Should You Keep Topping Up Your CPF RA After 55? | CPF LIFE

[00:00:00]Hello everybody. Welcome back to the channel. Recently, one of my viewers shared in the comments that he had topped up 35k into his RA at age 58.

[00:00:11]That caught my attention because I shared in my previous videos that my wife and I have been thinking about topping up our RA yearly from 55 to 65 as part of our portfolio rebalancing.

[00:00:25]So, I reached out to him and he very generously shared some of his actual numbers with me. And me being me, I went to crunch those numbers and came up with some rather interesting findings. In this video, I'd like to share those findings with all of you. So, without any further delay, let's dive in.

[00:00:47]As usual, let's set the stage. We have a 58-year-old male in 2026 who tops up 35,000 into the CPF RA. According to the projection from CPF board, this 35,000 top-up will increase the monthly payout under the CPF Life Standard Plan by around $230 starting in 2033 at age 65. As we 35,000 will compound at 4% per annum in the RA for 7 years, growing to approximately 46,000 by age 65. Once CPF Life Standard starts, all the money in the RA becomes the CPF Life Premium. The interest earned from the Life Premium goes into the common pool for risk pooling. And in return, the member receives a higher monthly payout for life. So, let's start with the simplest calculation. 46,000 divide by $230 a month works out to exactly 200 months.

[00:01:51]That's 16 years and 8 months. So, the CPF member will get back the full principal of 46,000 at around age 81 years and 8 months. That is the break-even point. Of course, CPF Life is longevity insurance, so the additional $230 per month continues for as long as the member lives. So, I asked the next logical question. What is the effective return on the original 35,000 top-up if a CPF member dies at different ages? I calculated this at 5-year intervals starting from age 85. At 85, the effective return works out to 2.77% per year. At 90, it increases to 2.68% and at 95, it goes up further to 4.24%.

[00:02:43]So, as expected with longevity insurance, the longer you live, the better your effective return. And somewhere around 92 and 1/2, the effective return reaches 4%. The last thing I did was to compare these effective returns with the numbers I got from my previous CPF Life Standard calculations at age 55. So, I placed the two sets of numbers side by side, 55 versus 58. Age 85, 3.39% versus 2.77% at age 90, 4.15% versus 3.68% at age 95, 4.62% versus 4.24%.

[00:03:25]Quite clearly, the effective returns for money put into RA at 55 are higher across all three ages compared to the top-up at 58. At age 85, the difference is the largest at 0.62 percentage points. At age 95, the difference has narrowed to 0.38 percentage points. From the trend above, we can safely conclude that the later the money goes into the RA, the lower the effective return of the top-ups. Now that we have seen the numbers, let me share three perspectives on what these numbers mean to me. The first is the 2.77% effective return at age 85, our average national life expectancy. That's really close to the 2.5% interest we get from leaving the money in CPF OA. And remember, this is a top-up made at age 58. What happens if someone tops up at 59, at 60, at 65, or even later? From the trend, I think we can see quite clearly that top-ups after 58 have a very real chance of eventually falling below 2.5%. My second observation is the break-even point. The later we top up, the break-even point appears to move later as well. My previous model showed that for RA monies at age 55 under the standard plan, the break-even point was around age 80. For this top-up at age 58, it has shifted later to age 81 years and 8 months. With the average life expectancy for both sexes at around 85, I think it is perfectly reasonable to ask whether we will even break even on money topped up later at say 65 or beyond. And this brings me to my third and most important observation. There is a very common narrative in Singapore today that goes something like this. RA gives you a guaranteed 4%. So, if you have spare cash, just keep topping up your RA to get higher lifelong payouts even after 65. On the surface, that sounds very logical. But, I think this exercise shows why we need to be very careful with that statement. The 4% return is guaranteed, but that doesn't automatically mean that the effective return from every top up is 4%. Those are two different things. In this case, if a member dies at 81 year 8 months, the effective return on the 35k will be 1.55%.

[00:06:00]One whole percentage point below 2.5%.

[00:06:03]This exercise is also very personally relevant to my wife and me. I have shared in recent videos that we are thinking of starting with FRS at 55 and then progressively top up our RA towards ERS over the following years as part of our portfolio rebalancing. But after doing this exercise, I'm starting to reconsider that approach. It reminds me again of two things I've been talking about quite a bit on this channel recently. Over optimization and mixing insurance with investment. Sometimes when we try to over optimize and do a bit of kung fu as some people call it, we end up with outcomes we didn't expect. We end up doing more, earning less. For ourselves, I think we'll stick to a simpler approach. Decide how much we want to put into our RA at 55 and stick with it. Keep our CPF OA for liquidity and for returns, we'll stick with our risk assets. And that brings us to the end of this video. A heartfelt thank you once again to the generous viewer who shared this data point with me. One person's numbers may seem like a small thing, but it has helped me rethink my own retirement plans and hopefully it can also help more Singaporeans make better informed decisions. If some of you have topped up your RA at different ages, I'd love for you to share your numbers with me. I genuinely enjoy crunching these numbers and sharing what I find on this channel.

[00:07:34]As always, I'd love to hear your thoughts in the comments below. If you found this helpful, like, share, and subscribe. And till the next time, remember, sometimes the best form of aging is just aging normally. See you in the next one.