Review: CPF LIFE Plans

Just recently, I happened to read on another personal finance blog where the author was considering purchasing an annuity at a young age of 30 (very close to my age!).  His post caught my attention simply because the annuity he was sharing gave a 12% return per annum!  That is HUGE!  He managed to get more attention from people who could not believe it.  True enough, it was too good to be real.  He subsequently updated the blog to correct the number to 4% instead.

For those of you who are not familiar with the term, annuity, here is an excerpt from Wikipedia:

A life annuity is a financial contract in the form of an insurance product according to which a seller (issuer) — typically a financial institution such as a life insurance company — makes a series of future payments to a buyer (annuitant) in exchange for the immediate payment of a lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity.

Annuities are often used as a form of retirement tool.  A typical practice would be to accumulate a large amount of wealth till your retirement age, then purchase an annuity that gives you a decent amount of income for as long as you live.  The reason why people would want an annuity is that it provides you a stable income, and protects you from the woes of outliving your fortune.  It is a true form of passive income, and so I decided to have a little chat with my friend who is selling such products.

Strangely enough, instead of offering me any of his products, he gave me a print out of an estimate using CPF LIFE plan.  He explained to me that insurance companies used to provide such products, but ever since CPF board launched CPF LIFE, most (if not all) of such annuity products were withdrawn from the market.

According to CPF LIFE website,

CPF LIFE is a scheme that will provide lifelong income for our elderly in their retirement. It is an improvement over the current Minimum Sum Scheme (MSS) where payouts only last about 20 years.

Depending on whether you would like to leave any remaining cash value (bequest) for your beneficiaries after your demise, and how much you would like to receive on a monthly basis, you can choose one of 4 available plans:

1. Basic (Low monthly payout, high bequest amount)
2. Balance (Medium monthly payout, medium bequest amount)
3. Plus (High monthly payout, low bequest amount)
4. Income (Highest monthly payout, no bequest amount)

To put things into perspective, I used the CPF LIFE Payout Estimator to get the expected monthly payout for different retirement amounts for each of the 4 plans.  (Assuming date of birth is 1 Jan 1954, and that you are about 58 now)

With a Retirement Amount of $100,000,

	Payout Range	Average Payout	%
LIFE Basic Plan	$651 to $710	$680.50	8.17%
LIFE Balance Plan	$693 to $755	$724	8.69%
LIFE Plus Plan	$728 to $794	$761	9.13%
LIFE Income Plan	$778 to $844	$811	9.73%

 

With a Retirement Amount of $250,000,

	Payout Range	Average Payout	%
LIFE Basic Plan	$1,528 to $1,675	$1601.50	7.69%
LIFE Balance Plan	$1,632 to $1,786	$1709	8.20%
LIFE Plus Plan	$1,719 to $1,882	$1800.50	8.64%
LIFE Income Plan	$1,842 to $2,003	$1922.50	9.23%

 

With a Retirement Amount of $500,000,

	Payout Range	Average Payout	%
LIFE Basic Plan	$2,991 to $3,282	$3136.50	7.53%
LIFE Balance Plan	$3,198 to $3,504	$3351	8.04%
LIFE Plus Plan	$3,370 to $3,694	$3532	8.48%
LIFE Income Plan	$3,614 to $3,936	$3788.50	9.09%

 

From the numbers, it goes to show that the higher your retirement amount is, the higher your monthly payout will be, but this is achieved at the cost of a lower percentage return.  Nonetheless, the returns of the income plan is still rather attractive, and knowing that an annuity of at least 9% is readily available is a rather comforting thought.  In a way, this is akin to purchasing real estate at a price of $500,000 and renting it out at $3788.50 per month for life.  Not bad!

However, perhaps due to the complexity of the plans, CPF board will be revising the CPF LIFE plans into two simpler plans instead of the current 4.  The new plans are expected to be announced come Sep 2012.

To find out more about CPF LIFE, you can read its online brochure.

 

Do you think the CPF LIFE is a good deal?  What are your thoughts on annuities as a form of retirement tool?

 

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