Last Updated on 30, August 2017
One of my client – who is 79 years old - was thinking of how to make his money work harder as his fixed deposit was earning just 1.2%pa.
So I suggested to my client to consider to do a CPF top-up to his CPF Retirement Account. Initially he was skeptical because he does not think it is possible to top-up his CPF. So I went down with him to one of the CPF business center to make an enquiry. After discussion, we decided to ask them to write to my client to provide an official quotation instead of a verbal quotation.
In less than one week, CPF wrote a letter to my client providing a quotation as shown below.
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According to the letter, the client is currently receiving a total monthly payout of $266.67 consist of CPF Life ($254.53) and AMP ($12.14). I assumed the AMP refers to the drawdown from the CPF-RA. The AMP only last until 90 years old while the CPF Life pays for life.
If he does the CPF top-up for $50,000, the payout increases to $754 consist of $283 (CPF Life) and $471 (AMP).
To calculate the discount rate, we assume a life expectancy of 90 years old and there is no bequest at 90 years old. Hence, PV = 50000, PMT=754-266.67= 487.33, N=12*(90-79), FV=0 and assuming ending mode, the discount rate is 4.76%pa. If he lives beyond 90, the discount rate will be higher.
If he top-ups $45,000, the discount rate is 4.88%.
My client was delighted as he is only earning 1.2%pa from his fixed deposit. As majority of the top-up is going to his CPF-RA, the amount of bequest is predictable. The bequest is simply whatever what is left inside his CPF accounts plus any cash value remaining (if any) of his CPF Life.
My client found my proposal to be acceptable. He also thinks the CPF is risk free although I did warn him that CPF rules have a policy risk in the sense that the government can change the rules.
I also advised him to top-up his Medisave as it was running low due to the payment of integrated shield plans premiums and withdrawals due to medical fees. Medisave has an interest of 4%.
In the end, he decided to top-up his CPF-RA with $100,000 and another $30,000 to his own Medisave. He did similarly for his wife. The combine top-ups were more than $250,000.
For those who are curious, the $100,000 top up to CPF was equivalent to 4.34% per annum. Below is the quotation for the $100,000 top-up:
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For those above 55 and have met the BHS and FRS (or BRS with property pledge), they can do voluntary top ups. The money will go into their OA @ 2.5%. The first $20K in their OA will also get additional 1%. This 2.5% to 3.5% will beat any other bank accounts or FDs.
As they have met the BHS & FRS/BRS, and are above 55, hence they can simply withdraw whenever they need. In essence turning CPF into their high-yield bank account.
Let’s say your client passes away at 90.
What is the unused premium for CPF life which will be bequested?
The above is an assumption that he passes away at 90 and beyond.
What is the discount rate if he passes away before that? Say 81 years old, 85 years old?
In my calculation I assume there is no bequest for the CPF Life at age 90. If there is a bequest amount at 90, the discount rate is even higher.
The portion that are in the CPF-RA has a discount rate of at least 4% because that’s the interest.
The discount rate for the CPF Life portion is not known.
Hi Wilfred, thanks for your reply.
My thinking is for CPF life , a portion is used as an annuity premium . this will be refunded without interest if one passes on. Therefore, depending on how big this premium is ( I heard is 10% from forum and I don’t know ), and also that this premium loses the 4% or so interest rate , if one is to die say somewhere before 90 yo, the discount rate will be less than calculated.
So what I am trying to say is I am wondering how big the premium is as this will drag down the discount rate, where the shortest living candidate subsidies the longest living candidate.
However I believe the discount rate is still good as the conparision will be against fd and, maybe some AAA bonds since older folks shouldnt take risk.
Is the CPF payout comprises 2 portions?