Coping With Extreme Longevity Risk- CPF Retirement Scheme Just Needs A Tweak

Source : The Straits Times Forum Story, Aug 25, 2007

UNDER the Government's compulsory annuity scheme, a small portion of the CPF Minimum Sum of those below age 50 is to be set aside to be pooled together. And it will pay out $250 to $300 monthly once we hit age 85 and had exhausted our Minimum Sum, till the day we die.

The premium has still not been announced. But with this premium deducted from the $99,600 Minimum Sum, the monthly $790 payout from the CPF Retirement Account would be less. Yet, we can expect to receive only $300 from age 85. If one dies before age 85, the premium will be used to support others in the pool unless we pay a higher premium.

Currently, if we had the Minimum Sum of $99,600 at age 55, we could withdraw $790 per month over 20 years, from age 62 to 82. The starting age for the payout will be raised gradually to 65. So, let's put the withdrawal years at age 65 to 85.

If we bought a safe lifetime annuity, it would pay us a monthly income of $559 (the range is from $505 to $559, based on a Lianhe Wanbao report) till we die.

For both CPF and annuity, if one dies before the $99,600 has been paid out, CPF rules require that the balance be returned to the beneficiaries.

Assuming I opted to receive payouts from my CPF Retirement Account, and save the monthly difference of $231 ($790-$559) in a bank.

At age 85, I would have saved $55,440. Without adding bank interest and with a drawdown of $559 monthly, this amount could last me for another 8.3 years, i.e., till age 93.

If that amount could be put back into the CPF Retirement Account to earn interest, I believe it would last me till at least age 95.

Similarly, if the drawdown is only $300 monthly, $55,440 would last me 15.4 years, i.e., till age 100.

If my understanding and computation are correct, what benefit is there in buying a bank annuity? Of course, those who live beyond age 95 will benefit, but how many of us are likely to do so?

The current CPF retirement scheme is already good. However, it can be improved by reducing the $790 monthly payout to $550 so that the 20-year payout period will be extended to maybe 30 years. The most important point is this: Should one die before age 85, the balance would be returned to the beneficiaries.

Tan Yeong Heng