Which CPF Life Plan for me? Basic, Standard or Escalating? (UPDATED JULY 2018).

An annuity is supposed to help fund our retirement. 

So, I should be looking at getting a bigger payout, if possible, and not a smaller one.

So, my choice is the Standard Plan.

I know there are people who would like to leave more money behind for their children and they might say I think the way I do because I have none (or at least I think I have none).

OK, maybe so.

However, I do feel that children should take care of themselves once they are adults. 

Some might tell me that this is a Western idea. 

OK, then, how did this Chinese saying come about?

儿孙自有儿孙福，莫为儿孙作马牛。

Bad AK! Bad AK!

Now, for some numbers.




Following my last blog on annuity rates, if we were to choose the CPF Life Basic Plan in order to possibly leave more money behind when we die, the annuity rate is approximately 7.16% (i.e. $991 x 12 /$166,000). 
- Refer to Ervin's comment on annuity rate at the end of this blog.

If we were to choose the Standard Plan, the annuity rate is much higher at approximately 7.88% (i.e. $1,090 x 12 /$166,000).
- Refer to Ervin's comment on annuity rate at the end of this blog.

I feel that when it comes to an annuity, the bequest should not be a primary consideration because leaving a legacy is not the purpose of an annuity.

An annuity is not a legacy planning tool. 

An annuity is a retirement funding tool.

What about the new CPF Life Escalating Plan?

I would probably stick to the Standard Plan as receiving a more meaningful sum of money right from the start and for many years after that is intuitively more attractive to me.

Intuition is fine but let me see if I can explain my choice mathematically.

The CPF Life Escalating Plan's annuity rate will escalate at 2% every year. 





Therefore, for the annuity rate to be on par with that of the CPF Life Standard Plan's, it would take about 11 years.

Only from the 12th year, the Escalating Plan's annuity rate would be higher than the Standard Plan's. 

This means its monthly payout would only become higher than the Standard Plan's then.

This seems attractive but in terms of total dollars received from the first payout, it would have lagged behind the Standard Plan and, logically, it would take many more years to catch up with the Standard Plan to make up for the "shortfall".

If we take into consideration the time value of money which says a dollar today is worth more than a dollar tomorrow, the difference in value spanning a period of years is probably quite stark.
.




.

I have never been very good at Math and, like with all my blogs, this is just me trying my best to make sense of things but maybe not doing a good job of it.

You have been warned.


So, why would I choose CPF Life Standard Plan?

You blur?

I also blur.




Please remember that I think this is right for me but it might or might not be for you.

Yes, you have been warned again.



---------
Lee Keh Yi:
CPF has updated their CPF Life Calculator.
It show much more details now

.


.

Ervin Ong says...
Your annuity rate calculation is wrong: "CPF Life Basic Plan in order to possibly leave more money behind when we die, the annuity rate is approximately 7.16% (i.e. $991 x 12 /$166,000)". This is because $166,000 is what you have at age 55, but you only start collecting annuity at age 65. You have missed out all the interest for the 10 years period.

Related post:
1. CPF Life estimator.

2. Annuity rates.

What is effective annuity rate and is CPF Life competitive?

A reader read an article in The Straits Times on CPF Life and asked me to write a piece on it.

I have blogged about CPF Life so much already and, so, to avoid boring anyone too much, I will try to keep this short.




This is taken from a recent chat with another reader:

foolishchameleon said...
... with so many annuities in the market, what returns would be considered decent?
2.5%? 3% ?

AK said...
What is a decent return? I have not done any comparison lately but I know none is able to come close to what CPF Life is able to generate which is a minimum of 4%.
However, if it is only 2.5%, I might as well just do annual VC to my CPF account as the OA pays 2.5%. So, intuitively, I would demand at least 3% from a private annuity.

