Tan Kin Lian's Blog: Investing the CPF Minimum Sum

Monday, August 16, 2010

Investing the CPF Minimum Sum

In this FAQ, I explain the options for investing your minimum sum at age 55 and how to choose between the retirement account, CPF Life annuity and buying a life annuity from an insurance company. Many people reaching age 55 have to make this important decision.

Read "Investing the CPF Minimum Sum" in
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Practical Guide on Financial Planning

15 comments:

Unknown said...: Mr Tan, your attempts to advocate CPF Life over insurance company annuity is one sided. You conveniently forget to mention that the CPF Life payout is only a *projection* and it is not guaranteed. In contrast, insurance company annuity while having a lower payout is guaranteed at a minimum payout that is a contractual agreement and legally enforceable. Maybe you should comment on this. What is there from stopping the government from cutting the CPF Life payout in the future?; August 16, 2010 7:29 AM
Tan Kin Lian said...: Garrett
If you wish to have your views posted in the future, you have to refrain from labelling my view as "one sided".

I know about what is guaranteed and projected, and I believe that CPF does pay a better deal, for the reasons that I have stated, in spite of the figures being projected.

I still advice people to buy CPF life, instead of buying an annuity for an insurance company that has high expenses and a profit motive.; August 16, 2010 9:28 AM
zhummmeng said...: Garret,
Let me help you to understand CPFlife. Yes, each month's total payout is not guaranteed for CPFlife. Is the private annuity's TOTAL payout guaranteed? Also no, only the base payout is guaranteed. CPFlife has a guaranteed based return,ie 2.5%+1%. Is 3.5% better than the scam annuity that one company is still promoting? How many victims have fallen prey to the conmen and women who don't put the interest of their clients first but their own commission? What is the return of the private insurer's annuity?
What is there to stop the company from going bankrupt? Your annuity is as good as the issuer.
I wonder this Garrett is a salesman agent from ntuc? All salesmen don't put the interest of their clients first.They only think of how to con customers into buying their products. Whatever 'advice' doesn't earn commission for them they hide from their clients.I pity their victims.; August 16, 2010 10:04 AM
hanglian said...: Dear Mr. Tan,

Would you consider adding a number column to the table of articles? Makes it easier to identify an article, for example article number 20, "Investing the CPF Minimum Sum".

Thanks.; August 16, 2010 10:24 AM
Tan Kin Lian said...: Hang Lian
The number will change as the articles are sorted in order of the title.; August 16, 2010 11:22 AM
Spur said...: The "social enterprise" annuity payout is also projected. The guaranteed base amount is really pathetic in order to protect the ass of the social enterprise in case their investment funds go sour.

Furthermore the social enterprise annuity is projected based on 2% interest only. And this is not guaranteed --- usually it is lower. If you look at the past 10 yrs, in some years this social enterprise didn't increase the annuity payouts, unlike what is written in the Bullshit Info (BI). Or the increase was only a measly 0.5% or 1%, unlike the 2% projected.

CPF Life has base guaranteed interest of 3.5% --- how to even bring in this social enterprise annuity to fight? By 2013, when CPF Life is compulsory for all, it will be even worse for the social enterprise annuity as they lose out on customers, their annuity funds becomes smaller and become more inefficient i.e. higher admin costs and higher investment costs.

For those who have a choice from now till 2013, basically it is just deciding between CPF Life and leaving in Retirement Account for the existing draw-down regime.; August 16, 2010 1:22 PM
ron said...: I will be 55 next year.

I intend to leave all the money untouched.

I have met the minimum sum
I have met the medisave minimum sum

The total amount is more than 350K.
I do not intend to draw out anything until the official draw down age of 65 which is about 10 years away.
With interest rates so low, It is better to leave it with the CPF which pays a guaranteed 2.5% on the 300K.. and that means in 10 years, the amount will be about 100K more.. I should have 400K at 65 years.

From 65 to 85 years it is a total of 20years.. taking 400K divided by 20 years will be 20K per year and dividing it further means $1,600 per month for 20 years.

My estimation is that it is sufficient for my personal needs.
If I should live beyond 85years.. I will have no money left. That is ok.. simply "trip" and fall down the stairs, landing in a coma will solve that problem.

What use is an 85 year old anyway?; August 16, 2010 5:23 PM
Unknown said...: To: zhummmeng

Base payout from private annuity is guaranteed and enforceable by law. Total payout depends on how long you live. Commercial annuity method of "repaying" back the unused money to the beneficiaries is also more transparent. For e.g., NTUC will payout 97% of single premium with interested accumulated minus the payouts received. In contrast, CPF LIFE does not pay out to the beneficiary all the interest accumulated from the annuity premium, which can be a significant loss to the family if he annuitant dies too early. CPF LIFE doesn't even have a Benefit Illustration. So who is more transparent and trustworthy here?

