By: Leong Sze Hian
I refer to the article ‘CPF review: Members can opt for new annuity plan with monthly payouts that increase over time” (Straits Times, Aug 4). It states:
“The CPF Advisory Panel is proposing to introduce a new CPF Life Plan that will feature monthly payments that increase by 2 per cent every year. But it will come with a cost: Those who opt for the CPF Life plan – the national annuity scheme – with “escalating payouts” will start with payments that are about 20 per cent lower compared to the current default plan…
“Panel member and actuarial consultant Colin Pakshong added that the panel is “constrained by simple mathematics”. Anyone who chooses the escalating payouts plan will have to decide if the trade-off in lower payouts at the start is worth the escalating payouts in the future,” he said.
Under the current CPF Standard Plan – the default option – a CPF member with about $80,500 on his accounts can expect to receive $720 a month for the rest of his life. If the member chooses the new plan, he gets just $560 at the start. But this will increase every year. By the time he is 75, his monthly payments will reach $680. And nine years after that, when he is 87, his monthly payments will grow to $860 a month.”
So, does it mean that the increasing monthly payouts will reach the original $720 under the fixed annuity, at around age 78?
Given the time value of money – that a dollar today is worth more than a dollar in the future – at what age is it likely for one to be better off?