(Source: https://singaporeanstocksinvestor.blogspot.sg/2017/10/how-insurance-weakened-familys-balance.html)

So, when the article in The Straits Times says CPF Life is able to offer a 7.1% effective annuity rate based on $100,000 premium, what are we looking at here?

We are not talking about effective interest rate here. 

We are talking about effective annuity rate.

If we are talking about interest rate, then, based on $100,000 savings in our CPF-RA, the first $30,000 gets 6%. Next $30,000 gets 5%. The rest gets 4%.

Average interest rate is 4.9%. 

I hope my math is up to scratch.





An annuity rate is not interest rate as it refers to how much is paid out as a percentage of our premium each year.

So, in the CPF Life example mentioned in The Straits Times, a 7.1% annuity rate based on $100,000 gives us $7,100 a year or $591.66 per month from age 65 for life.

It isn't a 7.1% interest rate.

It is quite clear that annuity rate and interest rate are different especially when we remember that some of this regular payout is a return of capital which is why at some point in our old age, when we pass on, there is nothing left for our beneficiaries.

Source: 
The Telegraph, 17 May 2017.

Taken from the article in The Straits Times:

The report highlighted that with CPF's interest rate structure, CPF Life is able to provide an effective annuity rate of 7.1 per cent based on a $100,000 premium.

"This compares favourably with life annuities in most markets," stated the report. The annuity rate was calculated based on the ratio of annual payout to premium paid, for a male member born in 1962, or is 55 this year, who receives payouts at age 65.

It is no wonder that financial experts like Mr Christopher Tan, chief executive of Providend, believes that every retiree's portfolio must include an annuity plan to hedge against longevity risk.


He says: "CPF Life is currently the best annuity plan in the market. It is low-cost and offers high return."




Read full article here:
http://www.straitstimes.com/business/invest/is-the-new-cpf-life-plan-ideal-for-you

Related posts:
1. An annuity.
2. Retirement funding.
3. CPF Life Escalating Plan.

Retirement funding assurance for the average investor.

I have met many people who told me they didn't believe in the CPF and they didn't believe in CPF Life.

When I explained that CPF Life is an annuity that would pay us a monthly income for life from age 65, some would go on to say that they didn't believe in having annuities.





There are different reasons given for not having an annuity but amongst investors, those that do not believe in annuities usually believe that they can always do better investing their own money.

It could indeed be the case that some of us constantly outperform the market.

See related post #2 at the end of this blog.

Well, I am not too confident of my own ability to do so.

So, I like to have some assurance that I would have a basic retirement income that is predictable.





In case my investments do not perform well enough in certain years, I have a well I can depend on. 

Having a well helps us to live well.

Sorry, I couldn't resist it.

Really.

No Evian? At least have well water.

That is what an annuity like CPF Life can do for us.

AK anyhow draw one.

Peace of mind is priceless.




Related posts:
1. An annuity.
2. CPF Life Escalating Plan. 

What to do with $45K? It depends.

Reader:
I have a bal of 45k which trying to find place to put. need for kid study or health problem. Is posb invest-saver a good choice?







AK:
Since you say you might need it for health problem, then, it is not money you can afford to lose.
Go for the safest options.
In case you are wondering, safest options are those that will not result in monetary loss. 🙂
So, if you need the money, you know you can get 100% of it.

Reader:
ya. cause read many earn from this invest saver but not savvy in investment. think just buy some good stock to keep is better.






AK:
Invest saver is an investment plan.
There is a risk of monetary loss.
The same goes with stocks.
Invest only with money u can afford to lose.

Also read this:
Investor psychology.

Reemployed with lower pay and worried about retirement.

Reader says...
I have been a reader of your blog for many years now.

Similar to your childhood experience - my parents also went thru bankruptcy during my teens and bad memories of money lenders coming to the old house.

I am Malaysian and coming to 55 years old. I was made redundant middle of last year, was unemployed for 4 months and have since resumed working.






My current gross salary is just enough to cover my household expenses + medical insurance for the whole family. (wife+ 3 kids.)

