Singapore’s life annuity scheme, CPF LIFE, protects all Singaporeans and Singapore PRs with the assurance of lifelong monthly payouts.
There are several stages to the retirement plan put in place by the Singapore government using our CPF contributions:
1) Throughout our working lives, we save up for our retirement by contributing a mandatory portion of our salary into our CPF accounts – Ordinary Account (OA); Special Account (SA); and MediSave Account (MA).
2) When we turn 55, the combined balances in our OA and SA are transferred to a newly created CPF Retirement Account (RA).
3) When we turn 65, we can enter the CPF LIFE scheme. Once we do so, we can start collecting a monthly payout for as long as we live.
What If We Pass Away Before Withdrawing What We Have Contributed Into CPF LIFE?
This is one common question that many people (rightfully) ask – would we be better off not contributing to CPF LIFE, and just withdrawing a portion of our own savings from our Retirement Account?
On the CPF website, it is explicitly stated that “you and your loved ones will always get back at least the amount that you have put into CPF LIFE, in the form of payouts and/or bequest, no matter what age you live to”.
This means if we pass on before withdrawing – in the form of monthly payouts – what we have contributed into the CPF LIFE scheme, our beneficiaries will receive a BEQUEST amount not less than the PRINCIPAL AMOUNT (total we contributed to CPF LIFE) minus CPF LIFE PAYOUTS (total amount we received in monthly payouts during our retirement).
Another way of looking at this scheme is that we are always in “break-even” status. Either we will withdraw all our principal and more in monthly payouts or our beneficiaries will receive the remaining amount in the form of a bequest.
Aren’t We Just Getting Back Our Own Money Then?
This is another fair question many people ask: if we or our beneficiaries are just getting back our own money, then what’s the benefit?
The real benefit of CPF LIFE is that it provides us with the security of a lifelong monthly payout regardless of how long we live. This means that if we live beyond what our funds can normally provide us in our retirement, we are assured to continue receiving our monthly payouts for as long as we live.
With Singaporeans already having one of the highest life expectancies in the world, and continuing to live longer, this certainty in our old age is priceless. We will not have to rely on or burden younger family members to take care of us.
What Happens To Our Interest Returns Once We Put Our Money Into CPF LIFE?
This question is key to the security of our lifelong monthly payouts. Once we enter the CPF LIFE scheme, our contributed funds stop giving us an interest return directly. Rather, they continue earning the same interest returns, but this is contributed to the Lifelong Income Fund.
There are two implications for this: 1) the interest returns from our CPF LIFE contributions does not form part of our bequest and 2) it is the interest returns that provide Singaporeans and Singapore PRs who live longer the security of a lifelong monthly payout.
How Long Do We Have To Live To Earn More Out Of CPF LIFE Than We Contributed Into It?
This is quite a cynical question to ask, but it does make sense if we really want to know how long it takes for the CPF LIFE scheme to actually benefit us on an individual level.
To get to the answer is not straightforward as there are many moving parts on the CPF LIFE scheme. For illustration purposes, we will make the following assumptions:
i) A CPF member is turning 55 in 2019;
ii) We contribute the Full Retirement Sum (FRS) of $176,000 as of 1 January 2019 when we turn 55. Just to clarify, there are also the Basic Retirement Sum (BRS) and Enhanced Retirement Sum (ERS) that you can also opt for;
iii) We choose the Standard Plan when we turn 65. Just to clarify, there is also the Basic Plan and the Escalating Plan that we can opt for;
iv) We choose to start receiving monthly payouts when we turn 65. Just to clarify, we can choose to defer payouts up to 70 years old.
Also, we reiterate that we are always on “break-even” on our plan as our bequest will make up any shortfall in the amount we contributed to CPF LIFE, compared to the amount we received in the form of our monthly payouts.
Below is a screenshot from CPF LIFE Payout Estimator for the scenario we detailed. We can see that we will receive between $1,357 and $1,495 in monthly payouts based on the assumptions above. This goes on for as long as we live.
Next, we want to check when our bequest amount will fall to $0. In most cases, this will be the time we would have fully withdrawn our initial contributions into CPF LIFE. From the chart below, we can see that when we hit age 80, our bequest amount falls to between $0 and $8,875.
Working backwards, we can calculate that we would have withdrawn an estimated sum of between $244,000 and $269,000 in monthly payouts by the time we turn 80.
While this seems a far greater sum than the Full Retirement Sum of $176,000 we contributed into our RA at age 55, we have to take into consideration that this sum continues to compound for 10 years, until we turn 65, before going into CPF LIFE.
To calculate the actual amount we contribute to CPF LIFE, we need to account for a further 10 years of interest returns comprising an interest of 4% per annum, with an additional interest of 1% per annum on our first $60,000 balances, and an extra additional interest of 1% per annum on our first $30,000 balances. By the time we enter CPF LIFE at 65, we should have accumulated more than $270,000 in our RA.
Technically, this would mean we would have started “earning” from the CPF LIFE scheme beyond age 80 as we have withdrawn, in monthly payouts, the total amount we initially put into the scheme.
However, we can’t simply think we would be “earning” beyond this point as we have to account for the fact that we haven’t received interest on our contributions to CPF LIFE.
How Much Would Our Retirement Account Balances Have Grown To If We Didn’t Contribute To CPF LIFE?
Considering we kept the $270,000 in our RA when we turned 65, and withdrew $1,495 each month from it, we would still have close to $113,000 by the time we hit age 80. This means we don’t actually “earn” from CPF LIFE once we hit 80.
Here’s an estimate of how much balances we would have if we were able to reject CPF LIFE, and continued earning interest rates on our CPF RA balances, while still withdrawing $1,495 each month.
For us to start “earning” from CPF Life, we would need to get to the point that we withdraw more from the scheme than our contributions and interest returns would be able to afford us. This would be closer to age 88.
CPF LIFE Is More Than Just A Tool We Need To “Earn” From
With the average life expectancy at 85 today, there will definitely be a group of people who will not “earn” from CPF LIFE. However, CPF LIFE still provides financial security that cannot be measured in dollar terms for those who do live longer. Remember, because our monthly payouts are lifelong, a CPF member who is living till his late 80s or into his 90s never needs to worry about his retirement funds running out.
Another way of understanding CPF LIFE is that it functions as an annuity, rather than a savings account plan that pays you interest. It’s important to understand this distinction because the underlying concept of an annuity is that the longer you live, the higher your “returns” will be.
With rising life expectancy, more people will also be expected to benefit from CPF LIFE going forward.
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