There is no minimum payout for CPF LIFE. This was in fact brought up and confirmed in one of the parliament "debates" when CPF LIFE was launched, and it was confirmed that CPF LIFE payout can contractually and legally drop to zero. However, the counterpoint was that since it's allegedly non-profit and run by the government it is safe. Still, it is only the word of the government, and what is it worth these days? Nothing...

The 2.5%+1.0% interest rate only applies to SMRA accounts and not CPF LIFE and by end of this year it will be pegged to 10YR SGS Bonds + 1% Rates. The floor rate of 2.5% for OA and SMRA accounts in enshrined in the CPF Act, but is CPF LIFE part of the CPF Act? I'm not sure about this...

You claim that NTUC may go bust, I agree it is a possibility. But the possibility of CPF LIFE payout being adjusted downwards is even higher since it is government run. How many times have the government changed the rules of CPF to our detriment? Contribution Rates, Retirement Age, Minimum Sum... the next thing that will be cut is the CPF LIFE Payout.

Finally, insurance companies are subjected to regulations and probably some auditing. Who is to regulate and audit CPF LIFE? Nobody... it's probably going to be as well regulated and audited as the CPF Scheme, and I'm sure you know how "well" it has done so far.

So zhummeng check your facts before speaking and stop making baseless accusations. I don't trust insurance companies in general, but trusting the government is even worse!; August 16, 2010 7:13 PM
Unknown said...: Slight amendment to my previous post, CPF LIFE is part of the CPF Act, however under PART IIIB, 27J to 27Q (the part of the act governing CPF LIFE) on a quick skim through I cannot find any mention of minimum guaranteed payout or even minimum guaranteed interest. The floor rate of 2.5% in the CPF Act is written in Part II, which is dealing with normal CPF Scheme. I have no idea if the floor rate also applies to the CPF LIFE pool of money.

Another point to worry about is part 27O which states "The Insurance Act (Cap. 142) shall not apply to the Scheme or to anything done by the Board under this Part." This reinforces my previous point that CPF LIFE may not be as well regulated as we like to think, as while it operates like an annuity, it is not regulated by the relevant legislation.; August 16, 2010 7:46 PM
zhummmeng said...: Garrett,
we don't get paid a commission by CPF for promoting CPFlife.We do it in the interest of the general public to prevent them from being conned by insurance agents who are desperately trying to con people before the deadline , 2013.
I agree that you can terminate your private annuity and get a refund or if you should die your beneficiary will get the remainder money. But if it is because of these features then you miss the big picture. The big picture is YOU, the retiree.You should have big enough payouts to retire comfortably until you pass on and NOT your beneficiary. Get it? In fact 3 CFPlife plans provide for refund if something should happen to the annuitant.
If you take up ntuc annuity you may have to live beyond 95+ years old before the total payouts equal CPFlife assuming a 1.5% bonus every year. Can you live that old in order to enjoy a higher payout?
CPFlife payouts are calculated within the range of 3.75% -4.25% rate of return. The 3.5% is the guaranteed minimum.If the average rate of 10 year bond goes beyond 4% or 5% the payout will be the average plus 1%.
NTUC is dead duck depending on bonus. With this new management you can start learning how to eat grass otherwise you will be disappointed.You should have learned a lesson from the last bonus restructuring.
When you signed up for CPFlife IT IS A CONTRACT which no party can back out.
I don't get you when you say there were many times when CPF changes were of detriment to you? Paying you extra 1%+1% is to your detriment? Of course the benefits come with a condition..eg cannot take out..it is for your retirement. is it a detriment? it is tradeoff.
Let me tell you your private annuity is NOT getting better with rising cost..payouts will be FLAT, ie no bonus . Look at the cost rising, risng as long as the Great Wall of China or gored by the Spainish bull run; CEO increasing his performance bonus, agents more incentives if not don't push products..ads cost..fullpage ..unneccessary makeovers, etc..do you see your bonus in there, in all those places?
No audit? no regulation for CPF, you must be joking..the parliament, the people on top of all the legal restrictions, are the 'regulators.'
Anyway, Mr. Garrett, this is your business. We are advising you not to be conned by your trusted insurance agent who is ONLY interested in your money and NOT your financial well being.This is in their DNA.
The social enterprise wants to be #1 and it is sales at all cost; it doesn't matter how the agents do it , just bring in the sales.. This is dangerous.; August 16, 2010 10:32 PM
hosingping said...: new rule now is only 60K then can have CPF Life. wat if one dont have 60K in CPF? is it better to migrate out?; August 17, 2010 8:13 AM
Unknown said...: To: zhummmeng

Who says there is a need to sell annuity before 2013? You can still buy annuity under the CPF Investment Scheme even after 2013. Check your facts.

