By Aaron Low, Political Correspondent

THERE are two basic questions that a good retirement financial plan should be able to answer.

Can the retirement nest egg one built up during the working years last the entire period from the time one retires till one dies?

Is there enough income generated so that one can live a decent life?

The recent reforms to the the Central Provident Fund, in the form of providing higher returns for the first $60,000 of CPF savings and a compulsory national annuity, provide solid answers to the first question.

The key objective of introducing the national annuity, CPF Life, was to inject the element of life-long income to hedge against the 'problem', or risk, of longevity.

An annuity, the CPF Life pays out a stream of monthly income for CPF members when they reach 65 for as long as they live.

People have four plans to choose from and the trade-off between the plans is this: The more one wants for his monthly payments, the less his beneficiaries get when he dies.

Depending on how much one has in his CPF retirement account, one could get from $350 to over $1,000 a month.

This trumps the previous Minimum Sum (MS) Scheme as the MS was supposed to last for only 20 years, from age 62.

This was problematic, as studies have shown that more than half of Singaporeans will live beyond 85.

But does CPF Life, as a retirement plan, fulfil the second criterion of being enough to sustain one's life 'decently' through one's retirement years?

On the surface of it, the CPF Life payouts look decent, compared to previously. Under the MS scheme, $67,000 in the retirement account would yield about $530 a month for roughly 20 years.

Under the CPF Life Balanced plan, which is the plan the Government expects most Singaporeans to take up, the payouts for life range from about $550 to $620.

Getting a guaranteed $600 a month for the rest of one's life is pretty sweet.

But what is bitter, which CPF Life does not address, is inflation.

Last year, inflation in Singapore hit a high of 6.9 per cent, fuelled by higher property, food and energy prices.

This has eased to 2.9 per cent in January, according to latest official figures.

But while some economists have called last year's figures an aberration, it is likely that inflation will no longer stay between 1 per cent and 2 per cent, as has been the case in Singapore for the past few decades. This is because food prices, which affect lower-income people more severely, are expected to resume rising on a global scale.

Chatham House, a British think-tank, recently issued a report saying that the era of cheap food prices is well and truly over. The combination of a rising global population, climate change and higher demand for biofuels will push food prices higher in the near future, said the report.

What this means is that the effectiveness of CPF Life payouts will be affected.

If inflation stays on the low side, at 2 per cent, 10 years from now, $550 will be worth just $434 a month at today's prices.

If a slightly more pessimistic view is taken, say a 3 per cent inflation rate, in a decade $550 will be worth a paltry $360 today.

This is currently what an elderly person living alone on Public Assistance from the Government gets.

This puts a big question mark over whether CPF Life is sufficient for retirement.

Any good financial planner will say it is foolish to rely on one source of income.

One would ideally want to have multiple streams of income to support one's lifestyle. These should include investments, savings and family support.

But studies like British insurer Aviva's annual Consumer Attitudes to Saving survey show that many seem to not be saving enough for retirement.

About six in 10 of 1,000 Singaporeans polled said they regularly put aside money for retirement. But at the same time, 61 per cent are still worried that they will not have enough money set aside for their golden years.

Additionally, filial piety, in the form of financial support for aged parents, will be difficult to uphold as Singapore's population structure is altered over the next two decades.

The ratio of working adults supporting elderly persons was 9:1 in 2005 and will narrow to 5:1 by 2020.

The sandwiched class of working adults will find themselves hard-pressed to care for both their children, who they are encouraged to have more of, and their parents, who are living longer.

What these two developments mean is that many people will end up relying on their CPF payouts alone for their retirement needs.

One possible solution to the problem of potentially low payouts is to introduce inflation-pegged plans into CPF Life.

By doing so, the annuitant can be assured that he or she will not have to worry about inflation eating into their purchasing power.

To offset the cost to the state, people who want inflation-pegged plans will have to forgo bequeathing the leftover savings from their annuity to their family members if they die.

This means that their entire retirement account savings would be pooled to hedge against the risks of both longevity and inflation.

This is similar to what is being done when people opt for the plan with the highest payout - which offers only slightly more in payouts than one which allows people to bequeath their savings to their loved ones.

The quest for better returns on CPF savings should also not be tossed aside.

Such a suggestion might seem illogical in the light of the massive losses being suffered by many in the stock market.

But consider this: In 1949, 20 years after the Wall Street crash, the value of the Dow Jones Index had risen by some 360 per cent. By 1959, the value had risen by about 14 times, or 1,400 per cent.

So instead of turning conservative, this might be the best time to think about getting even better returns on retirement funds.

This article was first published in The Straits Times.