until a longer age of 85 years old. You see this gap here. Because of this gap, there needs to be an upgrade, and this upgrade is basically CPF Life.
That is why CPF Life was launched. If you look at it, you realize that actually, the CPF Life structure is really the Minimum Sum Scheme structure but just with some tweaks to it.
So, what are these tweaks? Just follow along with me. I'll highlight to you this animation in blue color. These are basically the tweaks done by CPF Life.
The first tweak is that instead of paying out from 62 years old, CPF will only pay out at 65 years old. This is also known as your Drawdown Age (DDA). So, that is the first tweak: a delayed payment of that monthly income.
The second tweak is that this Retirement Account balance is now split into two accounts. Number one, that's your Retirement Account, which is still your Retirement Account. This is your first account. The second account is a new account called the Annuity Premium (AP) account.
The money inside the AP account is used as a premium to buy into this Lifelong Income Fund to give us that lifelong income, basically as the name suggests. It gives us that income for life.
So, what does the split between this RA and AP look like? I'll elaborate a bit more on this in my next slide. But just for now, take note that CPF Life is basically using the Minimum Sum Scheme structure with just a bit of tweaks to it.
With that, let us go into CPF Life. There are three main options you can choose. We might have heard of them. The three CPF Life options are:
1. The Basic Plan
2. The Standard Plan
3. The Escalating Plan
The Escalating Plan is really an extension of the Standard Plan, and we are not really great fans of the Escalating Plan. Later, I'll share a bit more on why that is so.
For now, let's dive deeper into CPF Life on the Basic Plan and Standard Plan.
Let's take a look at this CPF Life Basic Plan. If someone is on this CPF Life Basic Plan and assuming that he has pledged property, he has put in $99,400 into his RA account.
What happens at 65 years old? As I mentioned, there will be this split of account into this RA and AP account. For the Basic Plan, how does the split look? The split is basically 90% of the money will still remain in your Retirement Account, and 10% of the money will be used as this Annuity Premium to buy into this Lifelong Income Fund.
At 65 years old, what happens is that we will receive our first payout from our CPF Life. Whether CPF Life gets the money from, it's actually drawing down from your Retirement Account. This 90% over here is drawn down from 65 years old onwards.
It will pay out about $730 a month until the Retirement Account balance has run out. When will this money run out? It's estimated to run out at about 90 years old.
So, what happens if at 90 years old the Retirement Account balance has been depleted? After that, if you still remember, we have actually earlier on put in 10% of our Retirement Account into this Lifelong Income Fund through this Annuity Premium.
What happens after 90 years old is that this Lifelong Income Fund will continue to pay us. This AP portion will kick in to give us a continuing payout of $730 a month until however long we are alive or upon death.
So, this is the Basic Plan payout. Now, let's take a look at the Standard Plan.
For the Standard Plan, everything is the same. You put in $99,400 into the Retirement Account. Everything is the same. But what is different now at 65 years old? How does the split look?
This is no longer a 90-10 split, but instead, the full Retirement Account and the interest, 100%, is actually being used as this Annuity Premium to buy into this Lifelong Income Fund.
What that means is that at 65 years old, this Lifelong Income Fund will already start to pay us. It will start to pay us here. It will keep paying until however long we are alive, and it will pay out at a higher amount of about $800 a month compared to the Basic Plan of $730 a month for as long as we are alive.
So, this is the Standard Plan. You realize that the difference between the Basic Plan and the Standard Plan is not much—only about $70 a month, right?
But then some of you might ask, "What happens if death occurs?" Let's take a look at that.
If, let's say, this person is on the Basic Plan, quick recap again: at 65 years old, the Retirement Account balance, 90%, will be split into RA, and 10% will be in AP.
At 65 years old, what we paid out first will be from your Retirement Account. It will pay you until 90 years old. Then, that's when your AP or your Lifelong Income Fund starts to pay you for the rest of your life.
So, for the Basic Plan, you will receive a lower amount of $730.
What happens between 55 to 65 years old? Because the RA-AP split I mentioned only happens at 65 years old, if death occurs here, what will be paid out to your nominees will actually be your Retirement Account balance.
