You will build a floor sheet that shows what guaranteed income covers and what the portfolio must provide.
Most people have a vague sense that CPF will cover "a lot" of retirement. This exercise replaces the vague sense with a number for every year: what your guaranteed income pays, and exactly what your savings must add on top. You'll build it once with your chosen start age and once with a later one, so you can see what waiting does.
Open the spending sheet from lesson 1.4, Build your retirement spending estimate, and your CPF LIFE estimates from lesson 2.2. Allow about thirty minutes. The worked example uses Jasmine's made-up figures, including invented CPF LIFE payouts that have nothing to do with CPF's real rates.
Start a new tab. Put one row for each age from the year your CPF LIFE payouts could begin to your planning age. Jasmine's rows run from 65 to 95.
Add two columns, essential spending and flexible spending, and fill them from your spending sheet for each age, in future dollars. If your spending sheet only has three ages, extend it so every year has a figure: the same formula, today's amount times one plus the growth rate to the power of the years from now, works for any age.
Jasmine's essential spending runs from about S$35,000 at 65 to about S$40,800 at 70, S$47,700 at 75 and S$65,700 at 85. Her flexible spending runs from about S$17,900 at 65 to S$29,400 at 85.
Add a column for CPF LIFE, using the yearly payout from the estimator for your chosen plan and start age, and zero in any year before it starts. On a level plan the figure is the same every year. On a plan with rising payouts, grow it each year by the rate the CPF Board publishes for that plan.
Add a column for any other guaranteed income you counted in lesson 2.3, Ways to raise the floor, such as a private annuity. Leave out rent and part-time work, or put them in a separate column you can switch off, for the reasons that lesson gave.
Then add a total guaranteed income column.
Jasmine's invented level payout from 65 is S$19,200 a year. She has no other guaranteed income, so her total is S$19,200 from 65 onwards.
This is the step most people skip. Work out the gap for essentials and the gap for flexible spending separately.
The essentials gap is essential spending minus guaranteed income, or zero if guaranteed income is larger. The flexible gap is flexible spending minus whatever guaranteed income is left over after essentials, which for most people is simply the whole of flexible spending.
Keep them apart because module 4 funds them differently. The essentials gap should come from the safest part of your savings, the flexible gap from the part that can rise and fall.
Jasmine's essentials gap is about S$15,800 at 65, S$21,600 at 70, S$28,500 at 75 and S$46,500 at 85. Her flexible gap is all of her flexible spending, from S$17,900 at 65 to S$29,400 at 85. Together, at 65 her portfolio has to provide about S$33,700, and at 85 about S$75,800.
Look down the essentials gap column. On a level plan, it grows every year, because spending rises with inflation and the payout doesn't. That is the shape you are planning for.
Copy the tab. Change the start age to a later one and replace the payouts with the estimator's figure for that age.
Two things change. In the years before the later start, the whole of your spending becomes the gap, essentials included. In every year after, both gaps shrink because the payout is larger.
Jasmine's second tab starts her invented level payout at 70, at S$25,800 a year. Between 65 and 69 her essentials gap is her entire essential spending, about S$35,000 rising to about S$39,600. From 70, the gap is smaller than in her first tab by S$6,600 every year: about S$15,000 at 70 instead of S$21,600, and about S$39,900 at 85 instead of S$46,500.
The cost of waiting is the payout she gives up: S$19,200 a year for five years, or S$96,000. Put that figure at the top of the tab so you see it every time you open the sheet.
Put the two essentials-gap columns side by side and answer three questions.
In which year does the later start begin to produce a smaller gap? For a later start, it is the first year of payouts.
How large is the extra spending your savings must carry before then? This is the figure from step 4.
By your planning age, which tab has the smaller gap, and by how much each year? Jasmine's later start lowers her yearly gap by S$6,600 for every year from 70. Her drawdown map in module 3 will show whether those savings ever catch up with the S$96,000 she gave up, once investment returns are counted.
A finished floor sheet has two tabs, one per start age. Each has a row for every year to your planning age, with essential and flexible spending, guaranteed income by source, and two gap columns. At the top of each tab sit the start age, the plan, the yearly payout and, on the later tab, the total payouts given up by waiting.
Fill in your own two tabs now. When you finish, the yearly gap columns are the figures you'll carry into the activity.
Build the floor sheet and write the yearly gap your portfolio must fill under two start ages.
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