By Larry Haverkamp (Doc Money)
YOU may know that when you hit 55, a retirement account is created for you with savings from your CPF Ordinary and Special accounts.
The best part is it earns the highest risk-free interest rate in town, which is now 5 per cent for up to $60,000 and 4 per cent on amounts in excess of that.
You get monthly payouts over about 20 years, from age 62 to 82. The first draw-down age is set to gradually increase from 62 to 65 between 2012 and 2018.
Now there is something new. More than 700,000 CPF members over 51 years of age can opt into a new retirement scheme called CPF Life. If they do, they will get payouts for life, instead of 20 years.
CPF Life has four plans to choose from. At one extreme is the Income plan which makes high monthly payments, but pays nothing to your beneficiaries when you die.
At the other end is the Basic plan. It has the lowest monthly payouts, but more goes to your beneficiaries.
The two plans in between are Plus and Balanced.
Those born in 1957 or earlier can now choose (i) to do nothing and stay with the current system, so your retirement account will be paid to you in monthly instalments over about 20 years OR (ii) you can opt into CPF Life and receive monthly payments for life.
The Government is offering incentives to join CPF Life. You can receive an L-bonus of up to $4,000 if you qualify based on your income and flat type. To get the maximum payment, you probably need to live in a three-room flat or smaller, and earn less than $2,000 a month.
Those 62 or older can take until 31 Dec 2010 to decide whether to take the L-bonus and switch to CPF Life. If they don't take the L-bonus, they have until age 80 to decide if they want to switch.
Keep in mind, all this applies to people born in 1957 and earlier.
Should you switch?
The current 20-year payout and CPF Life's Basic Plan are similar. Both pay the balance in your account to your beneficiaries if you die.
Which is better? Here are three ways to decide:
One way is to consider your expected lifespan. If longevity runs in your family and you think you can live well past 80, you are better off with CPF Life.
A second way is to ask: 'What are the chances I will run out of money in my 80s?'
If you think it could happen, you are probably better off switching to CPF Life, especially if you qualify for the L-bonus.
A third way is to take one person and calculate their (i) monthly income and (ii) bequest to beneficiaries under each scheme.
I did that. To my surprise, CPF Life Basic beat the retirement account payout. I can't see why it would pay more, but it seems it does. It is another reason to switch to CPF Life.
Take all cash?
IF YOU are age 51 or younger, you need not worry about these decisions until you hit age 55. Then, you will choose one of the four CPF Life plans or be placed in the Balanced Plan by default.
When that time comes, many may prefer more cash and choose the Income plan.
It seems logical since the scheme's purpose is to guarantee cash for CPF members in their old age and not to enrich their beneficiaries.
But a special feature makes the all-cash Income Plan a poor choice.
It's because if you die between age 55 and 62, NO money is refunded to beneficiaries under the Income Plan.
The other three plans don't have this feature and return ALL the money to beneficiaries in the event of death before age 62.
It makes the Income Plan more risky than the other three and probably a bad choice, although I suspect it will still be a popular one.