What will be paid out is your Retirement Account balance plus whatever accrued interest that you have accumulated over the years.
But what happens if death occurs after the split has already happened? You will see here that between 65 to 90, your Retirement Account is still paying you for your monthly income.
What will be paid out in the event of death will actually be the balance RA that has not been paid out to us as Lifelong Income, plus whatever interest that is still inside your Retirement Account.
Also, remember just now we put in 10% of this into AP, right? This AP has not been touched yet, so this will also be fully paid to you upon death between 65 to 90 years old.
What happens after 90 years old? As I said earlier, your Retirement Account has no more money, and that's when your AP has started to kick in already.
So, what happens if death occurs here? You realize that you'll only get the balance AP that has not been paid out to you as Lifelong Income.
Some of you might ask, "What about the interest of this AP? Where does it go?" The interest of this AP will actually still continue to remain in this Lifelong Income Fund.
Why is that so? Because CPF Life is an annuity scheme; it's a risk pooling scheme. The interests of those that have passed on will remain in this Lifelong Income Fund to provide for those that are still around.
It will continue to pay out to these people. Let me illustrate this by using an example.
Imagine all of us here today are in the cohort that is turning 55 years old this year. Thirty years down the road, I call for a gathering, and I get all of us back into this YouTube video.
At 85 years old, what happens is that 50 of us will still be here, but another 50 of us would have passed away. The interest of those people that have passed on is in this Lifelong Fund to continue to pay those that are still around. CPF estimates that this amount will be enough to pay for us that Lifelong Income until the last one of us drops.
You might ask, "Is there a chance that CPF might get the calculation wrong?" Of course, it's possible because we are living longer and longer.
How does CPF mitigate this risk? Reason number one is that they observe this situation on a regular basis. Let's say they observe that if really not enough money is left. What they will do is lower this monthly payout amount to ensure that all of us will have sufficient for the rest of our lives.
That's the first way they can mitigate the risk. The second way is that if you think about it, currently, we are looking at just this cohort of 55-year-olds, but this CPF Life scheme is actually a nationwide scheme. The pool of people that are in this is actually very wide, so the risk is actually shared among all of us.
That's how the second risk is being mitigated.
With that, let me share about the situation of someone who is on the Standard Plan. What happens upon death?
Let me do a quick recap again. At 65 years old, what happens? 100% of your Retirement Account plus your interest is being used to buy into this AP, right?
At 65 years old, the $800 monthly payout that you receive is coming from your Lifelong Income.
What happens if death occurs here, before 65 years old, before the split? The treatment is the same as your Basic Plan. 100% of this money will be paid out from your RA and your interest because this has not been paid out to you as Lifelong Income.
But after 65 years old, the Lifelong Income or the AP has started paying you already. So, what happens if death occurs here? After the Lifelong Income has started paying out, what will be paid out upon death is actually the balance AP that has not been paid out to you as Lifelong Income.
This is actually a hint to you. You realize that for the Basic Plan, you will take a lower monthly payout amount, but for the Standard Plan, you take a higher monthly payout amount.
However, for the Basic Plan, upon death, you'll be able to get that RA account balance plus the interest to be paid out to your nominees or your loved ones. Whereas for the Standard Plan, you'll notice that it's only the balance AP without the interest.
So later, we will go through these numbers of how much bequest will be paid out for the Basic Plan and someone on the Standard Plan.
Let's move on to the third option for CPF Life, which is the Escalating Payout Plan. As I've mentioned earlier, this Escalating Plan is an extension of the Standard Plan.
If, let's say, the Standard Plan pays out $800 a month, the Escalating Plan will start off with a lower payout amount of about $640—$20 lower than the Standard Plan.
This $640, because it's escalating, will increase by 2% every year until it reaches the point where the monthly payout of $640 has grown to be the same as the Standard Plan of $800.
How long does it take for us to reach this point? It's estimated to be that you have to reach about 78 years old—basically 13 years from 65 years old.
Let me just write it down here: from 65 years old to 78 years old, that's about 13 years. You have to wait 13 years before the payout becomes the same.
But from 65 to 78 years old, there has been this underpayment that you have received if you were otherwise on the Standard Plan.
