You will be able to explain how deferring the start of payouts changes the monthly amount.
Linda plans to keep working three days a week after she leaves her full-time job, probably until she is about 68. Her part-time income would cover most of her spending in those years. Her friend asked the obvious question: if you don't need CPF LIFE until 68, why start it at 65?
You don't have to start payouts the moment you become eligible. Waiting raises every payment for the rest of your life, and for some people that is one of the best deals available. For others it is a mistake.
Your payout eligibility age is the earliest age at which CPF LIFE payouts can begin. It is set by law for your cohort and has been raised before, so check the current age on cpf.gov.sg.
You can start at that age, or defer to any later age up to a limit the CPF Board sets. You don't have to decide years in advance, and if you do nothing, payouts begin automatically at the limit. The decision is yours to make when you get there.
Each year you defer, your monthly payout goes up. Two things drive it. Your RA keeps earning interest for longer before payouts begin, and the pool expects to pay you for fewer years, so it can pay more each month. The CPF Board publishes how much each year of deferral raises payouts. Check the current figure rather than relying on what you read years ago.
The increase applies to every payment for the rest of your life. That is what makes deferral powerful for people who live long, and costly for people who don't.
Deferring means giving up some payments now in exchange for bigger ones later. A simple way to judge it is to find the age at which the bigger payments have made up for the ones you gave up.
Here is a toy example. The figures are invented and have nothing to do with CPF's rates. Suppose starting at 65 pays S$1,000 a month, and starting at 70 pays S$1,350 a month. By deferring five years, you give up S$1,000 times 60 months, which is S$60,000. From 70, you receive S$350 a month more. To make back S$60,000 at S$350 a month takes about 171 months, or about 14 years and 3 months. So in this toy, deferring pays off if you live beyond about 84.
That calculation leaves out interest, inflation and the bequest, so treat it as a rough guide. But it gives the right shape. Deferral is a bet that you will live past the break-even age, and the larger the increase per year, the earlier that age arrives. Run your own figures through the CPF LIFE estimator in lesson 7.4, Compare plans with the CPF LIFE estimator, and find your own break-even.
Deferring only works if you can live without CPF LIFE in the gap years. That income has to come from somewhere: part-time work, savings, SRS withdrawals, rental income, or a spouse's income.
If you defer by drawing down savings you would otherwise keep as a buffer, you swap one risk for another. You are protecting yourself against a long life while making yourself more exposed to a bad year early in retirement. Planning the money for those gap years is covered in Financial independence: planning the number and the path, lesson 3.3, The bridge years before CPF pays.
Health matters too. If you have reason to expect a shorter life, the break-even age may be out of reach, and starting earlier makes more sense. If your family tends to live long and you are in good health, deferring tilts the odds your way.
Linda's part-time income would cover most of her spending until 68. She has a small cash reserve and some savings outside CPF. Deferring to 68 would raise her monthly payout for life, and her family history suggests she may well pass the break-even age.
Against that, she isn't sure she will want to, or be able to, keep working that long. She decided to keep the option open. She will plan to defer, keep her cash reserve big enough to cover a year of spending in case the part-time work ends early, and start payouts sooner if it does. She noted that the decision can wait until 65, when she will have up-to-date information.
List the income you expect to have in the years after you stop full-time work and before your payout age. Then think about whether any of it could carry you for a few years beyond that age.
Write your other income sources for the years after you stop work and decide whether deferring payouts could make sense.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).