Review of CPF LIFE

CPF LIFE (Lifelong Income Scheme For The Elderly) kicks in since September to ensure that seniors in Singapore have an assured source of income for life. Unlike the mass media, CashBench will not focus on the 4 CPF LIFE plans but reviews the scheme itself, including 3 key aspects that every Singapore resident must know.

 

CPF LIFE Overview:

The CPF LIFE scheme is essentially meant to be an improvement to the Minimum Sum Scheme (MSS). In the older Minimum Sum Scheme, a minimum amount of savings in our CPF accounts is set aside with the CPF Board to provide a regular source of income for retirement needs. This minimum amount is referred to as the minimum sum. However, this minimum sum is slowly reduced by each monthly payout during retirement. Therefore, income from the MSS will last for about 20 years only. Seniors who live beyond 20 years after retirement will lose this source of income, perhaps, when they need it most.

CPF LIFE … promise of a monthly source of income that will last for life, without any age limits.

The biggest change brought about by the CPF LIFE scheme is the promise of a monthly source of income that will last for life, without any age limits. Beyond this promise and key objective, the CPF LIFE scheme has 4 plans: Basic, Balanced, Plus and Income. They are different from one another in one important area: whether there is a bequest, and how much is the bequest amount.

A bequest essentially allows a senior to leave some money to his/her children, spouse or other beneficiaries after death. The Basic plan promises the most bequest amount, while the Income plan leaves no bequest at all. On the other hand, the Basic plan offers the least monthly payout, while the Income plan offers the most payout per month.

CPF members are free to choose which plan suits their needs best, but they cannot change from one plan to another after making a selection. Those approaching retirement can choose to remain in the Minimum Sum Scheme while younger folks must join the CPF LIFE scheme upon retirement in the future.

With this overview, let’s look at some key aspects that every Singapore resident must know about the CPF LIFE scheme.

1. Monthly payout is guaranteed but not fixed

While CPF LIFE guarantees a regular source of monthly income, the amount received is not fixed, and will be reviewed every year. Every senior under the CPF LIFE scheme will receive an initial monthly payout based on a number of factors.

… lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future.

After the initial monthly payout is determined, two key factors are used to determine if the payout amount should be revised. These are (a) interest rates, and (b) average age that seniors pass away. In general, lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future. Unfortunately, these are not factors within our control.

In addition, the numbers that are shown in newspapers or CPF guides for typical monthly payouts are meant for those approaching retirement soon. These figures do not apply to those far away from retirement now. Given the uncertainty in the monthly payout amounts, it is therefore wise for working professionals not to depend on CPF LIFE as the only source of income when retirement comes along.

2. Monthly payout is not adjusted for inflation

While chatting with a friend recently, CashBench was told that a bowl of fishball noodles costs only 50 cents in the early 1970s. Fast forward to 2009, this bowl of fishball noodles costs at least $2.00 now. Inflation sounds like a big word, but it simply refers to the gradual increase in prices of things we buy. Using fishball noodles as a measure, inflation over the past 4 decades is about 3.6% a year.

Looking at CPF LIFE again, it is important to realize that the monthly payouts are not adjusted for inflation. This means the monthly payout remains the same even if prices of things we buy get more and more expensive. For example, if we receive $600 monthly today, we can happily buy 300 bowls of fishball noodles. That’s quite a lot of noodles! However, a bowl of fishball noodles will cost $2.80 after 10 years if inflation stays at 3.6% per year. By then, we can only buy 214 bowls of noodles with the same $600 payout. That’s a reduction of almost 30%!

… the monthly payout we receive will buy less and less stuffs as we grow older.

Essentially, the monthly payout we receive under CPF LIFE will buy less and less stuffs as we grow older. For this reason, it is again important not to rely on CPF LIFE as the only means of income during retirement. Instead, we should also invest in assets that can give returns that either match or is higher than inflation.

3. Bequest amount is not guaranteed, and not fixed

One reason why CashBench is not overly concerned on an in-depth discussion among the 4 CPF LIFE plans is the fact that bequest amounts are not guaranteed. While the Basic, Balanced and Plus plans provide for bequest, it is impossible to determine beforehand how much will be given. In fact, there may not be any bequest eventually. Why?

If a senior received payouts more than the premium he/she initially paid, there will be no bequest.

To join the CPF LIFE scheme, the initial money set aside is now called a premium, instead of the minimum sum in the Minimum Sum Scheme (MSS). The bequest amount left to the beneficiaries is calculated as this premium minus all monthly payouts given out before death. If a senior received payouts more than the premium he/she initially paid, there will be no bequest. This is true no matter what CPF LIFE plan he/she is in.

The maximum premium payable to join CPF LIFE right now (exclude any bonus top-ups) is S$117,000. Any bequest received by the beneficiaries will not be significant unless a retiree passes away very early during retirement. Even if the retiree dies before any payouts is given, the maximum that a beneficiary can receive is $117,000. Even by today’s standards, this is not enough to buy most HDB flats.

What’s more, the exact bequest amount is uncertain as we won’t know exactly when we’ll pass away. From another perspective, beneficiaries will also not know how much to expect from the bequest. What does all these mean? A senior who is really keen to leave a gift for beneficiaries should probably not depend on CPF LIFE as the primary means of bequest.