Since 1 in 3 Singaporeans will likely live past 90 years, one of the biggest challenge is to make sure you have the financial means to have a reasonable quality of life. In reality, the biggest challenge that most older persons worry most is outliving their savings. In simple terms, you can protect against the risk by using an insurance product known as life annuity. Typically, you hand over a lump sum to the insurance company who then agrees to pay you a regular stream of payment (typically monthly) for the rest of your life.
Think of life annuity as your pension – something that you can count on, rain or shine, every month. Since the concept of company or government pension is all but gone today, the next best thing is a life annuity. As you retire, you may have various forms of savings that you will need to carry you through your old age. The best strategy is to calculate how much monthly payout you would need for the rest of your life, taking into consideration inflation to calculate how much you should invest in a life annuity. This way, you will be creating a “financial safety net” that is virtually rock solid. Of course, whatever savings is left behind after buying the life annuity would perhaps be considered your discretionary fund.
Here are 5 reasons why your should max out your CPF LIfe Contribution:
- CPF Life is probably the most cost effective and affordable life annuity plan in Singapore. The cost of administering an annuity plan is not cheap for insurance companies or banks. Most commercial plans require that you put in a larger lump sum and the payout is typically less per dollar because of the bank’s administrative costs and profits/commission charged for the plan. Since CPF Life is a national plan and is part of the national CPF implementation, it has the economy of scale and is able to give you a better payout per dollar.
- CPF is 100% secured. Being backed by the good faith and financial strength of the Singapore government, it is probably the most secure insurance product in the market. The Singapore government has one of the best credit rating compared to most countries.
- Select from 3 types of life annuity plans to meet your needs. Whether you want to maximise monthly payouts, leave more for your loved ones or plan for future inflation, you can select the plan that complements your retirement strategy.
- CPF Life Plan payouts are more stable. Typically, the monthly payouts are impacted by changes in interest rates and mortality table. However since CPF LIfe is administered by the goverment – we can expect the government to cushion any major swings. This is what is footnoted in the CPF Life literature: “Payouts may also be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.”
- CPF Life offers flexibility to increase payouts in the future. If you are already participating in CPF LIFE and would like to increase your payouts for life, you can top-up to your RA and buy an additional CPF LIFE annuity. Alternatively, your monthly payouts will also increase if you choose to defer the payouts past 65 years of age.
If you are nearing 55, you should begin to pay attention to CPF Life. You can learn more by visiting the official CPF website by clicking here. You can also get an easy to read brochure on CPF Life by clicking here.