This article was written in collaboration with the CPF Board. All views expressed in the article are the independent opinion of DollarsAndSense.sg
The impression of ‘retirement’ among most young people is a state of enjoying life and not having to work. The truth is, retirement planning is not just an optional luxury that we can do without.
As we grow older, we’re likely to grapple with health challenges and an increasingly competitive job market, making us not as economically productive. Making plans and preparations today in anticipation of the future is thus essential for all Singaporeans, especially if we don’t have a family fortune to fall back on.
When we start retirement planning early, we are able to leverage on a longer time horizon to accumulate our savings, ride out short-term price fluctuations, as well as grow and compound our investment returns.
However, for most of us, it’s easy to agree on the importance of a concept (in this case, retirement planning), but still end up doing nothing about it. Think of all the times we set a goal for ourselves but failed to achieve it: wanting to eat healthier, hit the gym more often or learn a new skill.
It’s the same when it comes to retirement planning. The lure of realising immediate gains, in the form of a relaxing holiday or the comfort of driving a car, is far greater than stashing away money today to use in 30 years’ time. However, before we know it, years would have passed, and we will be in our 50s, just as clueless about how we’re going to get by in retirement as the day we graduated from school.
Here are four simple ways that we can get started today, even if we have limited time and money or do not have experience in investing.
# 1 Transfer Unused Funds To SA/RA To Earn A Higher Interest
Before 55, our CPF account is made up of three separate accounts. They are the Ordinary Account, Special Accountand MediSave Account. If you are 55 and above, you will also have a Retirement Account.
Contributions made to our Ordinary Account (OA) can be used for housing, insurance, investment and education. Our OA earns us a base interest of 2.5% p.a.
Contributions made to our Special Account (SA) are primarily meant for our retirement and earn us a base interest of 4.0% p.a. This means our SA pays us 1.5% p.a. more in interest each year than our OA. Moreover, we earn an additional 1% interest on the first $30,000 of our combined CPF balance. This means that our SA savings can earn interest of up to 5% per annum*. Given a long enough time period, this can compound to a large difference.
If we are not willing to take the risk of investing our retirement portfolio, one simple way to grow our monies will be to transfer unused funds from our OA to our SA.
For example, if we have $10,000 in our OA today that we don’t intend to use for housing or our child’s education, transferring it to our SA will earn us an extra $7,541 more in interest after 20 years. Do note that transferring from your OA to your SA only applies to those below the age of 55. If you are age 55 and above, you can set aside more savings for retirement by transferring your SA and/or OA savings to your RA.
You can calculate for yourself the additional interest you stand to earn . This will be based on your current age, and the amount that you wish to transfer from your OA to your SA.
This is the easiest thing that we can do today in order to have more for our retirement. There is no investment risk involved or additional knowledge required to receive the higher returns. However, be mindful that such transfers are irreversible.
# 2 Top-up SA/RA Using Cash
If we have additional cash-on-hand to put towards our retirement, we can consider topping up our SA. Once again, this only applies to those who are below 55. For those above 55, you can top up to your RA.
By doing a top-up, our SA savings will earn us a risk-free interest of up to 5%*per annum. We can also enjoy tax relief of up to $7,000 per calendar year for cash top-ups to our SA/RA, and additional tax relief of up to $7,000 if we top up our loved ones’ SA/RA with cash^.
We don’t need a huge amount to grow our nest egg. In fact, we can save more when we top up a small amount regularly. For as little as $5 a day, we can grow our CPF savings to more than $35,000#in 15 years.
*Including an extra 1% interest paid on the first $60,000 of a member’s combined CPF balances, with up to $20,000 from the OA. Members aged 55 and above will receive an additional 1% extra interest on the first $30,000 of their combined balances, with up to $20,000 from the OA.
^Cash top-ups can be made to any recipient who is Singaporean or a permanent resident. You can enjoy tax relief of up to $7,000 per calendar year if you are topping up for yourself and additional tax relief of up to $7,000 per calendar year if you are topping up for your parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings. For other terms and conditions on tax relief, please refer to the section on the benefits of topping up .
#Based on the base interest of 4%. Terms and conditions apply.
# 3 Top-up Our Parent’s Retirement Account
Most young people would think of retirement planning as something which we would need to do for ourselves. However, for some, it’s possible that retirement planning involves not just our own retirement, but those of our parents as well.
One way to support our parents is to provide cash top-ups to their Retirement Account. While topping up our parents’ Retirement Account isn’t building up our own, it’s a good option for those of us who need to financially support our parents.
Rather than give them a few hundred dollars each month, we can top up their Retirement Account. This way, our parents will be able to grow the savings in their Retirement Account more quickly.
Helping our parents top up their Retirement Account would help them set aside more retirement savings, which would translate into higher monthly payouts for their retirement needs if they are on CPF LIFE.
For example, a 55-year-old person today who has $80,000 in their Retirement Account can start receiving a lifelong monthly payout of between $688-$754 if they are on the CPF LIFE Standard Plan at age 65. However, if they top-up their Retirement Account by $5,500, they will have $85,500 in their Retirement Account. This in turn would translate to a payout of between $727-$798 per month. In other words, the more you give them today, the higher they will get in the future during their retirement.
# 4 Utilise The Supplementary Retirement Scheme
The Supplementary Retirement Scheme, also known as the SRS, is another way to contribute and build up your retirement savings, while concurrently saving on our income tax.
The annual SRS contribution cap is currently set at $15,300 for Singapore citizens and permanent residents. Voluntary contributions made to our SRS account are also eligible for a dollar-for-dollar tax relief, which means we can get a tax relief of up to $15,300 each year.
The SRS and you can enquire with any of the three appointed banks if you like to find out more.
Contributions made to our SRS account only earn a nominal interest of 0.05% p.a. What this means is that in order to earn higher returns, we should aim to invest our SRS contributions in assets that we are comfortable investing in. Some of these assets include stocks, bonds, fixed deposits, unit trusts and annuity plans.
The SRS is a good way for us to build up our retirement portfolio over time, while enjoying immediate tax savings.
Retirement Planning Should Start Today
With how quickly time flies, planning for our retirement while we are still young is something that we should not take for granted. In fact, our youth allows us to tap on the power of compound interest, while CPF’s risk-free guaranteed returns ensure that assurance in retirement is something available to all.
Whether it’s through utilising the CPF schemes in place, contributing to our SRS account or buying an investment or retirement plan, starting early (i.e. today!) will give us a higher chance of achieving our retirement targets.