How Psychology and Precommitment makes sure you either lose or don't a whole bunch of money.
In summary, there was a big hoo-hah about the CPF payout allegedly changing from Age 65 to 70.
There's been a lot of blog writings on it from other bloggers and I'm expecting a few more before it's done. No reason not to check them out - and they all have different focuses and perspectives.
Me, I'd like to highlight the danger. The common misconception, like the idea that an ILP is harder to understand than an ETF.
This turned out to be false too, but with its own kicker – you’re eligible for your payouts at age 65, but you have to opt in, or it will start at Age 70.
Of course, anti-PAP news sources made a big deal out of it with a fairly clickbait headline, while at the same time, pro-PAP news sources have tried to make it clear that it’s fake news.
And there was kickback.
Simply put… It always boggles me when people will talk about the features CPF Life in the present, like as if it’s going to stay that way their entire life.
How irrationally optimistic.
I mean, even 1M65 was 1M55 16 years ago. (and no offense to Loo, who’s running a pretty great movement, but)
Interest rates went from 6.5% to 2.5%.
Your Full Retirement Sum basically doubled in that time, WELL above our inflation rate.
And for this particular point - it’s not rocket science.
Having it available at 65 and it automatically paying at 70 is NOT the same as having it available at 70 and automatically paying at 65.
There's plenty to learn from this, so let's start from here.
Insert Objective Part Here (it’s the actual header)
I actually make subtle attempts to be objective generally, so let’s be fair to CPF Life.
First of all, this thing does increase your options.
If you’re a highly rational and competent person, this is useful because by the time you actually hit 65, you’ll probably have a pretty good idea whether you really need the money or not.
Then you can leave it in there for a) a longer period of time, where it’ll generate interest and you can have a slightly bigger payout later, or b) a bigger bequeath for your children and grandchildren.
These are good things, people.
Additionally, it makes sense to some degree. Our longevity has jumped from an average age of 65 to 85 in the last 30 odd years. It’s not at all unlikely that by the time most of the people here actually hit 65, your expected average longevity could at least be 90-something.
Not to mention your risk of critical illness.
And of course, it’s important to recognize that CPF interest and payouts are currently risk free and level.
So that’s the good news.
The bad news is that you’re much, much more likely to fall for the sneaky wine businessman scenario. And I don’t know how long you expect to be as rational and competent in your old age.
When I was a Young Warthog
Sneaky businessman what…?
See, back when I was a young lad, when Money Maverick was still a fledging nooblet - getting rejected by prospects so often every day that he’d have a no issue asking out girls now (if he didn’t already have a steady girlfriend).
He was also extremely poor. Please help by dropping him a message below.
…I’m going to talk about CPF Life, I promise. Trust me. There’s a point to this.
Sidetracking aside, what happened was that a prospect, who CLEARLY knew more about finance than Money Maverick at the time - felt pity for him and tried to teach him one or two elements about business through a story that’s stayed with him ever since.
The Sneaky Wine Businessman
The story goes roughly like this:
ONCE upon a time, a sneaky businessman had a pretty successful wine vineyard/business.
Feeling the need to expand, he decided to open a cheese restaurant and use his wine to complement the dishes.
…In hindsight, he should probably have made it a steak restaurant instead. There’s only so many cheesy noodles, fries and pizza you can eat before it becomes sickening (gets bombarded by cheese fans).
Point being, his cheese restaurant was not doing well.
He tried all sorts of stunts and promotions, but it just wasn’t taking because his business was pretty niche-y. Not everyone loves a restaurant that specifically specializes in cheese.
Desperate to improve his business, he talked to a business consultant.
The advice he got was simple: instead of trying to reach out to a broad audience of everyone, focus on building the niche he already had. If a customer was already there for his delicious cheese dishes, get them to spend more.
The sneaky businessman thought about what he could do to accomplish this, and he decided to rely on the ‘Leceh Principle’.
The ‘Leceh Principle’
'Leceh' means 'troublesome' in Malay. I think.
It was pretty simple – if a table ordered $30 worth of food, he’d tell them:
“Sir, if you order $60 worth of food – you’ll be entitled to collect a free bottle of wine worth $50!”
In summary, if the customer could spend $30 more, he’d get both a $50 bottle of wine and $30 more delicious food.
At the end of the dinner, the customer would get a receipt with a 6-month expiry date. Their bottle of wine was ready for them at the businessman’s vineyard, and all they had to do was take a 20-minute drive from the restaurant to collect it.
For a customer at Face Value, $30 for $80 worth of goods is a bit of a no brainer. Plus, food.
So it was a deal that sat very well with them. As a result, many customers went ahead with this deal, and everyone walked away quite pleased with themselves.
Naturally, the sneaky businessman’s sales went up tremendously.
But what about the wine?
Well, he took a stock take of the wine receipts that he had offered after 2 years, just to make sure that his business approach had been sound.
The result was this:
For every 200 bottles of wine offered out, an average of 3 were claimed within a week, more often immediately after the dinner. 2 more were claimed within the expiry date (6 months).
That’s 2.5% of the clientele. Every other bottle remained unclaimed and belonging soundly with the sneaky businessman, who essentially doubled all his intended sales for a small business cost of a few free bottles of wine.