My fear of becoming destitute in the old age has created self-stress, as I continue to have interrupted sleep & tension with family members as I continue to delay/disapprove of their wants.

I currently have > RM3.3Mil in Malaysia Bonds, EPF & fully paid-up endowment policies. I park SGD$0.57Mil in a Singapore bank and have 2 fully paid-up landed property (one for my parents and the other for my family worth a total of RM2.5Mil).

AK pls talk to yourself, How should this person 'live life' going forward?






AK says...
All of us need to plan for the day when we stop working either voluntarily or involuntarily.

Usually, it means saving some money first and then putting it to work.

Hopefully, by the time we stop working, we would be able to receive a regular and meaningful income to have a comfortable retirement.

If your gross salary is enough to only cover your expenses, it means that you do not have any money left to grow your savings. So, I can understand your worry.






However, I can see that you were prudent in your younger days. 

Having 2 fully paid homes, $0.6 million in savings and RM3.3 million in bonds, EPF and endowment, I feel that you could possibly have a comfortable enough retirement if you have a modest lifestyle.

Having said this, I agree that you should continue to be prudent when it comes to wants because your earned income does not have room for wants. 

To satisfy the wants, you would probably have to dig into your savings.





Assuming the old folks at home are financially independent, I would continue to work till my 3 children are financially independent.

If my parents depend on me financially, then, I would continue to work till they pass on and when all my children are financially independent.

Maybe, I could switch to part time work and have more leisure time when fewer people depend on me financially.






You could rent out one house when your parents pass on in future. 

The rental income plus the interest income from your bonds and EPF savings mean you would have a more meaningful passive income.

Money from your fully paid endowments and savings in the bank could be put to work when Mr. Market goes into a depression or whenever there is a good investment opportunity. I would think of these as your war chests.





If you are risk averse, you could think of purchasing a few annuities to fund your retirement. 

You might want to do this sooner than later so that you could start receiving another stream of passive income sooner.

At your age, your balance sheet is definitely not weak but with dependents, it could be exhausted quite quickly if you are not careful especially when you are not able to grow your savings meaningfully.






As long as you stay prudent when it comes to expenses, when you no longer have dependents, all else remaining equal, I believe that your retirement will still be a comfortable one.

Related posts:
1. Advice on saving.
2. Needs and wants.
3. To retire, have a plan.
4. Have an annuity?
5. Too late to plan at 57?

How insurance weakened a family's balance sheet?

This is the continuation of a conversation with a reader who is having difficulty accumulating an emergency fund and who depleted her savings after her dual income household became a single income household.

Reader:
I just read on "How many 20 years and $29,000 do we have?"

I have the Prulink too and have been paying for 12 years now.

Apart from this I have an endowment plan to be paid for another 9 years before mature.

My husband and I plus 2 kids have whole life plans, personal accidental and hospitalisation plans.








AK:
You are (probably) paying too much for insurance.

Your children don't need life insurance. Life insurance are for people with dependents. Children don't have dependents.

I won't touch investment linked policies or ILPs (e.g. PruLink) even with a 5 feet pole. I don't mix investment and insurance.





My action plan if I were in your shoes:

1. You and your husband just need term life insurance (+Critical Illness cover). (You need life insurance until your children are no longer financially dependent on you.)

2. You do not need whole life insurance. Definitely, your children don't need life insurance (until they have dependents). It is a luxury.

3. ILPs are terribly expensive life insurance. (I would get rid of this.)





4. Keep the hospitalisation insurance (H&S). (This is essential.)

5. Accident insurance is not a must but they are pretty cheap. You can keep this if you like. (Otherwise, don't renew when it expires.)

6. Endowment plan, 9 more years. A form of forced savings. Just complete it. (A plain vanilla endowment is less problematic than an ILP.)

Before terminating any of your life insurance policies, get covered with term life insurance of equivalent level of protection first.







