Monday, September 22, 2014

CPF Life vs NTUC Annuity

After I wrote my previous post about some retirement products, it got me thinking for quite a while.

If CPF Life is so good, why not leave the maximum amount of money in CPF Life? Since CPF Life is not run for profit, it should definitely be cheaper than private plans, since the are no profit margins, right?

Well, I sought out to do an apples to apples comparison between CPF Life (Basic) and NTUC's Annuity product.



So the above 2 pictures show what would be the payout based on $100,000 at the age of 65. But which one is better? Well, let's deconstruct it a little bit.

CPF Life Basic is based on projections based on 3.75% interest rate and will pay out $616 based on that. If the higher 4.25% project rate is used, the payout would be $667.

NTUC has a guaranteed portion of $490 and a non-guaranteed portion of $107 using a projection rate of 4.75%.

Wow. So even if CPF uses a lower projection rate of 4.25% instead of 4.75% used by NTUC, CPF will payout more for almost the first decade. I think that the non-guaranteed portion of the NTUC annuity is much much too optimistic. So, comparing monthly payout amounts, CPF Life pays out more initially, but may be overtaken by NTUC perhaps 10 years down the road.

However, a HUGE factor to consider is that CPF Life still has a death benefit portion to it. This portion remains a very substantial even when someone is into their 80s!

Personally, I think a relatively conservative retirement planning decision might be to NOT pledge your house to reduce your MS required, and instead keep the maximum amount in there and allow it to be converted to your CPF Life plan of choice.

Knowing the difference between CPF Life and private annuities, I think some people would even want to contribute more into the CPF Life plan and increase my monthly payouts and final bequest! But alas, it is not allowed. You can only have your CPF Life maxed out to the MS.


Personally, I think I will try and aim to do that. On top of aiming for the maximum payout from CPF Life, I am also currently exploring other retirement annuity products that can be added on top of my future CPF Life payouts to provide me with a very comfortable base for the rest of my life.

Above and beyond the basics, I would depend on the rest of my portfolio to generate me income in the form of dividends and coupons. I hope that this would be a decent enough sum too, then I can really enjoy my retirement. It is so far away, but it is not something that I am dreading, because I know that my future self will definitely be happy with my current self!

Is thinking about CPF Life and other lifelong payment products being a bit too conservative? I know it is a very safe and risk-adverse strategy, but it is a bit comforting to know that a large portion of your basics will always be met. I kind of view this strategy as paying off a house in full. Of course if you buy it with a loan, you can invest the rest of the money and pocket the spread between returns and the interest rate on your loan. However, a piece of mind does come along knowing that you fully own your house. A penny for your thoughts?

2 comments:

  1. Got Money, Got Honey,

    Good job!

    I guess there will be 1 less person clamouring to have ALL their CPF money back at 55 ;)

    It's ironic that a lot of big daddy policies are meant for the man riding on the SMRT bus; yet these are the very people when given the chance, would love to take all their CPF out at 55...

    While there are others who are financially more well-endowed and literate maybe wishing they could put more money into our CPF accounts and into CPF Life!

    We just have to pause to ask WHY there's a salary cap for the employer's CPF contribution, the cap on Special Account voluntary contributions, and this cap on joining CPF Life.

    CPF is in effect turning money away from the well to do. But of course! To be a premier finance hub in Asia, we need our banks and insurance companies to flourish too!

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    Replies
    1. Hi SMOL,

      I wonder if government and CPF policies will change from now until my retirement age! I wouldn't be surprised if it does, but at least I think I got the current situation worked out if things doesn't change.

      Not withdrawing all your excess cash over the MS in a single go can also be a good idea, since the CPF accounts gives amazing risk-free rates! Since they still allow you to withdraw once a year, perhaps one should think of CPF monies as a slightly more illiquid fixed deposit with great rates?

      I never thought about the reason for the cap to all these things... You are probably right, they don't want CPF to become a public bank instead of a pension scheme! Interesting new perspective!

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