We have no proof that there is a guaranteed minimum interest rate for the CPF LIFE pool. Please show me in which part of the CPF Act it is stated specifically that the CPF LIFE Fund has a guaranteed interest rate. Even if I give you the benefit of doubt and *assume* that the interest rate is equivalent to SMRA, the rates will be 10 YR SGS bonds + 1% and not 3.5%. Can't you read properly? And given that 10 YR SGS bonds is now hovering just above 2%, the long-term interest rate may be 3%+ which is nowhere near the optimistic projections of 3.75%-4.25% used by CPF LIFE.

Unlike the contract between you and NTUC, in which to the best of my knowledge nobody can back out unless they find a legal loophole, the so-called contract between you and the govt (managing CPF LIFE) is totally one-sided. Since there are no guarantees, the government is NOT required to pay you a SINGLE CENT by LAW. Get it? Plus the govt can change the CPF Act anytime, NTUC can't change the Insurance Act. Would you go into a deal if one party can unilaterally change the terms and conditions at his whim?

And people like you have short term memories. CPF changes that we detrimental? Either you have selective memory or you're too young. Cut of CPF OA rates that were more than 4% to 2.5% in the late 1980s, Cut to CPF contribution from employer that were never restored from the 1990s, Raising the Minimum Sum, Raising the Retirement Age. Need I mention more?

And you do know that this one party state has ZERO ACCOUNTABILITY to the public right? You parent's CPF monies which were taken by Temasek and GIC to "invest" and generate higher returns were never audited. We do not know how much they benefited from using the citizens CPF money as a source of low-interest loan. We definitely know that no citizen has received a single cent of the profits from their investments. The same thing is possible for CPF LIFE when the govt take the pool money to "invest" and when the economy drops they just need to and lower the CPF LIFE payout.; August 17, 2010 6:12 PM
ron said...: Well, its an interesting topic & two interesting, thought provoking views.
Thank you Garrett & Zhummeng.

It is a fact that interest rates for CPF life is undetermined. and it is regulated by the CPF ACT in which there is a schedule for which it is to ensure lifelong income through an agency.. in this case CPF LIFE was created.

I am no legal eagle and these ACTS are written in gobbleygook.

Till I get a clearer picture of what is in store.. I stay rooted in leaving my CPF monies untouched till 65.. thats when i will elect monthly payouts for the next 20 years..

Thanks to Mr Tan too.. for allowing a diversity of views.; August 17, 2010 11:04 PM
zhummmeng said...: Ron,
if you are already 55 and don't know whether to join the CFPlife or leaving in the CPF to draw down when you are 65 consider some of these factors.
1. your current health status. Do you have a medical condition that may worsen in old age.
2. what is your family average life expectancy?
3. define your own life expectancy
If you think you are not confident of living beyond 90 years old ANY annuity is useless and not to your advantage.
4. stay with CPF and draw down.
of course those born in 1957 and in 2013 will not have the options as you have.
What I loath about the insurance agents is they anyhow sell annuity without fact finding.They only care about the commission and 'hi see' a lot of lot of old folks. They lack the conscience when it comes to money.They even twist the facts about CPFlife to sell theirs and many are simple unwary unsavvy folks too trusting and kenna conned. You make a wise choice but do consider my advice. You have another chance at 65 to join it . It was just legislated.; August 18, 2010 12:12 AM
Unknown said...: To Ron:

I am in partial agreement with zhummeng on this one. If you are old enough not be affected by CPF LIFE, the best possible choice is to stay out of it. The *voluntary* uptake for CPF LIFE for those older folks is about 10% of the population, and it just goes to show how much popular support and faith there is in the CPF LIFE scheme.

Normal CPF Min Sum can pay for 20 years, but you can always voluntarily lower the payout so that your Min Sum can be stretched longer for e.g. 24 years. Assuming your retirement age is 62, it is possible to stretch the Min Sum till around 85. No offense intended, but as a young person I seriously doubt I will live past 85 years old, despite the so-called statistics.

The controversy arises for those who are trapped by CPF LIFE, as the question is whether or not to get a commercial annuity. Personally, I do admit that there is too many missing information about CPF LIFE to make a really informed decision, but I will personally advocate a 50/50 split between CPF LIFE and the best commercial annuity for diversification purposes.; August 18, 2010 7:54 AM

Monday, August 16, 2010

Investing the CPF Minimum Sum

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