This article was written in collaboration with the CPF Board. All views expressed in the articles are the independent opinion of DollarsAndSense.sg
According to the Department of Statistics, Singapore’s Core Inflation (also known as the MAS Core Inflation Measure) has been averaging around 1.7% every year for the past 20 years. This means that for the same basket of goods we could have bought for $100 in 1998, we will now need to spend nearly $137 for it today.
How Core Inflation Impacts Your Retirement
The simple truth is that inflation is a very real issue that we need to combat against as we grow our retirement nest egg. The logic is simple – what we earn and save today might not be worth as much during our retirement.
If all we did was save as much money as we can for our retirement, inflation would slowly, but surely, eat away the purchasing power of our savings during our golden years.
To protect our purchasing power, we need to make our savings grow in order to beat the inflation rate.
Dealing With Lifestyle Inflation
Another challenge that we need to deal with is lifestyle inflation.
While core inflation makes us spend more in the future for the same basket of goods, lifestyle inflation is the result of how we might spend more in the future because we are used to, and expect, a higher standard of living.
For example, when we started earning our own salary, we may think that it’s perfectly fine to make the most of our (limited) annual leaves to travel as often as we can, and to explore the world. Over time, we might get used to travelling often and to places that are more expensive. The result is that holidays may become a part of the lifestyle we cannot give up on and have to keep up with financially.
Lifestyle inflation can impact even frugal individuals. For example, it’s common for most households in Singapore today to have one mobile line for each household member, in addition to a home broadband plan. Costs like these was something we didn’t need to spend on 20 years ago.
Very often, lifestyle inflation is a result of spending more on our consumption habits because we are earning more.
Our Retirement Plans Should Take Into Consideration Lifestyle Inflation
On its own, there is nothing wrong with spending more when you have the means to do so. However, we could end up getting used to a lifestyle with a higher (and costlier) standard of living. Hence, it’s important to consider the lifestyle we want to lead when we plan for our retirement, when we are no longer working.
Many retirement plans today account for a slight dip in expenses during our retirement years. However, this may not be the case if we expect to travel more or enjoy the finer things in life during our retirement. In fact, a survey by the CPF Board reveals that 4 in 5 Singaporeans want to maintain their lifestyle after they retire (Source: CPF Board Survey 2019, based on n = 1,000 Singaporeans and PRs).
Unless you are willing to compromise on your existing lifestyle, chances are you won’t spend less during your retirement. We have to ask ourselves whether we have enough savings to maintain our current lifestyles in future.
Using CPF LIFE To Meet Our Retirement Needs
Besides the need to account for lifestyle inflation, the reason why we need to think ahead and save for our retirement is also because we are living longer. Compared to 20 years ago when life expectancy was 77.3 years old, now it’s at 84.4 years old.
It is likely that we will be spending more years in retirement. This means more years to provide for ourselves and more funds required. Therefore, it’s imperative that we have access to a steady stream of lifelong income that we can count on for our retirement, which will guard us against the risk of longevity.
More importantly, we need to ensure that the money we are setting aside for our retirement helps us keep up with both core inflation and inflation of our lifestyle needs. In Singapore, our CPF can form the foundation of our income to meet our needs or even maintain our lifestyle during retirement.
Understanding How CPF Savings Support Our Retirement
All Singaporeans and PRs will contribute to their CPF accounts from the time they start working. Our CPF savings also earn us an attractive interest of between 2.5% and 5.0% per annum. If we want to save more for our retirement, we can also consider topping up our CPF accounts. You can find out how much more you can contribute to your CPF savings here.
At age 55, a Retirement Account (RA) will be created for you. The savings from your Special Account (SA) followed by your Ordinary Account (OA), up to your Full Retirement Sum (FRS) will be transferred to your RA to form your retirement sum. The retirement sum will provide you with a monthly payout from the payout eligibility age, which is 65 for members born in or after 1954.
For a person who turns age 55 this year and sets aside the FRS in his/her RA, the monthly payout that he/she can get under the CPF LIFE Standard Plan from age 65 is $1,350 – $1,450*.
* The Full Retirement Sum is $176,000 for members who turn age 55 in Year 2019. The amount is fixed when members turn age 55 and will not change thereafter. Payouts are estimates under the CPF LIFE Standard Plan and computed as of 2019. Payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
Based on how much you think you need each month for the lifestyle you want in retirement, you should then decide how much savings you need in your CPF Retirement Account in order to get the corresponding payout that you need each month.
For some, the Full Retirement Sum monthly payouts ($1,350 – $1,450) will be sufficient. For others, the monthly payout from the Full Retirement Sum may not appear enough. As such, they can choose to set aside the Enhanced Retirement Sum ($264,000) in order to receive a higher monthly payout of between $1,960 to $2,110 each month.
Very often, we don’t realise that planning for our retirement isn’t just about saving up as much as we can. It’s also knowing how much we are spending today, based on our lifestyle, and what we will need in order to maintain this lifestyle in future. Understanding what you want to do during retirement and how much you’ll need will be the first step towards having the appropriate amount of savings for your golden years.