I am turning 55 soon and need to make a choice of which retirement sum to set aside. After my analysis, my initial choice is to top up to CPF Enhance retirement sum (ERS) for a higher guarantee lifetime income. After reading some opinions on financial blogs, I have doubt if this is the best choice.
I would appreciate it, if you could (especially those above 55) kindly share with me which of the following options you have taken for your retirement sum in CPF, brief description on the rational in making this choice and your risk appetite in investing (Low, medium, high).
Please take note for all the options listed below, assumption made is, you have the required Enhance retirement sum in your SA.
Choose to pledge your property and opt for Basic Retirement Sum (BRS) + keep balance in Special account(SA) to accumulate at 4% compounded. *this works if you do not need to draw from CPF for your expenses, as CPF board require you to draw from SA before using Ordinary account(OA).
Opt for Full retirement sum(FRS) + keep balance in SA. * smaller accumulation in SA.
Opt for Enhance Retirement Sum(ERS). * no accumulation in SA.
Opt for Enhancement Retirement Sum but top up the difference between ERS and FRS in cash. *some accumulation in SA.
Others. Any other option that is different from the above.
Please let me know your esteem opinion. I hope I have frame the query clearly.
oops I might have got option 1 wrong, you might not able to keep money in SA.
How long before you have to elect the plan?
A colleague shared his view, and I have… just done a 10 min analysis between frs and ers.
Using a very crude method of calculating payback and irr, I calculated the return on frs to be 3.34% (payback 21.55 yrs), and 3.23% (payback 22.3 years). This is purely just between the two plans, without further considering that you can vary further choosing between basic / standard / escalating plan (the one that starts about 23% less but adds 2% per year thereafter).
Just to explain my thought process if I were to make this decision if I were 55 right now
if my oa + sa / ra > 275k, I would choose ers. If its only enough for frs / brs, then I would go for that without trying to top up cash. The payback period between frs and ers doesn’t seem to be too far off, and honestly it’s hard to tell where interest rates will be 20 yrs later, but my bet is your ssb 10 Yr yield will not exceed 3% in the next 15 years. Getting a 3.2% return guarantee risk free is very good enough for me.
considering 65 + 22 = 87… The current life expectancy is about 85 (and this will go up) , chances are your life expectancy around 87 is very likely, in fact you might even live till 90 or above. The good point abt cpf life is you are still covered even when you live beyond 87, so the longer you live, the more cash / better returns you get especially with escalating plan.
- note: if your health not that good (ie pre-existing conditions that already lower your five-ten year survival rate) , and you think you may die before 85-87, then instead go for frs or even brs because you leave more for estate / family, due to lower premiums .
So in summary
- if health not good / higher chance of shorter life than average life expectancy, go preferably for brs with lowest payback and highest return.
- if you think you will outlive national average, go for ers and escalating plan, that has surely the most money paid out if you die at 88 or later, the later you die, the more you get out of the system.
A lot of people say that they have this or that plan or even putting money in market will give better returns, but a lot of those options tap onto market returns. In the next 20+ years when you draw down on cpf, you may get two more bear markets that could just be like the current one… Will you be in a position to say you can live with less because the index went down like 20+%?
I would take it the other way, get as much risk free money as possible, set aside some in savings. If you can live on the cpf payout, use your other savings / assets in cash etc to do investing (since the risk free rate outside of cpf is prob 1+% at best). Take the cpf like a risk free bond that diversifies away the risk of your portfolio, rather than to concentrate all of it in market.