We should increase our income if we can but we must be sure that in the event our income suffers a dip or disappears, we are able to cope.

We want to be especially careful with any long term financial commitment that takes up a significant percentage of our regular income.

Making sure that these long term financial commitments are absolutely necessary will help to avoid weakening our financial health too much.






This family can bring down their expenses rather significantly and strengthen their balance sheet by not overpaying for insurance and to buy only what they need.

Related posts:
1. Critical illness insurance.
2. Disability insurance.
3. Term life insurance.

Exceeded CPF FRS and 2 questions.

Reader:
May i get your advise on this matter. Am going 52, meet Full Retirement Sum (FRS) with excess. So OA, SA and MA all met limit.

I read your blog said its good to do Voluntary Contribution (VC) to CPF.




Questions:

1. If i do a VC, where or which account will the money go to since all 3 accounts had hit limit?

2. Can i withdraw the VC that i put in with interest together with my excess above the FRS at 55?

Thanks for your advise in advance.

AK:
Please remember the CPF Annual Contribution Limit (i.e. $37,740 which is 17x of CPF monthly salary ceiling of $6,000 x 37%).

How much Voluntary Contribution you can do depends on how much Mandatory Contribution (from employment) is made in a year. 

Of course, if you are retired or unemployed, then, there is no mandatory contribution.

In your case, Voluntary Contributions will flow into your OA and SA. Nothing goes to your MA.

(The same thing happens with Mandatory Contributions for anyone who is still gainfully employed.)




You want to read this blog and refer to the Allocation Table provided:

http://singaporeanstocksinvestor.blogspot.sg/2017/08/cpf-sa-savings-10-years-from-now.html

At 55, the FRS will go to your newly created CPF-RA. The FRS money will be from your CPF-SA and, if that is insufficient, your CPF-OA. 

Anything in excess of the FRS in the CPF-SA and/or CPF-OA, you can withdraw when you turn 55.



Related posts:
1. Know how to grow our CPF?
2. Average HDB household $1M.

Insurance agent told me I am a valuable piece of art.

Agent:
"We should do a review. Your salary is higher now. You should need bigger insurance coverage."

This was what one of my insurance agents said to me many years ago.

I was wondering why did she say something like that. 

Wasn't I financially more secure by then? Why would I need to increase my insurance coverage?

Agent:
"You are worth more now. Your life is more valuable. It is like insuring a valuable piece of art. More valuable the artwork, the higher the coverage."

OK, at that point, I think most people would have just bought into the argument.

I didn't.

I decided that the agent was only interested in lining her own pockets with more of my money.






Read this conversation I had with a fellow blogger on the need to buy insurance and how this need correctly changes with our circumstances.

AK:
We should look left and right before crossing the road. In some instances, we should look back as well to make sure we are not in the way of some speeding motorized scooters.

Risks have to be managed and having insurance helps to manage risks.

Since we are talking about risks, actually, insurance companies could go bust too. What then? OK, I am being a little perverse. ;p

So, even if we have insurance, it is still important to have a meaningful emergency fund and I do maintain a very large emergency fund well beyond the 12 to 24 months of recurring expenses that I usually suggest.






The need for certain insurance products in life diminishes if we have a large enough emergency fund as well.

Insurance is most relevant when we want to transfer risks which could result in catastrophic financial losses or hardship.

So, we have to insure ourselves against events which we or our loved ones might find hard to cope with on our own.

The financial ability to cope will, of course, differ from person to person and from family to family.






la papillion:
I think it's a important to know that everything we do runs a risk. Even if we buy insurance, it's also possible for the company to close down, as u had mentioned. (that's why don't buy all your policies from one single company).

That's not the only risk of buying insurance. These days, even if u bought a plan, u might not be able to claim because of some disclaimers laid out but u didn't know about.

So, I agree that we should progressively take the risk ourselves as our financial situation improves.

