CPF LIFE, Singapore's national longevity insurance annuity scheme, is a retirement scheme that most Singaporeans and permanent residents born after 1958 have to be enrolled it. But should we try to maximize it or should we try to get out of it in search for a better longevity risk hedge?
In Part 1 of Immortalize's CPF LIFE series, we went through the basics of how CPF LIFE works and pitted CPF LIFE against the Retirement Sum Scheme (RSS).
We've concluded that CPF LIFE is better than RSS in terms of payout duration but RSS is better than CPF LIFE in terms of monthly payout and inheritance.
But does that mean we should minimize our contributions to CPF LIFE? Is CPF LIFE comparable to private annuity offered out in the market? In Part 2 of this CPF LIFE series, we'll explore these considerations.
Note: Annuities are financial products that provides a stream of payouts for a predetermined period of time.
Is Retirement Sum Scheme or CPF LIFE better?
Here's a table to summarize what we have discussed.
In short, the longer you live, the more 'worth it' CPF LIFE becomes. So which should you choose?
It depends on your agenda and needs.
(Note that the following discussions are the author's opinion and not advice of any sort)
Choose CPF LIFE if you can and try to maximize the payout from it.
The purpose of RSS or CPF LIFE is to ensure that you have enough money to spend in your old age. It's about protecting you and your welfare, not maximizing what you leave behind for others. There are other tools you can use to protect your family.
"If You Can"
To maximize payouts from CPF LIFE means to sacrifice what you can have now for what you can have in future and not everyone can sacrifice now for the future, especially if you need the money now to survive.
Scenarios where CPF LIFE may not be the best option
Scenario 1: If I am terminally ill now, I would apply to withdraw my CPF. Whether you need the money now or not, CPF LIFE is not worth it from an investment viewpoint if you expect to die soon.
Scenario 2: If I am super rich and have
(1) a huge portfolio generating perpetual income;
(2) mechanisms in place such that I won't accidentally get scammed and lose my money, especially when I'm older and more vulnerable,
then longevity risk is not an issue for me. I will stay with RSS or opt out of CPF LIFE. Check here for the criteria to opt out of CPF LIFE.
Examples of why people don't want to be in CPF LIFE
Example 1: "I don't think I will live that long because my parents/grandparents didn't live that long."
The life expectancy in Singapore in 2020 was ~84 years old, which means there's ~50% chance you will live past 84 years old. 50 years ago, the live expectancy was ~66 years old.
Better technology, healthcare and quality of life will only improve the average life expectancy and this means that there's going to be a higher and higher chance that you will live older and older. If I die early, there's nothing much I can do. But what if, just what if, you live past 100 years old? Are you prepared for that?
Example 2: "My family will take care of me if I run out of money."
Sure. But having additional cashflow from CPF LIFE can lessen their financial burden and help them better take care of you.
How CPF LIFE Compares to Private Annuity Plans?
CPF LIFE is a non-profit scheme administered by CPF Board. As such, it doesn't incur advertising, agents' commissions and other costs that a private operator will incur.
The lower costs, together with a large member base, allows for longevity risk and costs to be better spread out among many people. This means that the pricing of CPF LIFE premium for the same kind of return will be better compared to privately run annuity plans.
Pays out for as long as you are alive
Most private retirement income plans that are available for the masses only last for a fixed period of time.
High return and close to zero risk
Backed by the Singapore government, CPF LIFE offers one of the highest return on any close to risk-free asset, ie, not only will you get the payout, the entity guaranteeing you the payout won't go bust and will definitely give you your money.
Best Gift From the Singapore Government?
There are definitely situations where CPF LIFE is not ideal. But for most of us, CPF LIFE is the best gift from the Singapore government to hedge longevity risk.
And as with all good things, there is a limit to CPF LIFE. You can't have unlimited amounts of it.
CPF LIFE is a great tool, but it may be inadequate as a complete longevity risk hedge, especially if you have a high monthly maintenance. There is a cap to the amount you can put in and thus, a maximum amount that you can get.
In Part 3 of this CPF LIFE series, we'll explore how to optimize your funds to ensure the maximum payout from CPF LIFE.
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FAQ
CPF LIFE, Retirement Sum Scheme or Private Annuity? Which is Better?
CPF LIFE is probably the best priced hedge against longevity risk because it pays out for as long as you are alive and has the highest return for any close to risk-free asset.
Disclaimer: Nothing in this article or site should be construed as providing legal advice or advice of any sort. The information provided are general in nature and may become inaccurate over time. Please consult a professional for advice.
For any issues or queries, please contact j@immortalize.io