Some thoughts about CPF Life Escalating Plan and LRIS

Well, I believe everyone heard about some news about the CPF, if not, I guess you can find them on the links below.


Regarding the new annuity plan (with incremental payouts)
http://www.straitstimes.com/singapore/cpf-review-members-can-opt-for-new-annuity-plan-with-monthly-payouts-that-increase-over

Regarding the new investment scheme
http://www.straitstimes.com/singapore/cpf-review-panel-recommends-new-lower-cost-investment-option-for-members
http://www.straitstimes.com/singapore/cpf-review-6-things-to-know-about-the-new-cpf-lifetime-retirement-investment-scheme

Do note that this is my opinion and take on it, it might not be suitable for everyone else.


Let's start with the new annuity plan.


So here's the comparison (taken from Straits Times, I cropped the picture into two parts to discuss each section individually):

So based on that picture, we are comparing the fixed payment of CPF Life Basic Plan ($640) vs CPF Life Escalating Plan ($560).

A quick comparison on spreadsheet software (LibreOffice, if you're wondering), shows that the Escalating Plan payout will match the Basic at about age 72, then exceed after that.

The reason why the Escalating Plan was devised was because of the suggestions that it should be pegged to inflation. On average, inflation does increase at about 2% in Singapore (core inflation at least). A good idea was inflation is not consistent yearly, giving an average rate is an easier way to plan. However, because it is an average rate, there are some better years and some worse years.

So why would I be for it?

• For those who aren't very savvy in savings, this could be a means of controlling your expenditure indirectly, so lifestyle is maintained instead of shrinking as time goes (fixed payouts).
• People who fear they would live very long (yes, that is a risk actually, no matter what others say. People normally only see the risk of not living long enough and hedge for it by spending more, yet when they live longer than expected, the lack of funds can make it more miserable.)

So why would I be against it?

• For those who spend wisely
• The starting amount is kinda sad
• People who fear they would live very short
• People who do not care about a higher bequest amount

I would consider myself in the latter group, where expenditure control is one of the reasons and that I prefer a fixed payout, which at this point in time, at the expense of the bequest amount.

On a side note, if one topups 39k (~48% more) more in the CPF, they get the same starting payout as the CPF LIFE Standard Plan (+$160, ~29% more) on the chart, which may be more expensive as the yield is reduced (just a rough estimate).

To end it, I would say it is perhaps a good idea to provide a 3rd option for those who see their needs fulfilled this way, but I would probably take the Standard Plan over the Escalating Plan for myself.

-----

Now for the new LRIS (Lifetime Retirement Investing Scheme)

From that chart, it shows that most people are not investing their CPF savings using the CPFIS (at least as much as analysts would like), I myself included (as for me, you can find my reasons here).

From the articles above, it suggests that they are looking into creating passive managed funds which offer low fees (and hopefully cheaper sales charges) to allow savvy folks to gain better yields.

My first thought is probably that the uptake would be at most minimal, considering the existing pool of people investing their CPF funds due to lack of interest and/or know-how (just talk to people around you).

Do also note that most folks are probably very risk adverse, including my mom, and would rather take a vehicle yielding lower returns yet guaranteed (she's still using fixed deposits, not even SSBs). The thought of possible lower returns would scare them right off.

Those already with the knowledge, would have already plunged in to direct their own investments in equities and/or funds. Perhaps the LRIS would provide additional funds they could put their money in.

Hell, even for many (from those I have met), would even transfer the excess OA funds (after settling housing and looking at retirement soon), into the SA for more interest to help building their retirement funds.

As for myself, time will tell when more information are unveiled in regards to the new funds for this LRIS.

A few reasons for this:

• Just by giving a figure of expected returns is not sufficient for me to make judgment, perhaps a 10 year annualised returns would be a better indication
• There's no information on
• Investment strategy of the funds (I would want to use it to diversify as well as know what risks I am taking)
• Sales charges (which eats heavily into your returns)
• Actual management fees (despite it being passive, looking at the both STI ETFs and the S&P500 ETF passive management fees for our stock exchange is still pretty expensive compared to my Vanguard ones, I'm not impressed)
• Any extra charges from CPF/CDP
• Lastly, after all of these, less fees and charges, it must beat the SA's 4% significantly, else there would be no point of me going through all these hassle.

Perhaps, I would be interested if they allowed access to the various passively managed US ETFs, such as my favourite VOO, with low brokerage fees like my TD Ameritrade brokerage.

But as of present, I would be standing more on the "No, I would not invest my CPF funds side", as I would be looking at the CPF as my safety net in case my investment strategies do not work out ^^", as evidenced by my SA actions for transfer and topup.


So what do you guys think about the new schemes?