CPF Life Plan - Standard, Basic, Escalating --- which one better ?

[dork32]

Yes, to a degree, but unfortunately not as well in/from Singapore. Allow me to educate you on something you are evidently not aware of!

Some sovereigns offer what are known as "real return bonds," a.k.a. inflation-indexed bonds. Examples include U.S. Treasury Inflation Protected Securities (TIPS) and a particular type of U.S. Savings Bond: the I-Bond. There are some real return bonds available in certain other currencies, too. (Governments in Canada, Australia, the U.K., France, Germany, Hong Kong, Italy, Japan, and some other governments issue them in their respective currencies.) And there's an active index fund market in many of them, especially in U.S. dollars, euro, and British pounds, making it very easy to hold an assortment of real return bonds.

If you hold a basket of real return bonds across various currencies, you can do pretty well from a Singapore dollar perspective given how MAS manages the Singapore dollar, as a loose peg to an unpublished basket of Singapore trade-weighted foreign currencies.

There are also some private life annuity purveyors that'll sell Consumer Price Index (CPI) linked annuities pegged to a particular currency's inflation, if you wish. I think Principal Financial is one of them (U.S. dollars in that case).

Direct inflation linking is great, because it most directly combats inflation. There's no ambiguity, no imperfection. Whatever inflation is (in the chosen currency), the real return bond and/or real annuity perfectly track(s) it and automatically adjust(s). Real return bonds and real return annuities are not generally something you should pursue with your entire accumulated wealth, but for a portion it can make a great deal of sense. And it just so happens I actually do this (real return bonds), in an appropriate portion.

Unfortunately, the Singapore government doesn't issue real return bonds (doesn't believe in them I guess), or real return anything. This is, for better or worse, the Singapore government's standard operating style. This government wants to maintain full freedom of movement, to use inflation as a policy tool if/when necessary. As a private individual, I certainly don't like that. But that's how this particular government rolls.

So, in Singapore in Singapore dollars, the best you can probably do is a fixed escalating life annuity (CPF LIFE Escalating Plan, which is part of my plan as carefully and repeatedly explained) and other, less direct Singapore dollar inflation fighters. As other examples, equities do a pretty good job fighting inflation, but holding too many equities (too high a percentage) is problematic for retirees. Short-term bond funds also do pretty well, but that too is difficult (at best) in Singapore dollars since the bond market is too thin, and real yields are low. Carefully constructed and managed fixed deposit and/or T-bill ladders are possible, but they're a lot of work and also have low real yields.

let me educate u on mathematics that you ang mohs are typically weak in. we do not need real return bonds. what we need is just bond interest being above the inflation rate. the returns of the bonds that is equal to inflation rate can be reinvested to combat inflation.

what is the difference between a 4% bond
and a bond that gives 2% to combat inflation and 2% real returns

 

[BBCWatcher]

so our garmen does not believe in fighting inflation your way.

It's not "my way." The simple fact is the Monetary Authority of Singapore does not offer a very common type of sovereign bond to Singaporeans (or to anybody else) that the governments of Canada, Australia, the United Kingdom, France, Germany, Italy, Hong Kong, Japan, Russia, India, Sweden, Spain, Mexico, Brazil, the United States, and some other governments offer to their citizens and residents.

I think MAS should offer inflation-indexed bonds to citizens and residents of Singapore, as so many other Treasuries and central banks do around the world. Why would you disagree? Isn't Singapore supposed to be one of the world's leading financial centers? The absence of what is now a bog standard sovereign bond around the world is odd, to say the least.

Do you believe Singaporeans should have fewer and less effective financial tools than Italians, Germans, Americans, and Russians (as examples)? That's...weird. Why are you so opposed to Singaporeans having more and better financial choices? That's what I want. I think Singapore is terrific, and I want Singapore to be even more terrific. So you disagree? How sad.

 

[dork32]

It's not "my way." The simple fact is the Monetary Authority of Singapore does not offer a very common type of sovereign bond to Singaporeans (or to anybody else) that the governments of Canada, Australia, the United Kingdom, France, Germany, Italy, Hong Kong, Japan, Russia, India, Sweden, Spain, Mexico, Brazil, the United States, and some other governments offer to their citizens and residents.

so this is not the singapore way. who cares what the other losers like italy and spain are doing. i certainly do not want to end up like them. You can always move to these countries if you do not like singapore

 

[dork32]

to me, what bbc said makes some sense. these are plausible suggestions.

better choices or not, can be debated.

