This topic is often debatable to conclude which plan is better – CPF LIFE or Retirement Income Plans. In this article, we are going to explore the differences and determine which plan is better for retirement.

Before we dive into the details of which plan is better, let us first understand what CPF LIFE and Retirement Income Plans are and how they work.

What is CPF LIFE?

CPF LIFE is a national longevity insurance annuity scheme that provides us with regular monthly payouts no matter how long we live, so we can enjoy our desired retirement lifestyle without worry. CPF LIFE consists of three plans which we can choose from: the Escalating Plan, the Standard Plan, and the Basic Plan.

a. Escalating Plan

The Escalating Plan has monthly payouts that start lower initially but grow by 2% a year for life. This will generally help us maintain our desired retirement lifestyle even as the prices of items increase over the years.

b. Standard Plan

The Standard Plan offers steady monthly payouts over the years. If keeping a fixed budget is our preferred approach, the Standard Plan suits our needs. However, this plan does not protect us against inflation, so we will have to purchase less as prices rise in the years ahead.

c. Basic Plan

The Basic Plan offers monthly payouts that start low and fall progressively when CPF balances fall below $60,000. This could mean that we will have to adjust our lifestyle and accept lower purchasing power.

What Is a Retirement Income Plan?

Retirement Income plans are financial products offered by insurance companies to help individuals build a steady stream of income for their retirement years. These insurance policies provide both guaranteed and non-guaranteed benefits. The non-guaranteed benefits come from the insurer’s profits, which are declared yearly and once declared, they are guaranteed.

At the time of writing this article, there are numerous types of retirement plans in the market:

a. Fixed Term Retirement Income Plan

This plan will provide a fixed number of years in which guaranteed monthly income is paid out. At the end of the policy term, there is a maturity benefit that includes a non-guaranteed bonus accumulated over the years.

Figure 1

b. Fixed Term Retirement Income Plan (Escalation)

Similarly to the Fixed Term Retirement Income Plan, this type of plan provides a guaranteed yearly escalating income payout (e.g. increase by 3% every year) to cover the inflationary environment.

Figure 2

c. Lifetime Retirement Income Plan

This plan provides a lifetime monthly income payout consisting of guaranteed and non-guaranteed bonuses. Such plans usually do not have a maturity benefit as the plan provides a higher monthly income payout.

Figure 3

d. Lifetime Retirement Income Plan (With Maturity Benefit)

This plan provides a lifetime monthly income payout consisting of guaranteed and a portion of non-guaranteed bonuses. Such a plan usually has a lower monthly income payout as the plan retains cash value.

Figure 4

There is also a retirement plan in the market that provides additional monthly income payout when the life assured suffers from severe disability (e.g. unable to perform at least 3 out of 6 activities of daily living, also termed as “ADLs”), which I will not be illustrating in this article.

Comparing CPF LIFE and Retirement Income Plans

Using an article from Providend, our sister company, this table provides a comparison of CPF LIFE and Lifetime Retirement Income Plans in terms of return at different ages (assuming death occurs).

Table 1

Looking at the table shows that CPF LIFE offers a much better return compared to a Retirement Income Plan. Besides the return of the financial tool, features from the financial tools are also important.

Table 2

Referring to Table 2 shows that the Retirement Income Plan offers flexibility in the feature of cashing out from the plan to changing plan ownership.

How Much Do We Need During Retirement Years?

According to Minimum Income Standard (MIS) 2023 for household budgets in a time of rising costs, different profiles and life stages require different amounts of financial resources to meet basic needs. For example, in 2022, a single person aged 65 and above would have needed a monthly income of $1,492, while a couple, aged 65 and above would have needed $2,551 to meet their basic needs.

Source: Household Budgets in a Time of Rising Costs

Apart from understanding the monthly income needed to meet basic needs, MIS has also researched how inflation affects average spending. For example, based on spending by single elderly persons aged 65 and above, the inflation impact was 5% between 2020 and 2022.

Source: Household Budgets in a Time of Rising Costs

How Much Monthly Income Do We Need During Retirement?

There are several factors to consider when building our retirement income:

• Current personal expenses
• Current household expenses (excluding dependent, for example, young children will eventually grow up and not depend on us for allowance).
• Retirement goals (e.g. aiming for a more comfortable or luxurious lifestyle)
  • How much do we need to allocate to achieve these goals (realistic assessment is crucial, e.g., increase expenses by 50%)
• Taking into consideration the average inflation rate till retirement age.

This would give us an idea of how we can start planning for our retirement.

A Case Study:

Peter, aged 50, is a single working professional who has started planning for his retirement. Before choosing the right financial instrument for his retirement, he needs to determine how much he will require for monthly income during his retirement years.

1. Aims to retire at age 65.
2. Current monthly expenses (personal and household): $2,000.
3. Desired lifestyle in retirement: Increase current expenses by 100% for more spending power on food and entertainment.
4. Average inflation: 2.5% till age 65.

Based on the above information, Peter’s monthly retirement income will need to be at least $5,800 to meet his desired needs. With this monthly income target, he can begin considering what type of financial instrument could help him achieve it.

CPF LIFE or Retirement Income Plan: Which Is a Better Financial Instrument for Retirement?

When it comes to this decision, it is a very individual one — ‘to each their own’.

CPF LIFE is irreplaceable; in fact, it offers a higher rate of return compared to the Retirement Income Plan. This is why retirees should aim to receive the maximum monthly income to meet their spending needs. Depending on each person’s ability to achieve the Basic Retirement Sum (BRS), Full Retirement Sum (FRS), or Enhanced Retirement Sum (ERS), CPF LIFE provides a safety net for our retirement as long as we live.

In conclusion, a Retirement Income Plan is never meant to replace CPF LIFE. Instead, it complements CPF LIFE’s monthly income payout by providing an additional layer of stable income to meet individual spending needs. The Retirement Income Plan is also appealing to individuals who wish to take fewer risks in the market (with less exposure to market volatility) while preserving their financial assets and ensuring a stable monthly income.

For individuals who wish to know more about how Havend guides our clients in their retirement planning, you can email us (contact@havend.com) to find out more.

We promise to tell you if you have enough insurance and if that is the case, you need not purchase any insurance from us.

This is an original article written by Mike Zhang, Lead, Insurance Specialist at Havend.

At Havend, if we are found to have oversold you, we have put in place a Money Back Guarantee (MBG) scheme, so you can trust that we will always prioritise your interests first. Unprecedented in Singapore, learn more about our Money Back Guarantee scheme here.