In Singapore, we’re trained to think about our long-term future and retirement from the day we start working. This is when we see a portion of our monthly wage channelled into our CPF accounts, namely the Special Account (SA), for our retirement.
While our CPF contributions also go into our Ordinary Account (OA) and MediSave Account (MA), these accounts can be used to pay for certain expenses, while our SA is primarily meant for our future retirement needs. For example, our OA can be used to pay the downpayment and mortgage of our home, tuition fees for our loved ones and certain insurances such as the Home Protection Scheme (HPS) and Dependent Protection Scheme (DPS). Our MA can be used for medical treatments and procedures as well as MediShield Life, Integrated Shield Plans (IP) and CareShield Life insurance policies.
While we can invest our SA balances, we can only do so with sums above the first $40,000. Moreover, the SA also pays an interest of 4% per annum – a decent risk-free return.
For most people, this means monies in our SA just sit there, compounding every year, until it’s ready to be lumped with the balances in our Ordinary Account at 55 to make up our new Retirement Account (RA).
What Happens When You Turn 55?
When we turn 55, a new Retirement Account (RA) will be created for us. Monies from our Special Account (SA) and Ordinary Account (OA) will be used to fund our RA, up to the Full Retirement Sum (FRS).
At this point, $198,800 (the FRS amount in 2023) will be channelled into our RA. We also have the option to pledge a property that we own and set aside only the Basic Retirement Sum (BRS) of $99,400 (0.5X the FRS), or even choose to set aside the Enhanced Retirement Sum (ERS) of $298,200 (1.5X the FRS). For the purpose of this article, we’ll just focus on the Full Retirement Sum.
The FRS is meant to safeguard our retirement, and hence it needs to keep up with the pace of inflation and standard of living. This means the FRS increases each year.
Anyone who turns 55 in 2023 will have to set aside $198,800. This is more than 3.5% higher than what people who turned 55 in 2022 had to set aside, which was $192,000. In turn, those who turned 55 in 2021 had to set aside a figure of approximately 3% higher than people who turned 55 in 2019, when it was $186,000. During Budget 2022, Minister for Finance Lawrence Wong revealed that the retirement sums will be going up by 3.5% in the next five years, rather than the close to 3% increments in the recent past.
What Happens If I’m Turning 55 Next Year?
As discussed, anyone turning 55 on or after 1 January 2022 will already know much they need to set aside for their FRS. Post the Singapore Budget 2022 statement, delivered on 18 February 2022, we also know the FRS amount for the next five years.
|55th birthday on or after||Full Retirement Sum (FRS)|
|1 January 2017||$166,000|
|1 January 2018||$171,000|
|1 January 2019||$176,000|
|1 January 2020||$181,000|
|1 January 2021||$186,000|
|1 January 2022||$192,000|
|1 January 2023||$198,800|
|1 January 2024||$205,800|
|1 January 2025||$213,000|
|1 January 2026||$220,400|
|1 January 2027||$228,200|
* Source: CPF
As we can see, the recent trend is that the FRS increases approximately 3% each year. However, going forward, this will rise to 3.5%. If inflation and cost of living rises at a higher rate, the government has shown that it will increase the retirement sums by more. With an FRS of $198,800 in 2023, an individual turning 55 this year would be eligible for CPF LIFE payouts of approximately $1,600 every month when they turn 65 in 10 years’ time.
If we think this isn’t sufficient, we should make it a point to start planning for our retirement as soon as possible and save more into our CPF accounts. We can also build other retirement nest eggs outside of our CPF accounts.
So, How Much Would I Need To Set Aside When I’m 55?
This question might not be a totally fair one to ask of the government. While they try to give us as much foresight as possible, predicting inflation levels and rising cost of living in the next 25 or 30 years may be very difficult, if not impossible.
Looking at past FRS figures, we can see that people who turned 55 in 2003 only needed to set aside $80,000 for their FRS, while anyone turning 55 in 2023, needs to set aside $198,800. And anyone who turns 55 in 2027, will need to set aside $228,200. This means the long-term compounded annual growth rate of our FRS is close to 4.5%.
|Age in 2022||55th birthday on or after||Full Retirement Sum (FRS)|
* Source CPF
However, a yearly increment of 4.5% may be on the high side as the latest FRS figures have only increased by 3% in the recent past, and 3.5% for the next few years. Further, according to the Department of Statistics Singapore, the compounded annual growth rate of the MAS Core Inflation Measure increased close to 1.5% per annum since 2003. In addition, there has only been two years where the MAS Core Inflation Measure beat the 4.5% compounded annual growth rate – this was in 2008 when it increased 5.7% from 2007, and when the figures are out for 2022, it will surely show that core inflation rose higher than 4.5% this year.
It could be that the earlier FRS figures were a low estimate when it started and the government had to play catch up subsequently. In future, increments in the FRS could potentially drop under the 3.5% benchmark it has recently set. Alternatively, the government has also shown that it will react if they believe more is required to be set aside for our retirement – by already raising the rate of increase from 3.0% to 3.5% till 2027. This will likely be the case in inflation continues to be persistently high in the coming years.
Here’s How Much We May Need To Set Aside When We’re 55
At this point, we should also note that there’s no guarantee the CPF will continue to function the way it currently is. In fact, there have been many changes to the CPF system in the past, and likewise, it could look very different in 25 or 30 years’ time.
We already know what the government expects someone turning 55 to have until 2027. And we also can draw on past figures to give us a sense of what is to come.
In the illustration below, we use both figures to give us a better idea of what may be in store for us.
|Age in 2023||55th birthday on or after||Full Retirement Sum (FRS)|
|Based on 1.5% increments||Based on 3.5% increments||Based on 4.5% increments|
Based on these figures, it doesn’t seem likely that the rate of increase can continue at an average pace of 4.5%. If this were the case, anyone who is 30 years old today would have to set aside more than $575,000 as their FRS when they turn 55. This is especially challenging given that the monthly wage cap on salaries is $6,000 for our CPF contributions.
Again, the government has shown that it will adjust the retirement sums as it sees fit. During Budget 2022, it was announced that the retirement sums will increase by 3.5% annually until 2027. This is higher than the 3.0% level that it has been increasing by in the recent years. If inflation continues to be persistently high, the FRS rates be even be revised higher. Also, there’s nothing stopping the increase of CPF contributions beyond the $6,000 salary cap.
Moreover, according to the Ministry of Manpower, the median gross monthly income from work has increased at a compounded annual growth rate of more than 3.8% since 2012, and likely even higher if we look at median wages before then. This could sway the argument for an average increment that is closer to 4.0% or 4.5% each year.
If the FRS continues to increase by around 3.5% each year, we would see our FRS rise to nearly $470,000 for those who are 30 today. While this is also a big sum of money, it is at a level that is below the average wage growth levels over the past 10 years – highlighted above.
Of course, if the annual increase in FRS tapers to 1.5% per annum, closer to the average long-term core inflation in Singapore, it will rise to a much more reasonable amount of over $310,000 for those who are 30 in 2023. At the same time, the last thing we would want is that we finally retire and find that our monthly payouts are insufficient to keep pace with inflation levels.
No one knows what will happen for sure in the future, but you should definitely work towards a retirement goal that you’re comfortable with, and ensure that your plans do not fully rely on your CPF LIFE payouts.
This article was originally published on 28 March 2018 and updated to reflect the changes to the Full Retirement Sum (FRS).
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