CPF – Nudge

Every birthday is important and significant – but some are even more so than others. Many of us would probably recall our feelings upon turning 18 and 21, which are ages during which we unlocked the ability to do things like earn a driver’s license, enter a club, or drink alcohol. In Singapore, one of the most significant birthdays is arguably the CPF payout eligibility age. This is the legislated age on which we can start receiving payouts under the CPF LIFE scheme. For those born in 1954 or later, the payout eligibility age is 65. However, even though CPF members can begin receiving monthly CPF LIFE payouts from the payout eligibility age, they can also choose to defer this start date to anytime between 65 to 70. In this article, we will explore the benefits and costs of CPF payout deferment and discuss whether it makes sense for you. How CPF LIFE Payout Deferment Works in Practice Instead of automatically starting to make monthly payouts to every CPF member once they reach their payout eligibility age, the CPF Board assumes that members would want to defer their payouts until they are explicitly told otherwise by members. Thus, the CPF Board would only start making monthly payouts when members request for it anytime from their payout eligibility age up to the age of 70. Since members are not able to defer their monthly payouts beyond the age of 70, all members will automatically begin receiving their monthly payouts at age 70. This practice is pragmatic albeit widely maligned, as explained previously in articles like this one. Benefits of Deferring CPF LIFE Monthly Payouts So, why would anyone want to defer receiving monthly payouts after waiting what must feel like a lifetime for it? Well, the CPF Board promises higher monthly payouts of up to 7% for every year payouts is deferred. This means that if a member were to defer for the full 5 years until the age of 70, they would potentially be receiving 35% more in monthly payouts – for life. A male CPF member who reached the age of 55 in 2023 is subject to the prevailing CPF Full Retirement Scheme (FRS) of $198,800. On the Standard plan, he would be receiving an estimated monthly payout of $1,600 from age 65 if he does not defer his payouts. If he were to defer the start of his payouts, here is how much his monthly CPF LIFE payouts will be once they commence: CPF LIFE Payout Commencement AgeEstimated Increase in Monthly PayoutEstimated Monthly Payout Amount650%$1,600667%$1,7126714%$1,8246821%$1,9366928%$2,0487035%$2,160 In addition to the significantly higher monthly payouts, there is also another side effect to deferment – that is the preservation of the value of bequest for members’ beneficiaries. This is because the value of the bequest is based on the total CPF LIFE premiums paid, less the amount paid out through monthly payouts. How Many Years is Needed for Deferred Payouts to Breakeven? So, with these benefits, does it actually make financial sense to defer one’s monthly CPF payouts for as long as possible? To figure that out, we will need do the math to find out how long it will take before the increase in monthly payouts will be greater than the loss in income from the delay in payouts. In our calculations, we will use the same profile as the previous section – that is a male who meets 2023’s FRS of $198,000 at age 55. That person would receive about $1,600 per month if they didn’t defer and receive $2,160 a month if they were to defer to the maximum age of 70. At age 70, they would have lost out of five years of CPF LIFE payments, which amounts to: Deferred Income Over Five Years = $1,600 x 12 x 5 = $96,000 Additional Annual Income from Deferment = ($2,160 - $1,600) x 12 = $6,720 Number of Years Needed to Breakeven = $96,000/$6,720 = 14.2 years This means that for those who deferred the commencement of their CPF LIFE payouts, they will only be better-off from age 84.2 onwards. This is near to the life expectancy in 2022 for women (85.2) and higher than the life expectancy for men (80.7). Another way of looking at this that for more than 14 years, the CPF member who choose to defer his payouts for five years would be worse off financially than someone who received their payouts as soon as possible. If your aim was to extract the most from their CPF LIFE plan, then deferring your payout makes no financial sense. Should You Consider Deferring Your CPF LIFE Payouts? As we have shown, if you wish to optimise returns from your CPF LIFE plan, you should not defer your CPF LIFE monthly payouts. And even if you wish to leave a bigger bequest for your surviving beneficiaries, deferment makes little sense, since even if you have other sources of retirement income, you could still keep aside your CPF LIFE payouts. While theoretically you could be better off in the off chance you were to live beyond Singapore’s life expectancy, the odds are not in your favour, especially if you are a male. It is hard to justify voluntarily being worse-off for 14 years in exchange for a small chance of an upside in the future.

Tag: CPF

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