CPF Life Isn’t Really 4%? | The Truth About Risk Pooling & Returns

Added: 2026-05-16

[00:00:00]Hi everyone, welcome back to the channel. This video was pushed back by one week because of Mother's Day and I thank all of you for your understanding.

[00:00:10]Now coming back to today's topic, one of my mates recently forwarded me a video by Mr. Lu Ching Chan. In the video, he makes a couple of strong claims that risk pooling is good and that 95% of people don't really understand CPF life.

[00:00:30]So, of course, my friend added a slightly naughty caption when he sent it over. Bro, you think you belong to the 5% or the 95%.

[00:00:42]Now, before I start, let me say this upront. I do appreciate Mr. for what he has done in the CPF space. Many of us including myself have benefited from ideas like 1M65.

[00:00:57]But at the same time, I firmly believe that diversity of thought is important.

[00:01:03]If we all agree with just one narrative, then the conversation stops. And I don't think that benefits anyone. So in today's video, I want to offer a slightly different angle. First on how I look at risk pooling and second on something that has been bugging me for a while now. This idea that CPF life returns 4%. And the leap from there to thinking that it can make you rich.

[00:01:36]After going through my CPF series and spending quite a bit of time understanding the mechanics, I've come to realize that this statement can be quite far from the truth. So, let's unpack both topics with a bit of number crunching along the way.

[00:01:57]As with all my CPF videos, let's set the stage with the same default scenario I've been using. male age 55 in 2025 with a full retirement sum of 213,000 which after compounding at 4% for 10 years gives 315,000 at age 65. We'll focus on the CPF life standard plan since this is the default if members don't make an active choice.

[00:02:28]It is also the plan that Mr. Lou referred to in his video and importantly the one where the effects of risk pooling are most pronounced compared to the basic plan. And yes, I know the numbers have been updated since then, but I'm using the 2025 numbers to make it consistent with my earlier videos.

[00:02:51]partly for continuity and partly because the mechanics don't change and also because I'm honestly too lazy to review all my models again. So, let's start with a quick recap of how the standard plan works. At 65 when you opt to start your CPF life standard plan payouts the entire amount in your retirement account about 315,000 assuming no additional topups is converted into what is called the annuity premium or AP. This AP continues to earn a 4% interest but and this is the key point that interest does not go back to your RA it goes into the common pool from that point on your monthly payout about 1,700 is drawn down from your AP month by month the AP balance reduces by that same 1,700 until it eventually runs down to zero. Based on my earlier calculations, it takes about 185 months or roughly 15.4 years. So if you start your payouts at 65, your AP runs out around age 80. Now if you pass away any time between 65 and the point whatever remains in your AP is returned to your beneficiaries which means effectively that 315,000 is all yours from 65 to 80.4 no matter you live or die. You don't lose it. But if you look at it from another angle for those 15.4 four years, your effective return is actually 0%.

[00:04:48]Now, some of you might say, "Wait, didn't you just say it earns 4%." Yes, it does, but that 4% doesn't go back to you. It goes into the common pool. And that in simple terms is risk pooling.

[00:05:06]And to be clear, I support this. Risk pooling is the foundation of insurance.

[00:05:12]CPF life being an annuity scheme is a longevity insurance. Without risk pooling, CPF life wouldn't work and many Singaporeans would face a very real risk of outliving their savings. So, at a system level, this is a very powerful and necessary mechanism. But here's the question I want to raise. Is risk pooling good for you as an individual?

[00:05:42]Because for that first 15 years, your effective return is zero and whether that's acceptable depends very much on your personal situation. A common response I hear among friends and on this channel is never I did already. Why care? Fair enough. But I don't think that applies to everyone. Take my own case. We have four kids and for my wife and I, that's potentially 630,000 combined at FRS amounts. At maximum ERS level, that will be 1.26 million. If both of us pass on before that 15 years is up, that 0% phase has a very real impact on what gets passed on. So for us, it is not a trivial consideration.

[00:06:41]4% of 1.2 million is 48k a year. Not exactly pocket change. So again, is risk pooling good? At a system level, yes.

[00:06:53]But at an individual level, it becomes a lot more nuanced. Calling risk pooling good without qualification starts to stretch what I would consider as sound universal advice. Now let's move on to the second part. CPF live returns. Now if the return is effectively 0% for the first 15 years, what happens after that?

[00:07:20]I plotted this out in a graph and the pattern is quite clear. The longer you live, the higher your return. If you live through 100, the annual return goes up to about 5.7%.

[00:07:37]Which is why annuities are often described as a longevity hedge. The longer you live, the more valuable CPF life becomes. Let me highlight a few key benchmarks. Around 84 to 85 years old, your return hits about 2.5%.

[00:07:57]Around 89, you finally reach 4%. Now think about that our national life expectancy is around mid80s. So if you're average, your return is somewhere around 2.7 to 3.1%.

