CPF Life: Should I defer the payouts to age 70?
In our previous post CPF Life: A Primer, we described how the CPF Life Scheme works . Subsequently, in CPF Life: Is it a Worthwhile Investment, we usd life expectancies for males and females, and the CPF Interest rates to work out the value of the CPF Life Schemes.
Under CPF Life, there are 3 different plans a CPF member can choose from. Each plan has a different amount of payouts starting from age 65, depending on gender:
| Savings at Age 55 | Your Monthly Payout for Life from Age 65 Onwards | ||
|---|---|---|---|
| Standard Plan (default plan) | Basic Plan | Escalating Plan | |
| Male Full Retirement Sum $176,000 | $1,401 - $1,549 | $1,273 - $1,412 | $1,099 - $1,227 (initial sum) Increases by 2% every year |
| Female Full Retirement Sum $176,000 | $1,302 - $1,445 | $1,229 - $1,366 | $999 - $1,119 (initial sum) Increases by 2% every year |
* Our update on CPF Life for 2020 is here!
Deferring the Start of CPF Life Payments
The CPF Board also allows the CPF members reaching the age of 65 the option of deferring the start of their payments up to the age of 70. In return, CPF members can expect an increase in the monthly payments of up to 7% per year deferred. Hence, a CPF member who defers his CPF Life payments form the age of 65 to 66 can expected the following payments instead:
| Savings at Age 55 | Your Monthly Payout for Life from Age 66 Onwards | ||
|---|---|---|---|
| Standard Plan (default plan) | Basic Plan | Escalating Plan | |
| Male Full Retirement Sum $176,000 | $1,499 - $1,657 | $1,362 - $1,511 | $1,176 - $1,313 (initial sum) Increases by 2% every year |
| Female Full Retirement Sum $176,000 | $1,393 - $1,546 | $1,315 - $1,462 | $1,069 - $1,197 (initial sum) Increases by 2% every year |
If the CPF member defers all the way up to age 70, he/she can potentially receive 35% more every month, compared to starting the payouts at age 65.
| Age when payments start | Male Full Retirement Sum of $176,000 | Female Full Retirement Sum of $176,000 |
|---|---|---|
| 65 | $1,401 - $1,549 | $1,302 - $1,445 |
| 66 | $1,499 - $1,657 | $1,393 - $1,546 |
| 67 | $1,597 - $1,766 | $1,484 - $1,647 |
| 68 | $1,695 - $1,874 | $1,575 - $1,748 |
| 69 | $1,793 - $1,983 | $1,667 - $1,850 |
| 70 | $1,891 - $2,091 | $1,758 - $1,951 |
Although the CPF Board has guidance for how the monthly payments will increase depending on the age they are deferred to i.e. “up to 7% per year deferred”, there is little detail on how the bequest amounts will be adjusted, except that the bequests will be the sum of unused CPF Life premium paid, without any interest accrued. We expect the bequest amounts to start at a higher level (reflecting the additional interest the Full Retirement Sum has earned before the payouts start), but reduce at a faster rate over time. In any case, this ensures that the value of the CPF Life annuity does not change depending on the deferment period chosen. The value of CPF Life to the CPF member will remain at around $176,000 as shown in our previous post.
At first sight, this increase in the CPF Life monthly payouts for deferring the start of the payouts seems attractive. Since the payouts at age 65 reflect an annuitisation rate of roughly 7% of the amount put into CPF Life, it would be fair to get 7% more every year per year deferred. But as with all things finance-related, the answer is not so simple:
- Firstly, deferring the payouts by a year or more does not mean that we live any longer. So even if we do get 7% more in payouts, we will receive fewer payments overall
- Secondly, the deferred payouts will continue to accrue interest, so we should expect to get a more than an increase of 7% in payouts
Is Deferring A Good Idea?
