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.
You might be thinking: “Wow, wasn’t that a really risky move? What if every single customer had gone to collect the wine? I know I WOULD have!”
Would you really?
The ‘Leceh Principle’ Explained
The Leceh Principle is a combination of human behavioral psychology across two primary principles.
First of all, there is the Benefit Perception Principle. The appeal of perceived benefits in the future is something that our short-term attention span pays very close attention to.
In English, it means that we feel extreme relief or satisfaction for the promise of a benefit in the future, regardless of whether it materializes or not.
Then there’s the ‘Free’ Principle (Behavioural Economics/Psychology).
Our psychology immediately attracts us to something ‘free’ regardless of the price you have to pay for it. And mind you - you're PAYING for it. FQ Mum does an excellent analysis of examples here, and
I’ll just quote off one or two of them.
1) Free donuts to those who joined the fun run. But the line is like a long snake that it might take you 45 minutes to an hour before you finally get your free donut. What is the cost of your time lining up for an hour?
2) Free pica-pica in a bar. But if you check out the price of one bottle of beer, it is 20% higher than the bars down the block. So are your peanuts and chips in this bar really free?
When you combine these two together, you get the ‘Leceh Principle’ – something that gives you i) intense relief, ii) is offered seemingly for free but iii) requires a decent amount of work on your part before you can get it.
As a result, most of the population tends to engage in such activity and not collect their ‘bottle of wine’.
Some other relatable examples are:
· Lucky draws which you need to check the results online on that date for
· Coupons with an expiry date
What does this mean when it comes to your CPF Life?
Well according to rigorous and replicated psychological studies, you’re a lot less likely to opt in than not, because it takes effort on your part to do so.
That’s what it means, and it’s a fair, evidence-based assessment and conclusion.
I’m not going to spell out any implications for you.
Who is the Sneaky Businessman using the Leceh Principle?
If you’re reading this and you’re like ‘wow, I got scammed, or I’m getting scammed.’
You didn’t get scammed, and CPF Life is NOT a scam. You see, I never said that it was wrong to be the sneaky businessman. I just spent time describing it.
The reality is, most businesses run on this premise. The system runs against your own natural psychology. That's how we fall for basically everything in the market. And if you’re the exception and not the rule, you need to habitually make it a point to collect the damn bottle of wine every single time.
Even on an extremely small scale, someone who renovates your house is running on this premise. There’s an in-built notion that you’re responsible for the upkeep of your house. An underlying effort solely on your part which makes the difference between renovating again in 5 years and renovating again in 20.
The times you were in good company and planned a holiday with those friends…but never got around to it?
The times where you asked someone to remind you to do something with the promise of doing it later…before it eventually handled itself or got handled by someone else?
That’s the Sneaky Businessman.
I’m a sneaky businessman.
And you’re a sneaky businessman, too. 😉
So that’s the conclusion. It’s opt-in payout at 65, but it’s not that simple either. It works against your human psychology – something that’s in built in you and takes actual effort to do.
The good news is that you’re not being scammed. Every single business, including the business that you work for as an employee, does this. It’s not a scam, or advertising would be considered as much, and it wouldn’t be allowed to exist.
You made a voluntary decision and all the details are out. Now that everyone knows the details of this, hopefully they’ll deal with the ‘Leceh Principle’ too.
Should the government behave like that, or like a business? I don’t know. I’m not going to draw any specific conclusion or comment.
But the final point is this – if you think your CPF structure isn’t up for change in the future, you’re kidding yourself. And the people who run this structure are smarter than you, and they know how you’ll behave.
If you don’t trust that kind of structure or trust yourself too much, take some control – drop me a message and diversify your money privately. I answer everything. I’m a sneaky businessman, but an extremely honest one as well.
Consultations are free. And there’s a whole range of customizable options that will give you what you want and when you want it.
Otherwise, make sure you’re the exception, not the rule.
As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.
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Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.
The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.
Here are some of my resources on:
3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)
4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)
5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy
6) Financial Optimisation: How I Avoid the Largest 'Fees' of All