Whatever the advantages are, it is going to come at a price. will this price be too steep?

however, this is how he replied to us last time. "if you dont like it, you can always leave this place."

i just to let bbc know never to argue your points this way.

 

[Mecisteus]

It's not "my way." The simple fact is the Monetary Authority of Singapore does not offer a very common type of sovereign bond to Singaporeans (or to anybody else) that the governments of Canada, Australia, the United Kingdom, France, Germany, Italy, Hong Kong, Japan, Russia, India, Sweden, Spain, Mexico, Brazil, the United States, and some other governments offer to their citizens and residents.

I think MAS should offer inflation-indexed bonds to citizens and residents of Singapore, as so many other Treasuries and central banks do around the world. Why would you disagree? Isn't Singapore supposed to be one of the world's leading financial centers? The absence of what is now a bog standard sovereign bond around the world is odd, to say the least.

Do you believe Singaporeans should have fewer and less effective financial tools than Italians, Germans, Americans, and Russians (as examples)? That's...weird. Why are you so opposed to Singaporeans having more and better financial choices? That's what I want. I think Singapore is terrific, and I want Singapore to be even more terrific. So you disagree? How sad.

1) Singapore don't need to follow other countries
2) Inflation linked bonds are not necessarily good


https://www.morningstar.com/articles/801922/20-years-in-have-tips-delivered.html
Will UK inflation-linked bonds be the choice of the wise?

 

[Mecisteus]

Guys, this CPF Life discussion will never end.

Let's not force our opinions on others.

There are 3 options. Pick the one that suits your circumstances.

 

[BBCWatcher]

will this price be too steep?

What "steep" price?

It's just a bond, auctioned just like any other, at an unsubsidized, market clearing price. The government wouldn't be giving away anything at all, unless you think other ordinary SGS sales are "gifts." They're certainly not that.

Currently, MAS doesn't have either a November or December auction -- there's a whopping 3 months between the October and January auctions -- so how about simply adding an early December auction to the annual calendar for a 5, 7, or 10 year inflation-indexed bond? This isn't rocket science.

On edit: Supposedly we live in a world class financial center, but it's unfortunate Singaporeans associated with bond issuance and trading can't get any local experience yet with this common debt instrument. MAS could fix that easily and quickly. Or Temasek could. We really shouldn't effectively force the best and brightest Singaporeans to go overseas to get their practical, relevant, and even halfway modern financial market experience.

 

[Mecisteus]

What "steep" price?

It's just a bond, auctioned just like any other, at an unsubsidized, market clearing price. The government wouldn't be giving away anything at all, unless you think other ordinary SGS sales are "gifts." They're certainly not that.

Currently, MAS doesn't have either a November or December auction -- there's a whopping 3 months between the October and January auctions -- so how about simply adding an early December auction to the annual calendar for a 5, 7, or 10 year inflation-indexed bond? This isn't rocket science.

An inflation linked bond has a hedging component. And the hedging comes at a cost.

No free lunch.

 

[BBCWatcher]

And the hedging comes at a cost.

Not to a responsible government, and the AAA-rated Singapore government is certainly a responsible government. The bond buyer pays the full price for the hedge, at the competitive bond market's auction clearing price. In fact, the government has to "win" this bet more often that not (since some degree of risk aversion is what the market arrives at competitively), and so a responsible government (such as Singapore's) can actually issue debt at a lower average cost. This is actually a money saving way to keep Singapore's bond market functional, which is really the only reason MAS issues bonds.

Sometimes everyone wins, and this is one of those cases.

Governments still strictly limit the amount of outstanding inflation-indexed bonds in order to maintain full monetary and fiscal freedom of movement. That would be the case here, too.

On edit: I took a look at current total U.S. Treasuries to see what fraction TIPS (Treasury Inflation Protected Securities) represent. According to the U.S. Treasury, total outstanding TIPS represent US$1.382 trillion. When you add in the I-Bonds (which are a tiny fraction), it's something like US$1.45 trillion...out of approximately US$21.8 trillion in total outstanding U.S. federal government debt. Under 7%, in other words, and that's within the most highly developed sovereign debt market. That's not a big share, and it never will be, but it is an important part of modern sovereign debt around the world that's a more affordable way (for the taxpayer) to finance government debt among high quality, responsible governments. For the Venezuelas of the world, no, it doesn't work (for the government).

