You will be able to compare the three CPF LIFE plans on starting payout, growth and bequest.
When Linda asked her sister which CPF LIFE plan she had picked, her sister couldn't remember choosing one. She hadn't. She had been placed on the default plan and never looked again. That turned out to suit her, but she hadn't known there was a choice, or what the other plans would have done.
CPF LIFE offers three plans. All three pay for life. They differ in how much they pay at the start, how the payout changes over time, and how much they leave to your beneficiaries.
The Standard Plan pays a level monthly amount for the rest of your life. It is the default: if you don't choose, this is the plan you get.
Its strength is simplicity. You know what will arrive each month, and it doesn't fall. Its weakness is inflation. A payout that buys a comfortable month at 65 buys noticeably less at 85, because prices rise over twenty years even when the payout doesn't.
The bequest under the Standard Plan is the part of your premium not yet paid out to you, plus any other savings left in your CPF. It shrinks steadily as payouts are made, and after enough years it reaches zero, although the payouts continue.
The Basic Plan pays a lower monthly amount than the Standard Plan and is designed to leave more for your beneficiaries for longer.
It works differently inside. Only part of your RA savings goes into the CPF LIFE pool at the start. The rest stays in your RA, and your payouts are drawn from your RA first. At an older age, when your RA runs low, payouts switch to coming from the CPF LIFE pool. Because more of your money sits in your RA for longer, more of it is still yours to pass on if you die in the earlier years.
The trade-off is a lower payout, and the payout can also drift down over time, because it depends partly on the interest your shrinking RA earns. The Basic Plan tends to suit people who have other reliable income and care most about what they leave behind.
The Escalating Plan starts with a lower monthly payout than the Standard Plan, then raises it by a fixed percentage every year for life. The CPF Board sets the rate of increase.
Its aim is to help with inflation. In the early years you receive less than you would on the Standard Plan. Later, the payout overtakes the Standard Plan's level amount, and in your eighties and nineties it is higher. The longer you live, the better this plan does compared with the others.
The catch is the early years. If your other income is thin in your late sixties, a lower starting payout can be harder to live with. If you die early, you will have received less in total than on the Standard Plan.
Three questions do most of the work.
First, how much do you need each month at the start? If the Standard payout only just covers your essential spending, the lower starting payouts of the other two plans may leave a gap you would have to fill from savings.
Second, how worried are you about inflation and a long life? If your family tends to live long, or you have few other assets that would keep up with prices, rising payouts become more valuable.
Third, how much does the bequest matter to you? If you want to leave a meaningful sum, especially in case you die in your sixties or seventies, the Basic Plan keeps more of your money in your RA. If you have other assets to leave, or the people you would leave money to are already provided for, the bequest may matter less than the size of your income.
The plans can also be compared with your other retirement income. Retirement & Estate: income for life and a plan for what you leave, lesson 2.2, Choose your CPF LIFE plan and start age for the whole plan, does that once you have built the rest of your income plan.
The figures for each plan depend on your RA balance, your age when payouts start, and current interest assumptions. The CPF LIFE estimator on cpf.gov.sg shows your own estimated monthly payouts and bequests under each plan. Lesson 7.4, Compare plans with the CPF LIFE estimator, walks through it step by step.
Linda ran it once, quickly, and found what most people find. The Standard Plan's payout sat between the other two at the start. The Escalating Plan's payout overtook it in her seventies. The Basic Plan's bequest stayed larger for longest. She is leaning towards the Escalating Plan, because she has a part-time income planned until her late sixties and the women in her family tend to live long: her mother is 79 and still active, and her grandmother reached 98.
Think about the three questions above for yourself, and decide which matters most: a level income, a larger bequest, or payouts that rise over time.
Write the plan you lean towards and the reason: level income, a larger bequest or rising payouts.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).