When we just started working, the insurer should bear a big part of the risk because we don't have the means to shoulder the risk. It should be inverted when our situation improves.






Don't think of ourselves as a valuable piece of art that needs insurance coverage.

We should become more valuable as a person because our wealth has grown.

As we become wealthier, we shouldn't need to have more insurance coverage.

How to become wealthier?

What?

Make more money and buy more stuff that we need to buy insurance for?

OK, maybe, I will ask that insurance agent who said I was a valuable piece of art to give you a call.

Related posts:
1. Emergency fund.
2. Best insurance.
3. Become wealthier.

CPF and public assistance are not the same.

Reader says...
do u remember what the PAP garment says about targeted help? 

Can remember right? 

Basically it means when it comes to helping the poor, must have targeted help, thats why cannot set poverty line blah blah. :)




so applying the garment's logic (not my logic hor) which u so happily agrees with, when it comes to the CPF the garment should also intervene in a targeted manner only on those individuals who cannot (in your words) act responsibly. Correct?

So why all a sudden when it comes to the people's CPF instead of targeted intervention, the garment now intervenes in a blanket manner on everyone?

so do u see the double standards and failed logic that the garment and u hold? :D

.....
AK says...
The CPF is about helping us in saving for retirement. 

The CPF Life is, in essence, an annuity but better. 

We are not asking for financial aid here. 

It is different from the poor requesting for help.

However, more importantly, how can we determine if someone is able to act in a financially responsible manner? 

This is a difficult thing to determine which is why a minimum universal safety net that covers everyone works.

(Ironically, it is probably the people who are financially more responsible who might not need this safety net but they want it whereas people who need a safety net the most might clamor for earlier release of their CPF money.)




We must bear in mind that in helping the poor and the needy, we are talking about providing aid using public resources. 

There is very little or almost no emphasis on self-reliance.

When using public resources to help individuals, I appreciate the targeted efforts the government make to ensure the best use of taxpayers' money.




You might think that there are double standards here. 

However, I think you have misused the phrase "double standards".

If there are two sets of standards applied to the matter of the CPF, one set for the rich and one set for the poor, then, I would say that double standards existed.




However, helping us to save money to ensure retirement adequacy is a different matter compared to helping the poor and the needy using public resources. 

The approaches have to be different because these are two separate and very different issues.




Related post:
So near and yet so far.

CPF LIFE is not commercially viable. (Remove the CPF Annual Limit and...)

Read comments section: HERE.

In reply to AK's comment that not having a cap (i.e. CPF annual contribution limit) would be a burden to the system,


全自然 said...
I am not convinced how can more money by contributors in CPF be burdening the system. 

While the return of CPF is higher than fixed deposits or bonds, the money is locked almost permanently, well you get what i meant.

To give a comparison, a whole life insurance can give a compound return of 4%, the insurance company will welcome more money if you are willing to put in.

AK said...
I spoke to a CEO of an insurance agency before and he says that he does not even try to sell private annuities because there isn't any out there that is stronger than CPF LIFE.

The returns from private annuities simply cannot match CPF LIFE's.

What does this suggest?

CPF LIFE is not commercially viable. 




CPF LIFE exists largely because of government intervention.

If a product is not commercially viable, it is a burden to the provider.

For people with more money, once they have maxed out their CPF membership benefits, they can always get private annuities to supplement CPF LIFE if they like.




CPF LIFE is a part of CPF's strategy to help all members achieve a basic level of retirement adequacy.

All CPF members should take full advantage of this.

CPF LIFE is a basic safety net.

CPF LIFE will help in ensuring retirement adequacy for all members and there should be no argument about this.




CPF LIFE aside, paying 4% to 6% interest for savings in the CPF-MA, CPF-SA and CPF-RA is a huge burden. 

Even paying 2.5% per annum for our CPF-OA savings could be considered a burden to the system because our AAA rated Singapore government is probably able to access cheaper funds. 

This could change in future, of course.