 

[Mecisteus]

In order for the inflation linked bonds to be beneficial to the holders, there must be some data to support that these bonds indeed outperform the vanilla government bonds in terms of real rate of returns measurement.

In my limited research about these linkers, I don't really see the benefit. So why issue then?

 

[Toni90]

Not to a responsible government, and the AAA-rated Singapore government is certainly a responsible government. The bond buyer pays the full price for the hedge, at the competitive bond market's auction clearing price. In fact, the government has to "win" this bet more often that not (since some degree of risk aversion is what the market arrives at competitively), and so a responsible government (such as Singapore's) can actually issue debt at a lower average cost. This is actually a money saving way to keep Singapore's bond market functional, which is really the only reason MAS issues bonds.

Sometimes everyone wins, and this is one of those cases.

Governments still strictly limit the amount of outstanding inflation-indexed bonds in order to maintain full monetary and fiscal freedom of movement. That would be the case here, too.

On edit: I took a look at current total U.S. Treasuries to see what fraction TIPS (Treasury Inflation Protected Securities) represent. According to the U.S. Treasury, total outstanding TIPS represent US$1.382 trillion. When you add in the I-Bonds (which are a tiny fraction), it's something like US$1.45 trillion...out of approximately US$21.8 trillion in total outstanding U.S. federal government debt. Under 7%, in other words, and that's within the most highly developed sovereign debt market. That's not a big share, and it never will be, but it is an important part of modern sovereign debt around the world that's a more affordable way (for the taxpayer) to finance government debt among high quality, responsible governments. For the Venezuelas of the world, no, it doesn't work (for the government).

You can email MAS and ask for it? See how they reply. Come here write very long for what.

 

[SkyNinja]

Escalating increase 2% per year correct? This plan is the best as it hedges against inflation... but must live to a long ripe age to be most worth it

 

[BBCWatcher]

Escalating increase 2% per year correct?

That's correct. It's 2% per year guaranteed escalation atop a not-quite-guaranteed (but relatively stable) monthly retirement benefit.

This plan is the best as it hedges against inflation... but must live to a long ripe age to be most worth it

The CPF LIFE Escalating Plan is the only CPF LIFE payout plan that offers any direct defense against inflation, that's correct.

No, you don't necessarily need to live to a "ripe age" to benefit from the Escalating Plan. First of all if you die before payout start then you haven't made a payout plan selection and thus your hypothetical plan selection is moot -- all financial outcomes are the same. (Insert my periodic reminder here that delaying payout start to age 70 is wise, if you can afford it.) Second, because the Escalating Plan offers direct inflation defense you would have the ability to adjust how the rest of your accumulated wealth is positioned. In particular, it would be prudent and reasonable to invest your other wealth more aggressively in what should be higher yielding assets (on a long-term basis). And/or you are in a much better position to give more wealth to heirs and charities earlier, while you are still alive. The value of gifts now versus bequests delayed can be enormous, even life changing.

 

[dork32]

Escalating increase 2% per year correct? This plan is the best as it hedges against inflation... but must live to a long ripe age to be most worth it

yes you are right on both instances

 

[dork32]

No, you don't necessarily need to live to a "ripe age" to benefit from the Escalating Plan. First of all if you die before payout start then you haven't made a payout plan selection and thus your hypothetical plan selection is moot -- all financial outcomes are the same. (Insert my periodic reminder here that delaying payout start to age 70 is wise, if you can afford it.)

total trash. the guy is asking if you would benefit if you live to a ripe old age.

for the above case, it does not matter have plan you decide to choose, the benefit is the same.

 

[dork32]

, it would be prudent and reasonable to invest your other wealth more aggressively in what should be higher yielding assets (on a long-term basis). And/or you are in a much better position to give more wealth to heirs and charities earlier, while you are still alive. The value of gifts now versus bequests delayed can be enormous, even life changing.

another set of trash. at 70, i will never turn to high return, high risk investment.

 

[BBCWatcher]

total trash. the guy is asking if you would benefit if you live to a ripe old age.

