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Is the CPF LIFE scheme really that bad?

The CPF Lifelong Income For the Elderly (CPF LIFE) Scheme and the Minimum Sum (MS) comes as a retirement package made compulsory for Singaporeans. evaluates this scheme from two different perspectives:

  • Pension
  • Investment


1) Drawdown age remains at 65 years old

2) Payout remains at S$1,200

3) Current interest rates of CPF will remain unchanged

4) The minimum sum of S$155,000 is attained at age 55 years old

5) Life expectancy based on World Bank is at 82.1 years old

6) Ten year average inflation based on World Bank at 2.73%


1) The amount accumulated at age 65 is approximately S$216,000

2) The effective interest rate is 3.32% per year

3) It takes 21 years and 4 months to completely wipe out the S$216,000

4) There will still be S$67,100 in the CPF, when an individual survives until 82.1 years old


1) The drawdown will last way past the average life expectancy

Even if CPF LIFE does not pay perpetuity, it will last until age 86 (65yrs+21yrs 4mns) years old. This means that as a pension fund, it has provisioned for the potential increment of life expectancy and continuously providing at a constant S$1,200/month to allow the individual to make long-term personal financial planning.

2) You will have a sizable sum left over for your beneficiaries

If an individual were to meet the life expectancy of 82.1 years old, there would still be a sum of S$67,100 bequeathed to their children or beneficiaries.

The prowess of the compounding effect allows individual to continuously earn interest rates throughout these years on the initial S$155,000. This explains why they can have such a sizable amount even at age 82.1 years old for their beneficiaries.

Definitely, if the individual lives way pass 86 years old, he/she should not expect any amount bequeathed to their beneficiaries due to the simple fact that they have exhausted the money in their CPF accounts.

3) Perpetuity!

CPF LIFE provides a monthly payout starting from your drawdown age (65 years old) for as long as you live. Our government has finally provided a loophole for us to “take advantage” of them. Live as long as possible to continuously receive that S$1,200 −FOREVER!

Conclusion as a Pension

The CPF Board has taken upon its shoulders to pay a relatively fixed amount per month for as long as the individual lives. It provides a constant cash flow and allows for appropriate personal finance management. This is equivalent to purchasing a perpetual bond that pays a monthly fixed amount. The advantage: Our Aaa rated government guarantees this.


(For the more finance-savvy people)

A) The Net Present Value of CPF LIFE is S$10,000 (if perpetuity is excluded)

Future Value (Age 65):         S$215,994

Periods:                                  10 years

Discount rate:                        2.73%

Present value:                        S$165,002

Initial investment:                 S$155,000

Net present value (NPV):     S$10,002

The discount rate should reflect a few factors (inflation, credit risk, liquidity risk, maturity risk, risk-free rate, etc.). However, to keep things simple we will peg it to the inflation rate due to the fact that other risks are not significant with respect to CPF LIFE anyway.

We took the 10-year average inflation rate, from 2003 to 2013, as an input. This provides a NPV of S$10,002.

B) The Net Present Value of CPF LIFE is over S$372,000 (if perpetuity is included)

Perpetual monthly payout:  S$1,200

Perpetual annual payout:     S$14,400

Discount rate:                        2.73%

Present value:                        S$527,473

Initial Investment:                 S$155,000

Net present value (NPV):     S$372,473

The 10, 20 and 30-year average inflation rates are 2.73%, 1.89% and 1.84% respectively. We took the most conservative inflation rate of 2.73% as the discount rate.

CPF LIFE would yield a net present value of S$372,473!

C) CPF LIFE > comparable securities!

Table 1

Length of SGS Bond 10-Year 15-Year 20-Year 30-Year
Coupon Rate 3.000% 2.875% 3.375% 2.750%
Yield at
2-Jan-15 2.33% 2.66% 2.83% 2.93%
5-Jan-15 2.31% 2.65% 2.79% 2.89%
6-Jan-15 2.25% 2.56% 2.72% 2.81%
7-Jan-15 2.16% 2.46% 2.62% 2.70%
8-Jan-15 2.17% 2.48% 2.62% 2.70%
9-Jan-15 2.17% 2.44% 2.57% 2.65%
Average yield 2.23% 2.54% 2.69% 2.78%

(Source: Monetary Authority of Singapore)

Table 1 shows comparable securities with CPF LIFE. The average yield range from 2.23% to 2.78% per annum for the 10-30 year Singapore Government Securities while the effective interest rate for CPF LIFE is 3.32% per year.

Furthermore, CPF LIFE provides for liquidity because they will provide a monthly payout. This reduces the duration and convexity risk inherent in all fixed income securities.

Conclusion as an Investment

We cannot reject the CPF LIFE “project”. However, the consolation is that CPF LIFE provides a high NPV of S$372,473. When compared to similar securities, the pension outrightly overshadows them with a much higher effective interest rate. To top it all off, CPF LIFE provides for monthly payouts as well.

In a nutshell

The government is not going to be responsible for our daily expenses and personal finance planning. There are over 5.4 million people in Singapore and 3+ million Singapore residents, so do not expect them to “babysit” us when we get older.

CPF LIFE should not be your ONLY retirement plan. You should always have multiple sources of income streams and always reduce your expenses from wants to needs. Having said that, do remember to pamper yourself once in a while!


For more CPF related articles: Is Our CPF System Really That Bad?

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