How long does the overpayment after 78 years take to break even with this underpayment? We have calculated, and it's estimated that you will have to be about 90 years old before this number actually breaks even.
It's actually quite late, so that is also why we say that we are not fans of this Escalating Plan.
What does this mean to you? CPF Life is great because it mitigates against longevity risk. The payout from your CPF Life pays you for as long as you're alive.
So, number one, it mitigates longevity risk. Number two, it mitigates investment risk. It doesn't matter if your investments go up or down; you still receive that same monthly payout.
CPF Life also mitigates against overspending risk because you receive that same payout amount whether at the start of your retirement or at the end of your retirement. You get the same amount throughout; it won't run out.
If you compare around, as I mentioned earlier, it is really one of the best annuity plans you can get in Singapore.
Because of this, since we need an annuity plan for a spending plan, CPF Life is one of the best annuity plans in Singapore. We will want to look at how we can integrate our CPF Life with other instruments to give us that reliable income stream to meet our essential expenses.
By itself, CPF Life can only give us a basic retirement lifestyle. In order to have enough for our retirement, we might have to use other instruments to achieve that.
Just now, I shared with you the example of the Basic Plan and the Standard Plan, where you receive monthly income of about $730 or $800, depending on which option you go for.
It sounds like very little, right? But actually, if we recall, this $730 is based on us pledging our property.
Let's say we did not pledge our property. If we use the Full Retirement Sum at 55 years old, at 65 years, instead of getting just $730, we are expecting an income of about $1,500.
And let's say at 55 years old, you want to enhance it to the Enhanced Retirement Sum. Your monthly income that you are expecting to receive is about $2,000 a month.
So for married couples, there's a combined monthly income of $4,000. Not that bad, right?
But again, this only gives us a very basic retirement lifestyle. If you feel that it is insufficient to meet your needs, you might want to look at using other instruments.
This is a quick recap of the three different CPF Life options.
So mainly, we are comparing between the Standard Plan and Basic Plan. CPF Life Standard Plan will give you a higher monthly payout.
But as I've alluded earlier, the bequest that your family members might receive in the event of death is actually lower compared to the Basic Plan.
You get a lower monthly payout for the Basic Plan, but it's possible that you get a potentially higher bequest for your loved ones upon death.
So how different do these numbers look? Let's examine this.
I've gotten numbers for this scenario. Let's assume this person is a male turning 55 years old in 2021. At that time, he had $186,000 in his Retirement Sum and chose to receive the payout of CPF Life at 65 years old.
The data we have is only for 2021 because if you go to the CPF website, you realize that the projection shown no longer has the bequest amount anymore.
But let's just use these 2021 numbers for discussion purposes. Imagine this person, if he has chosen the Standard Plan, come 65 years old, he'll be able to receive a monthly lifelong income of about $1,400 to $1,500. Let's use the lower amount of $1,400.
If, let's say, he had been on the Basic Plan instead, he would be able to receive a monthly lifelong income of about $1,300 to $1,400—not that much difference, about $100 difference a month.
So then, what happens upon death? Let's say after receiving the CPF Life for a few months at 65 years old, he passes on. If he was on the Standard Plan, the bequest paid out to his family members will be about $267,000.
In the case of the Basic Plan, it's also about $267,000—not that much difference.
But let's say if he had passed on at 75 years old instead. You realize that the bequest now is actually $89,000.
As opposed to if he was on the Basic Plan, the bequest paid out to the loved ones will actually be $196,000.
So there's a difference of about $100,000—quite a significant amount.
And let's say if death occurs at 85 years old. For the Standard Plan, there will be no more money left, so the family members won't receive any payout from this.
Whereas if this person is on the Basic Plan, the family members will still receive $93,000 of that bequest.
If that happens later, after that, there's no more money across the board—no more.
So mathematically, if you look at these numbers, you'll realize that for a difference of about $100 a month in payout, you are actually losing about $100,000 more in bequest upon death.
So mathematically, the Basic Plan is actually a more superior plan.
But of course, let's say for some of us, we feel that we want to have a bit more in our retirement. Of course, we can go for the Standard Plan.
But mathematically, the Basic Plan actually does give you a better return.