So, is deferring the CPF Life payouts a good idea? From the above, it does not sound like a good idea. To be sure, we work out the present value of the monthly payment using the same method here. We focus on the present value of the stream of payments and not on the bequests. If we benchmark the value of the stream of CPF Life payouts starting from age 65 at 100, the table below shows how much the payouts starting from a later age will be worth:
| Age when payments start | Male Full Retirement Sum | Female Full Retirement Sum |
|---|---|---|
| 65 | 100 | 100 |
| 66 | 99 | 99 |
| 67 | 97 | 99 |
| 68 | 94 | 97 |
| 69 | 91 | 95 |
| 70 | 88 | 92 |
Life expectancies in Singapore are such that there is no benefit to deferring the CPF Life payments. The increase in the payments of 7% per year deferred is insufficient to compensate for the shorter residual lifespan to receive them. This is particularly true for males, due to their shorter life expectancy. Even if life expectancies increase, the benefits of living longer still argue for starting the CPF Life payments as early as possible. The average life expectancy in Singapore has increased by roughly 2 years every decade, thanks to improvements in health and medical science.
There is no benefit to deferring CPF Life payments, as the increase in payments is insufficient compensation for the shorter residual lifespan
If the value of the monthly CPF Life payments is less due to deferring the payouts beyond age 65, where does the remaining value of the Full Retirement Sum go to? The answer is that it goes to the bequest amount.
However, increasing the bequest does not necessarily benefit most of the CPF members. About a third to a half of the value of the CPF Life bequest comes from payouts made to CPF members who pass away even before receiving their monthly payments. In these cases, the CPF member’s family receives the Full Retirement Sum (plus interest) which is not used to make any monthly payments yet. Deferring the CPF Life payments does not actually give them any extra money or cash value.
Furthermore, 90% of the value of the CPF Life bequest comes from bequests made to CPF members who pass away before the age of 75. Using the latest mortality statistics, 77% of the men, and 87% of the women aged 55 today can expect to live beyond that age. Hence the bequest in the CPF Life scheme will benefit very few CPF members in practice, which is why it is more important to focus on the monthly payments instead
Do Not Defer Your CPF Life Payments
So the message is very simple – do NOT defer your CPF Life payments, and make sure you apply to the CPF Board to receive the payments once you reach the age of 65.
This applies even if you are still working at the age of 65, or have alternative sources of income (e.g. investments, children), or have no immediate use for the CPF Life payments. At the very least, increasing your pool of liquid cash on hand will help in emergencies. Money locked up in the CPF Life Scheme for an additional 5 years is of no benefit to any one unless you pass away!
Even of you are still working at age 65, increasing your pool of cash on hand will help in emergencies
The 7% increase in the CPF Life payments per year deferred is insufficient to compensate for the shorter remaining life to receive them. How large does the increase in CPF Life payments need to be to make deferring worthwhile?
The answer is up to 11% per year deferred for the men, and up to 9% per year deferred for women (since women live longer). This is a lot higher than the 7% offered by the CPF Board at the moment.
Deferring your payout to 70 is madness. If one starts payout at 65, albeit at a lower sum, and someone starts at 70 to get an additional 7% per annum, it will take 13-15 years to level the quantum received in hand. The person starting at 65, has 5 whole years ahead in terms of quantum albeit a lesser monthly sum than the guy who starts at 70. Using excel, and depending on amount and gender, it takes 13-15 years to break even. Fred
Agree with you! Hence the unease we felt when the CPF Life start age was quietly pushed back to 70 years of age earlier this year. Surely the pros and cons need to be made clear to all CPF members.
I think a missing element on whether to defer payout is the amount of Bequest remaining, which could be significant.
eg) starting Payout at 65yo, under Standard Plan, Bequest wld run out at about 80yo (estimate) or 15 years later
alternatively, for someone who started Payout at 70yo, there would still be some Bequest left at 80yo.
Would the same conclusion be drawn if Bequest is taken into consideration ?
Would it be safe to assume that for Standard Plan, the Bequest decay is straight-line, reducing by the Payouts received each year ?
Wonder if you kept the Bequest numbers under the various plans (since CPF web has removed this feature) ?
I do not recall that the bequest information was made available for the case if the start date for CPF LIFE was at age 70. However, it should be safe to assume that it is a straight line decay as well. As the payouts starting from age 70 are some 34% higher than that at age 65, the decay of the bequest amount should be faster as well, and hence will run out at around age 80 as well.