Longevity Insurance

As reported on the news, the government has accepted recommendation for a Longevity Insurance scheme which targets to hold onto our Central Provident Fund (CPF) and investing it onto an Annuity plan that pays out to the insured from a certain age onwards till mortality.
(source : http://www.channelnewsasia.com/stories/singaporelocalnews/view/328324/1/.html)

With this insurance plan, it means we will not be able to withdraw most of our CPF funds upon retirement (I shall not dwell or discuss on the objection of such a scheme). The scheme is compulsory and auto-inclusion for all CPF members (with exceptions including low CPF funds and health reasons).

People’s Worry
Since the first mention about such a scheme, many are unhappy about such a scheme. People worry that they won’t lived long enough to receive sufficient payouts, near that of their money’s worth.

They also do not want their hard earned money to be forfeited should they depart, but to be paid to their family.

Government's View
Life expectancy have increased over the years. As such, upon retirement till mortality, the retiree may out-live their retirement funds. The scheme is targeted to ensure people do not run out of funds in their retirement years.

The CPF Longevity Insurance Scheme
The minimum sum (raised gradually to $120,000 by 1 Jul 2013, of which, half can come from the pledge of their property) will be split into two parts –a larger part that remains in the Retirement Account (RA), and a smaller part, the Refundable Premium (RP).

Upon reaching 55 years old, members will decide when they want the lifelong income payouts to begin.

Does This Provide Enough for Retirement?
Based on government’s computation, the average payout would be about $650 a month if the member has a minimum sum of $67,000 and starts payout at 65 years old.

Singaporean’s median age as at 2007 is 37.8 years old (source : CIA Fact Book). This group of people are 27.2 years away from turning 65 years old. With government’s calculation of 5% inflation per year, $650 in 27 years is only equivalent to today’s $277 per month. Is this sufficient?

What Can We Do To Increase Our Funds?
With 27 years, if we were to save $300 a month, we will be able to accumulate $110,363 (Principle + Interest [1%]) by the end of 27 years. Given that we spread this sum over 15 years (till 80 years old), it is an equivalent of $613 per month.

The add up of the personal savings and CPF LI scheme would be $1,263 per month. That is equivalent of today’s $537 per month.

Interest paid by banks is usually below inflation. We also need to take into account our money is eroded further by GST (currently at 7%). Why let our funds depreciate?

To better our savings, we could look into investing our funds into a highly secured (low risk) investment vehicle that provides us returns above inflation.

Should we invest the same savings illustrated above ($300/mth) into a low risk vehicle, the illustrated savings will grow as follows:

Monthly Savings : $300/mth over 27yrs
Approx Returns and Accumulative Total :
~ 1%/yr = $111,627
~ 10%/yr = $497,825
~ 15%/yr = $1,335,880

Lump Sum Savings : $20,000 over 27yrs
Approx Returns and Accumulative Total :
~ 1%/yr = $26,196
~ 10%/yr = $294,283
~ 15%/yr = $1,119,490

What do you want your retirement to be like in 27 years from now? How much spending money do you want to have per month by then? You decide.