The return for RA is 4.08%, but the return for CPF LIFE is not!

Unless you never turn on your phone notifications, you should know by now that CPF Special Account (CPF-SA) will be closed after age 55. This is one of the bigger news in the personal finance space.

If you have $100k excess in your SA, this $100k will be moved to your Ordinary Account (CPF-OA) once you set aside the Full Retirement Sum (FRS) in your Retirement Account (CPF-RA). You will lose 1.58% interest immediately for the $100k in your OA, which is $1580/year, just because of one announcement made on 16th Feb…

While the government has explained the reason for closing CPF SA, which is to avoid having high return and also having liquidity, the decision for CPF holders will now be to:

• follow the default arrangement of moving SA to OA, getting liquidity but lose the additional 1.58% interest, or
• move SA to RA until you reach the Enhanced Retirement Sum (ERS) to continue getting 4.08% interest.

But WAIT, are you really able to use the 4.08% interest?

Remember, the fund in RA is getting 4.08% interest, but you cannot take it out as you wish. RA will be used to join CPF LIFE from age 65. So, on paper, you are getting 4.08%, but you are not allowed to cash out directly. Hence, we should look at CPF LIFE returns instead of RA returns.

Ever since 16th February, I have seen many articles, videos, Facebook posts talking about OA, SA, RA return, but nobody is talking about CPF LIFE return!

In this article, I am going to delve into CPF LIFE return for you!

How do you calculate your CPF Life Return?

Firstly, CPF LIFE provides payout to you for as long as you live, with the default payout age starting from age 65. Let’s focus on the default option (CPF Life Standard Plan), which is parking $213k (FRS for 2025) at age 55 and getting a payout of $1730/month from age 65 for life. You can use CPF LIFE estimator to calculate the payout amount: CPF LIFE Estimator

However, the bequest (death payout) is missing in the CPF LIFE Estimator. The only information that you can get for the bequest is from the CPF FAQ page:

“After you pass away, your beneficiaries will receive your CPF LIFE premium balance, which is the total CPF LIFE premium that you have paid minus the total payouts you have received, together with any remaining CPF savings.

For example, if you paid a CPF LIFE premium of $200,000 and pass away after receiving a monthly payout of $1,000 for 10 months, we will pay your CPF LIFE premium balance of $190,000 (i.e. $200,000 – [$1,000 x 10 months]), together with any CPF savings to your beneficiaries.”

CPF FAQ

Based on the formula provided, we can calculate the bequest amount for death at 70 years old for a male enrolled in the CPF Life Standard Plan.

You will notice that the total CPF LIFE payout ($103,800) + bequest ($213,925) is still the same as the RA amount at age 65 ($317,725)….

You may ask, does this mean that the $317,725 never grows from age 65? Where does the interest go? The interest earned goes to the CPF LIFE pool, the pooling interest is the concept of annuity, those people who have a shorter lifespan, unfortunately, the interest earned will be used to support a lifetime payout for those people who live longer…

So, how to calculate CPF LIFE return? This is a classic cash flow analysis, nothing complex. You just have to input how much you invested at age 55 into RA, and how much you get back from CPF LIFE. Using Internal Rate of Return calculation, you will get the return for CPF LIFE. I have done the calculations for you, refer to the images for Male/Female entered FRS/ERS at age 55, and the detailed explanation below:

Male 55 years old with Full Retirement Sum (FRS)

Male 55 years old with Enhanced Retirement Sum (ERS)

Female 55 years old with Full Retirement Sum (FRS)

Female 55 years old with Enhanced Retirement Sum (ERS)

Some important points to take note:

1. There are two yields in the image. The annualized payout yield calculates the return based solely on the CPF LIFE payout, excluding the bequest. This is useful for people who are just looking at how much they will receive from the RA savings as bequest payout is not for them. Yield to death is the total return including CPF LIFE payout and bequest.
2. Based on the annualized payout yield, the breakeven point where you get back the same or more from CPF LIFE than your RA savings invested at age 55 is around age 75 or 76. If your lifespan is shorter than this age, you will be losing money if you do not take the bequest into consideration.
3. The worst age to die is age 80… Yes, you heard that right. The reason is that from age 65 to age 80, the bequest payout decreases by the amount that you received from CPF LIFE. The total payout for CPF LIFE + bequest remains constant until around age 80. Your yield to death at worst could be just 2.27%, this is worse than the OA account!
4. Before age 65, if you pass on, you don’t get any single cent for yourself. This is obvious as you cannot touch RA before age 65. So, it’s critical to ensure that you have sufficient savings for yourself before age 65.
5. You need to live until age 88/90 to see the 4+% yield. This is critical. Don’t just decide to go all in to RA to the ERS just because RA is giving 4.08% – you may end up only seeing a 4+% return after age 88/90!
6. If you live long enough, you can get 5+% from CPF LIFE. This is because you will receive CPF LIFE for a longer period. So make sure you manage your health and live long enough to outperform 4.08%.

Summary:

In summary, having a CPF SA is definitely better than RA as SA 4.08% is real and you can use it anytime. RA 4.08% is on paper only; you should look at CPF LIFE return to decide if you want to leave your excess SA to OA or top up to RA to the ERS.

So, will you do FRS or ERS after reading this article? For me, I will go for FRS, but I still have about 20 more years to hit age 55; by then, CPF rules may change again, and this is the biggest risk for CPF.