This article was written in collaboration with the CPF Board. All views expressed in this article are the independent opinion of DollarsAndSense.sg
Do you know exactly what you want to eat next week, and whether you’d like to order a drink or dessert with every meal? As you would admit, planning your meals a week in advance might be challenging, especially if you don’t even know which area you’ll be in.
You can imagine then, how much more difficult and complex retirement planning is, since you’ll only enter this phase of your life decades from now.
The future is never certain and even the best financial planners among us cannot predict with great confidence how much exactly we need to set aside for retirement. But ironically, the uncertainty of the future is precisely why we need to plan for our retirement in advance.
Even without a crystal ball, there are two things we can be certain about our future retirement plan. The first is that a dollar today is going to be worth lesser in the future due to inflation. The second is we are going to need to save more for our retirement as many of us will live longer.
This brings us to the CPF retirement sum. Often, people are unhappy that the CPF retirement sum is rising. But when we think about it, the rising retirement sum is one way of ensuring that future generations of Singaporeans who are retiring will be able to retain the same level of purchasing power.
Inflation + Higher Life Expectancy = The Need For A Rising Retirement Sum
The first factor, as mentioned above, is inflation. We might think that having $181,000 (the Full Retirement Sum for 2020) is going to be enough for our retirement. The problem is that this figure is only relevant if we are turning 55 in 2020. For most of us reading this article today, our retirement is likely to happen only years, maybe even decades, from today.
What this also means is that given the same amount of savings, inflation would erode our purchasing power over time. If we are still aiming to save $181,000 for our retirement, we need to be mindful that this amount is going to give us less purchasing power during our retirement. In order to retain the same level of purchasing power, we need to increase the amount of savings we set aside for retirement.
To compound the issue, people in Singapore are now enjoying some of the highest average life expectancies in the world. 1 in 2 Singaporeans aged 65 today are expected to live beyond 85 (Source: Department of Statistics 2018). On its own, living longer is a good thing. However, it also means that we need to ensure our retirement savings is able to last us for a longer period of time. This is where CPF LIFE, a life annuity scheme that provides Singapore citizens and PRs with a monthly payout for as long as they live, would come in handy.
To address both of these factors and to give ourselves the best chance of a pleasant and successful retirement, it pays (literally) to start planning for our retirement early. The earlier we start, the better the outcome we will get.
When You Start Working: Top Up Your CPF
Beyond the mandatory CPF contributions you and your employer make, you can also choose to top up your CPF account via the Retirement Sum Topping-Up Scheme. This allows you to grow additional savings for your retirement and earn attractive interest over the years.
If you are below the age of 55, you can top up your CPF Special Account (SA) up to the Full Retirement Sum, which is $181,000 in 2020.
If at age 25 you top up $7,000 to your CPF SA, over a 30-year period with a base interest rate of 4% per annum, your savings will grow to about $22,700 by age 55. This represents an additional $15,600 for your retirement from the initial top-up of $7,000.
In addition, making CPF top-ups allow you to enjoy personal income tax relief of up to $7,000 per year if you top up for yourself and an additional $7,000 in tax relief if you top up for your loved ones (spouse, parents, parents-in-law, grandparents, grandparents-in-law, siblings). Do note that only cash top-ups up to the prevailing Full Retirement Sum will be eligible for tax relief.
Buying A Home: Use Cash To Service Your Monthly Home Loan Repayment
For many of us, a home is going to be the most expensive purchase we make in our lives and would likely require us to take a housing loan, which means we need to make monthly mortgage repayments.
For example, if we take a $300,000 housing loan at 2.6% per annum over a 20-year period, we will need to make monthly repayment of $1,604. As CPF members, we have a choice of whether we want to service the monthly repayment using monies in our Ordinary Account (OA), with cash, or a combination of both.
Consider the pros and cons of each option.
Option 1: Assuming the combined OA contributions between our spouse and ourselves is exactly $1,604 per month. By using our OA, the advantage is that there is no need for us to fork out any cash, giving us more discretionary money to spend (or save) each month. However, after 20 years, we will have no savings in our OA (assuming we do not have further contributions to our OA).
Option 2: Alternatively, we pay our monthly repayment using cash, and keep this amount ($1,604 each month) in our OA, or about $19,248 each year. With a base interest rate of 2.5% per annum, this amount in our OA savings will grow to about $500,000 after 20 years.
Of course, we don’t have to go all-in on either option. We can also service our monthly home loan repayments using a combination of cash and OA monies, in a proportion that is suitable to our situation.
After Buying A Home: Transferring Unused OA Monies To Your SA To Earn Additional Interest
Earning a base interest of 2.5% per annum on our unused OA savings is good, but we can make our CPF savings work even harder for us by transferring monies from our OA to SA. Doing so allows us to earn a base interest rate of 4%.
For example, if we transfer the aforementioned $1,604 each month from our OA to SA, that amount would have grown to about $590,000 after 20 years.
Do note that transfers from OA to SA is only possible if the CPF member has not hit the Full Retirement Sum in their SA.
At Age 55: Choosing Not To Withdraw From Our CPF If We Don’t Need The Money
CPF members will have their CPF Retirement Account (RA) created for them when they reach the age of 55. Savings from their SA (first) followed by their OA (once the SA has been depleted) will be transferred to their RA, up to the prevailing Full Retirement Sum. Any other savings we have left in our CPF SA and OA may be withdrawn after that. Do note that even if you do not meet the Basic Retirement Sum, you can still choose to withdraw up to $5,000.
It might be tempting to withdraw whatever we can from our CPF when we’re 55, but if we want to have more for our retirement, we can leave the monies where they are! We can also opt for the Enhanced Retirement Sum – which is $271,500 in 2020. Doing so would allow us to channel more savings from our SA and OA to our RA, giving us higher monthly CPF LIFE payouts for life (pun intended) in the future.
When the CPF retirement sum goes up, you can transfer more funds to your Retirement Account, giving you even higher monthly CPF LIFE payouts when you reach your payout eligibility age (which is 65 as of 2019).
At Age 65: Commencing CPF LIFE Payouts
From the age of 65, CPF members can start receiving CPF LIFE payouts. They can choose from three different plans – Standard Plan, Escalating Plan, and Basic Plan, all of which would provide them with a monthly payout for as long as they live.
Beyond just choosing the various plans available, CPF LIFE members can also choose when they would like their CPF LIFE payouts to commence. They can choose to defer payouts until a maximum of age 70.
For each year that payout is deferred, monthly payouts will increase by 7%. This makes deferment an ideal option for Singaporeans who do not need the income immediately upon turning 65 and are looking for higher monthly payouts in the future.
Retirement Planning Is Never Static
Because the future is never certain, our retirement plans cannot remain static. Even if you are able to keep your lifestyle simple, there is no guarantee that your estimated cost of a ‘simple lifestyle’ today is going to be the same when you retire.
A rising retirement sum, which gives us a larger monthly income stream under CPF LIFE, can help protect us against the effects of inflation. At the same time, we can do our part in ensuring that we have enough for our retirement by taking the right steps at each stage in life to increase our CPF savings.