CPF Life has undergone another change.
Before the CPF Life change
At age 55, the CPF Member has to choose whether he or she wish to enrol in the CPF Life Standard Plan or CPF Life Basic Plan.
After the Change
With effect from 1 January 2016, the CPF Member does not need to select his CPF Life plan until the payout age.
So when should you select the CPF Life plan?
Here is what I did. I key in $161,000 as the CPF-RA for a next age 55 year old male into the CPF Life calculator. Below is the screenshot. For simplicity, I assume no L-Bonus.
Next, I assume the individual delay his choice until 65. Hence, I key in 161000 x 1.0410 = $238,320. This assumes the CPF-RA earns 4% per annum of interest. In actual fact, the interest may be higher (see below). Because the actual interest is higher and I assumed it is lower, I expect the result to be slightly worst off compared to the first scenario. Below is the screenshot.
Looking at the figures, differences in the figures are insignificant after accounting for the understated interest for the second scenario.
However, what is surprising is the very large differences in bequest for Standard plan. The Standard Plan’s bequest at age 65 for the first scenario is $194,168 - $199,504 while the bequest for the second scenario is $237,003 - $237,078.
The conclusion is that you should NOT select a CPF Life plan when you turn 55. Let the money in the CPF-RA earn interest. You can select the CPF Life plan when you wish to start receiving the payout The minimum payout age is 65.
For high networth individual, you can top-up the CPF-RA to the maximum allowed Enhanced Retirement Sum (currently $241,500).
I do not advice the average joe to top-up their CPF to the maximum Enhanced Retirement Sum because you never know what kind of changes will there be for CPF.
Previously I mentioned that the CPF-RA may earn more than 4%. Actually, it is quite complicated. CPF-RA indirectly earns more than 4%. The calculation for the additional interest is so complicated that nobody really understand. But I found a nice infographic on CPF Board’s facebook which explains 51% of how the extra interest is calculated (Source: Facebook).
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