[00:08:16]Higher than OA, yes, but still quite a bit below the headline 4%. And that 4% number, you do get there, but only if you live to around 89. So yes, saying CPF life returns 4% isn't wrong, but it is highly dependent on longevity. So when you line this up against the average national life expectancy, the simple conclusion is more than half of us will receive less than 4%. Now I also look at this from another angle. CPF life when viewed from a slightly different more international lens is best understood as a deferred annuity.

[00:09:04]Even though payouts only start at 65, the staging actually begins at 55 when your CPFSA is closed and your CPF is created. From that point on, the money in your RA is effectively locked away with excess allowed only under exceptional circumstances like life limiting conditions. Over the next 10 years from 55 to 65, this amount compounds at 4% plus an additional 900 bonus interest per year, growing the RA balance before the monthly payouts begin. That's why it's called a deferred annuity. You are essentially building a bigger principal amount during this 10-year period before joining the CPF live annuity scheme. Now, I do know a group of CPF members, especially those doing tax planning, who actively top up their RA between 55 and 65. So what if we include the 10 years from age 55 to 65 when the interest is still credited into your RA account. Now if we look at CPF live from this lens, what kind of return are we actually getting? To answer that, I extended the model back to 55 so that we can recognize the 4% plus bonus interest earned during those 10 years. Unlike the earlier model where we only start at 65. So let me flash the returns of this second model on the screen. This time the timeline starts from age 55. From 55 to 65 you're getting the 4% plus return. Then at 65 CPF life begins. The AP is created and the interest flows into the common pool.

[00:11:09]In this scenario, returns at 65 don't start from 0% anymore. But something interesting shows up. Even from this lens, returns actually drop below 2.5% around age 72, stays there for almost a decade, and only cross back above 2.5% at around age 82. Now, if you haven't caught the implication of this yet, let me spell it out clearly. If you took that same amount at 55, left it in your CPFA earning 2.5% instead of locking it up in RA and then started withdrawing 1,700 per month from age 65, you would last until about age 82 before all the money fully depletes.

[00:12:05]Think about that for a moment. from age 55 to 82 and that's 27 years. We have full access to that money. We can invest it, tap on it for emergencies or use it to live a fuller retirement while health and circumstances are on our side. Now again, I'm not saying one is better than the other, but this comparison does highlight something important. It shows that the 4% return is not as straightforward as it sounds. When we talk about CPF life returns, the framing matters a lot. So which model is correct? Honestly, both have limitations. We can certainly argue that starting the calculation at 65 is not entirely accurate since it ignores the interest earned during the 10 years from 55 to 65. And yes, I can already imagine some people saying that I'm sensationalizing the 15-year [snorts] 0% return from 65 to 80. But I do have my reasons. Once money goes into the RA, the move is effectively irreversible. I honestly can't think of many investment products where that happens. So to me, it only makes sense to account for that reality. One way being to start the analysis from age 65 when payouts actually begin. Doing it this way better reflects the trade-offs involved, especially the opportunity cost of having the funds tied up and only fully released upon death. And this brings me to what I think is the key takeaway.

[00:13:59]Don't mix up investment and insurance.

[00:14:03]CPF life at its core is a longevity insurance product, not an investment product. If we treat it like insurance, it makes perfect sense. But if we try to evaluate it purely based on returns, that's when things start to feel a bit off. Let me give a simple example. If I buy a term life policy for a million, pay a few months of premiums amounting to say $1,000 and then touchwood, something happens.

[00:14:36]My family get a million bucks. Am I going to say that my return is 100,000%.

[00:14:44]Of course not, because that payout is conditional on my death. And CPF life works in a similar way. The returns 4% or otherwise only makes sense when viewed through the lens of longevity risk. So I'm not against CPF life. In fact, I'm very happy to have it as part of my retirement plan. But like all things, there are tradeoffs and those tradeoffs will weigh differently for each of us depending on our situation, investment knowhow, and lift experience.

[00:15:22]So with this, I'm simply adding another perspective to the discussion on risk pooling. Not trying to prescribe anything, not trying to sway anyone, and definitely not trying to pick a fight with Mr. Lu Ching Chan. And honestly, it doesn't really matter whether I'm in the 5% or the 95%. What matters is that we are all trying to make better decisions for ourselves and our families. So, drop your thoughts in the comments below. Do you think risk pooling is good? neutral or not so straightforward and how do you think about CPF life returns? For next week, I will be doing another CPF related video. I recently had a conversation with Josh Tan from the Astute Parent, an honest insightful financial planning channel. Thank you once again, Josh, for the invitation and opportunity to share perspectives with you and your audience. I will leave a link to that video for those of you who are interested. In that video, we talked about OA to SA transfer, otherwise known to most as the 1 M65 strategy. So, this is what I'll be talking about next week on this channel where I will share more of my thoughts on this subject, especially for the younger Singaporeans out there. So, if you're interested, do drop by. If you like this video, hit the thumbs up, share it, and subscribe to the channel. And till the next time, remember, sometimes the best form of aging is just aging normally. See you in the next one.