No, it's perfectly sensible and logical. You cannot assume there's CPF LIFE exists in a vacuum -- that would be "trash."

 

[SkyNinja]

My family member is on deferred status (yet to reach 70 years old) and is allowed to do a 1-time switch to Escalating Plan if our decision is to take up Escalating Plan. Based on the comments here, there are strong pros and also strong cons to it. One big disadvantage is that the Bequest amount drops to $0 in the mid 80s for Escalating Plan? Since the payout is increasing 2% EVERY YEAR, this is really a big plus point.

 

[BBCWatcher]

My family member is on deferred status (yet to reach 70 years old) and is allowed to do a 1-time switch to Escalating Plan if our decision is to take up Escalating Plan. Based on the comments here, there are strong pros and also strong cons to it. One big disadvantage is that the Bequest amount drops to $0 in the mid 80s for Escalating Plan?

The residual drops to zero at just about the same age as the Standard Plan. In fact, the Escalating Plan is essentially the Standard Plan with a "slope" layered on top to provide the 2%/year guaranteed escalation. (The underlying monthly income amount is not quite guaranteed, but the 2%/year part is.)

However, I would point out the following facts: (1) Once payouts start, all CPF LIFE payout plans feature residuals that progressively decline in nominal terms (and decline even faster in real terms since there's some Singapore dollar inflation). (2) Residuals eventually drop to zero no matter what payout plan you choose if you merely live long enough. That is to say that none of the payout plans guarantees any bequest. In my view CPF LIFE's highest, best purpose -- what it's best designed to do even if you want to leave a bequest (or, much better yet, lifetime gifts) -- is to improve the odds that you'll be able to give away more money earlier (and/or reliably leave a bequest) using other assets.

Since the payout is increasing 2% EVERY YEAR, this is really a big plus point.

Yes, that's the key advantage with the Escalating Plan. It's a simple, fuss free way to provide a great deal of defense against inflation. Not perfect inflation defense, which unfortunately isn't available in Singapore, but very good defense. Said another way, among the available CPF LIFE payout plans the Escalating Plan is the closest to pure longevity insurance, to protect and defend a particular real lifestyle for life, however long it lasts. Longevity insurance is a very powerful tool to protect assured delivery of lifetime gifts and bequests (from other assets).

Note that you can also combine any CPF LIFE payout plan, including the Escalating Plan, with Additional Monthly Payouts (AMPs) if you wish. To do that you'd make Retirement Account cash top ups (and/or have qualifying family members making OA to RA transfers) after CPF LIFE payouts start. Then simply do nothing. By default the CPF Board will compute AMPs and start paying an additional amount per month basically the same way as classic Retirement Sum Scheme payouts are made. Or you can ask the CPF Board to recompute CPF LIFE payouts (raise them), as you prefer. In other words, you can tweak the payouts along the way if you wish, and if you or a loved one can push some funds into RA.

 

[dork32]

My family member is on deferred status (yet to reach 70 years old) and is allowed to do a 1-time switch to Escalating Plan if our decision is to take up Escalating Plan. Based on the comments here, there are strong pros and also strong cons to it. One big disadvantage is that the Bequest amount drops to $0 in the mid 80s for Escalating Plan? Since the payout is increasing 2% EVERY YEAR, this is really a big plus point.

you have good knowledge and understanding of cpf life. you have also good analytical mind. weighing the pros and cons, understanding that you have to pay a cost for benefit that you received.

i just want to highlight a few simple points to you, which may aid in you decision, comparing standard and escalating assuming you start your payout at 70

1. you take a steep cut in the initial payout. it will take you till 81 for the payout to overtake that of standard. even when that occurs, you are still miles behind standard because standard has been collecting a larger payout till this stage

2. after 81, escalating starts catching up with standard because of the higher payout. at 90, the total payout of escalating overtakes standard. but does this mean that at this point, escalating starts to become better? no. this is because of the higher payout of standard in the initial stages. it is always better to receive money at an earlier stage, if you understand the time value of money.

3. to factor in the time value of money, xirr is one of the method you can use. it is after 95 that the xirr of escalating overtakes that of standard.

4. an analysis of my own situation with respect to the 3 milestones. i should be able to reach 81, reaching 90 is a challenge, i think 95 is a tad too far for me. any one could guess my decision