If we have more money, we have to look elsewhere to stash it.


I am sure insurance companies will welcome our money but I am not sure they will be able to guarantee a return of 4% per annum. 

These days, such a guarantee would be quite a burden.



-----------------------------------------
Two blogs published earlier today:
1. Is AK right 6x out of 10x?
2. REITs and rights: Good at right price.

Related post:
Would you rather have it or not?

REITs and rights issues: Good at the right price.

Reader:
Can I ask u a question regarding to recently cache log have issue a right maybe know is it this right can be convert able into share when expired?

AK:
Once they have expired, rights are worthless.





Reader:
Alamak
Did u know when is expired date? Pls
And How do I sell off

AK:
It has already expired.

Reader:
Alamak like that mean nothing can I do with it?

AK:
I blogged about this. I even posted a reminder on my FB wall. 😉
All instructions and closing date in the package sent out by the CDP too.




Please be very careful and take note of all the dates when there are rights issues.

Exercise your rights to avoid dilution and, possibly, a big decline in distribution yield before the closing date.

How did Cache Logistics Trust's rights issue turn out for me?

I took up my entitlement and also subscribed for excess rights, receiving 40% more rights units than my entitlement as a result.




All investments are good at the right price and because heavily discounted rights units give the highest yields, unless it is a basket case, applying for as many excess rights as I can afford to makes sense to me.

Read this blog from earlier today?
Is AK the investor right 6x out of 10x?

Related posts:
1. Nil-paid rights and excess rights. 
2. Cache Logistics Trust 18 for 100 rights issue.

Is AK the investor right 6 times out of 10?

Recently, I got many more messages from readers on stocks I have blogged about.

Please remember don't buy or sell something based on what a blogger says. 

Always do your own due diligence.

If you feel uneasy, it is possible that you didn't know why you "invested" in something or you could be over invested.




1. 
If you didn't know why you invested in something, you might want to get out. 

You are not investing. 

You are gambling.

"Wah! AK says 8898 4D can tikam and really 3rd prize! This stock he says he is buying sure to win!"

Sounds like gambling, doesn't it?




2.
If you are losing sleep due to an investment, you might have invested too much, you might want to reduce your exposure.

"AK invested $100K in the stock. Must be safe!"

What is the percentage of $100K in AK's portfolio and what is the percentage of $100K in yours?






I always say that I am lucky that I have been right more than I have been wrong. 

My luck is not so good that I am always right.

Have I been right at least 6 times out of 10? I hope so.

Remember the $100K lesson from Marco Polo Marine.

It is important that if we should be wrong, the mistake does not sink our ship.

You are not me and I am not you.

Don't follow me.

If you must follow, don't do it blindly.

Read:
AK the investor in 7 chapters.

Sharing of anti-government websites.

Please do not share anti-government websites on my FB page or blog, especially those which oppose policies with spurious arguments.

From time to time, I had to delete such links.

These websites do nothing but to encourage ignorance and fan the flames of negative sentiments.




I welcome discussion on topics such as the CPF but not when it is apparent to me that the other party is opposing for the sake of opposing and using arguments which appeal to the heart and not the mind.

I said this on my FB wall just now when a reader posted a link to an anti-government website:

"No sharing of links to anti-government websites on my FB wall, please.

"Especially not those that do not even understand that an annuity (like CPF Life) is one of the best ways for most people to fund their retirement in their golden years."




Many of such websites are just out to sensationalize issues. 

They are more interested in pandering to an unhappy group of people.

Why not make an effort to understand how to make the system work for us instead of being frustrated and unhappy?

Worse, why make other people frustrated and unhappy?




Or are they quite happy with having a frustrated and unhappy audience they can pander to?


Or do they have a motive for making people frustrated and unhappy?


I don't read rubbishy stuff posted on websites like "Zhun Bo Singapura", do you?

Alamak. Don't.




Related post:
Would you rather have it or not?