Thursday, 5 February 2015

How you should respond to the CPF changes

The CPF Advisory Panel has made their initial recommendations and it is likely to be adopted (duh!)

What should you do?

If you are the low income earner who is unable to meet your minimum sum, most of the recommendations are of no help to you. And the option to withdraw 20% of your RA at 65 is not without costs.

It does provide you with a choice, but whether you want to exercise that choice will depend on your situation - do you have a need for that money at 65?

And that is for you to decide based on your personal situation.

For the gamblers in you, here's a tip. Or some scenarios to consider.

Scenario A

In this scenario, we have a couple who are the same age. The both turn 55 in the same year, and they both hit 65 in the same year. And they both meet the minimum sum in cash, and in full.

So when they hit 65, both starts to get CPF Life payment (say $1250), for a total of $2500 for the couple. (Let's assume they are either childless, or their children are working and are independent).

Life Expectancy in SG is 82. But for gender specific life expectancy, SG men can expect to live to 80, and women to 85.

So at age 80, the husband dies, and CPF Life payment for him stops. The wife lives to 85, but the last 5 years, she gets $1250 a month only.

Scenario B1

Here the couple are slightly different in ages (as is the case for many couple). The man/husband is 5 years older than the wife. the wife worked intermittently throughout her working life, because of family duties (child care and aged parent's care). As a result, she doesn't have enough in her CPF for a full CPF Life. So at 55, the husband decides to go for the full CPF Life ($1250). 5 years later the Wife hits 55 and she can only afford the basic retirement sum and will get the $650-$700 CPF Life.

Five years later the husband turns 65, and starts getting $1250 a month in CPF life.

And another 5 years later, the wife hits 65, and gets $700.

Their total combined CPF Life is $1950 for 2 person (I assume the husband will share with the wife... Or else). Not too bad.

Then 10 years later, at the age of 80, the husband dies. His CPF Life payment stops. And the wife will have to try to survive on $700 a month. For the next 10 years.

Good luck.

Scenario B2

This is the same couple as Scenario B1. Except now, the husband tries something different.

At 55, he gets only the basic CPF Life - $700. And transfer the rest of his SA to his wife.

Five years later, his wife is able to afford at least the full CPF Life ($1250).

When the husband hits 65, five years later, he starts to draw $700 a month from CPF Life.

Five years later, the wife hits 65 and starts to draw $1250 from CPF Life. Total income from CPF Life is $1950.

Ten years later the husband hits the SG Life Expectancy of 80 years and dies because he is a statistical artifact.

His wife lives on with CPF Life payout of $1250 per month for another ten years before she becomes a statistical artifact as well.

Scenario B3

This is exactly the same as B2, except the husband transfers enough for the wife to get the Enhanced CPF Life - $1900.

When the wife turns 65, their CPF Life payout is about $2600.

When he dies, the wife is still getting $1900 from CPF Life.

So good? No downside?

The downside

In a statistical anomaly, the wife dies at 70, and the husband lives to 100. For the last 25 years of his life, he has to survive on $700 a month CPF payout because that was what he bought for himself.

Wives, show this to your husbands.

Husbands, run!

[Update 9 Feb: CPF has this informative graphic.]

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