Comparing FRS in RA plus BRS in SA vs ERS in RA, Part 1

This Opinion post first appeared in my blog here: https://pwlcm.wordpress.com/2023/01/27/comparing-frs-in-ra-plus-brs-in-sa-vs-ers-in-ra-with-standard-plan/

This blog post is part of a 4-part series:

1. https://pwlcm.wordpress.com/2023/01/27/comparing-frs-in-ra-plus-brs-in-sa-vs-ers-in-ra-with-standard-plan/
2. https://pwlcm.wordpress.com/2023/01/27/comparing-frs-in-ra-plus-brs-in-sa-vs-ers-in-ra-with-cpf-life-basic-plan/
3. https://pwlcm.wordpress.com/2023/01/28/comparing-frs-in-ra-plus-brs-in-sa-vs-ers-in-ra-with-cpf-life-escalating-plan/
4. https://pwlcm.wordpress.com/2023/01/30/comparing-frs-in-ra-plus-brs-in-sa-vs-ers-in-ra-part-4/

Refer to the list of acronyms on CPF in the following blog posts: https://pwlcm.wordpress.com/2022/01/06/acronym-cpf/

I am a CPF Volunteer. If you find this blog post providing useful information about CPF matters and it leads you to using CPF online services, you may fill in my full name “Tan Choong Hwee” in the “Referrer Name” field in some selected CPF online services.

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One common question people asked is: "Should I top up my RA to ERS from my SA at 55?"

One might consider both SA and RA interest rates are the same at 4% p.a. and wonder what would be the benefits of moving BRS amount from SA to RA. Obviously such move would increase the CPF LIFE monthly payout amount, but at the expense of losing the liquidity of withdrawing cash from SA at our discretion.

So, I set out to compare between 2 scenarios:

• Scenario 1: FRS ($198,800 for 2023) in RA plus BRS ($99,400 for 2023) in SA
• Scenario 2: ERS ($298,200 for 2023) in RA

Using the CPF LIFE Estimator set to a male born in 1968 (i.e. age 55 in 2023), I get the monthly payout amounts for Standard Plan to be $1,600 and $2,360 for FRS and ERS respectively:

The difference in monthly payout is $760, or $9,120 in a year. To match up the shortfall in payout, we would need to drawdown from SA. When would SA be depleted in this manner? I set up an Excel spreadsheet comparing the 2 scenarios to find out.

I have simplified the calculation for SA interest and drawdown using annual values in scenario 1, but do take note that SA balance would be reducing every month due to monthly drawdown to match up the shortfall in the monthly payout. The actual SA interests earned would be less than those shown in the spreadsheet.

Both scenarios would payout $28,320 annually up till age 90. For scenario 1, SA only has $3,960 available for drawdown at age 91, beyond which SA is depleted and annual payout drops to $19,200.

In terms of bequest, scenario 1 would always have more bequest amount than scenario 2. The bequest amount would drop to zero at age 91 for scenario 1, and age 80 for scenario 2. The additional bequest amount comes from the interests earned in SA.

In summary, scenario 1 is good for those who want to leave more bequest to their loved ones, but would suffer a drop in payout if they outlive the depletion of their SA. On the other hand, scenario 2 is better at maintaining a lifetime payout to address longevity risk.