https://www.straitstimes.com/business/invest/why-cpf-life-can-be-better-than-an-investment-property
2023-06-10
It is impossible to buy an apartment for $600,000 that can guarantee you a monthly income of about $5,000 in today’s red-hot property market, but the Central Provident Fund’s (CPF) annuity scheme can give a couple such returns.
If a couple want to enjoy such a bumper monthly income for life with that same amount of savings, they can start planning with the aim of joining CPF Life at the highest tier when they reach the age of 55.
Many people do not realise that the national annuity scheme, which provides a good lifelong income for retirees, can yield far better dollar-for-dollar returns than a rental property.
Just like Singapore Savings Bonds or Treasury Bills, there is nothing to dislike about CPF Life because it works just like any annuity scheme in the market, except that it is much cheaper to take up and provides a stable monthly income for life because it is backed by the Government.
Yet, many people choose not to make better use of it, preferring instead to put their money into a second property, for instance, thinking it can provide a higher retirement income.
Those who do so often risk having their plans go awry when unfavourable economic conditions affect their plans, such as when the rental income is eroded due to higher mortgage rates.
Here are three reasons why CPF Life can provide better benefits to a retired couple, than having another property for rental income.
Affordability
Not everyone can be a landlord because it is expensive to invest in a second property. Even if you can buy one, you must be prepared to pay over $1 million for a better unit if you want to earn a higher rent.
You don’t need such high outlays for CPF Life because you can join the scheme based on what you can afford.
For instance, those hitting 55 who join with the Full Retirement Sum (FRS) of $198,800 in 2023 will stand to get about $1,600 a month from the age of 65, while those putting up the Enhanced Retirement Sum (ERS) of $298,200 will get about $2,400.
So a couple who put up about $400,000 can stand to get a combined lifelong retirement income of $3,200 a month, while those signing up with about $600,000 can get around $4,800 in total.
If they live up to 90, they would have received $960,000 (FRS) and $1.44 million (ERS) in total payouts.
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Tax- and hassle-free
Landlords don’t just pocket the rent; there are various costs to meet before they can earn real income. These include income and property taxes, mortgage payments, estate maintenance charges, costs for repairs, and replacement of household items, plus fees for finding tenants.
If you have the misfortune of ending up with tenants from hell, you may even have to spend hefty legal fees to resolve such nightmares.
Retired couples who have decent CPF Life payments don’t have such risks because there are no fees to pay and the payouts are tax-free. Indeed, those who don’t have high monthly expenses can even save a portion of these payouts for their annual holidays, without touching their savings.
Stable income
Rental income is dependent on the state of your property as well as market conditions. If times are bad, there is a risk that you may not have a rental income. While you can sell your property, the proceeds will not last forever unless you know how to invest prudently.
CPF Life payouts are stable and not as volatile as other private financial products. Indeed, you can even choose to increase your monthly payouts by making annual top-ups of up to $10,000 to the scheme.
Of course, it is all well and good if you can invest in extra properties for your retirement, but you should not miss out on the best deal in town that can provide a decent lifelong income for only a fraction of the price of a property.
The reality is that many property owners do encounter cashflow problems in their old age, so CPF payouts can help meet some of their bills. This has prompted some retirees to sell their properties so they can use part of the proceeds to join CPF Life, as long as they are under 80.
While their payouts won’t be as good as those who joined at 55, it is still better late than never to enjoy fuss-free cash payouts for life.
Finally, couples in their prime looking to plan for a good retirement should first do the sums for CPF Life before embarking on buying a second property. Don’t miss out the chance to secure a sound asset that will continuously give you payouts through your golden years.
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