After a year of sometimes staggering monthly inflation numbers, Singapore’s Core Inflation ended at 4.1% for 2022. This is significantly higher than the 0.9% Core Inflation in 2021. The CPI-All Items inflation, which includes “Accommodation” and “Private Transport”, was 6.1% in 2022, a jump from 2.3% in 2021.
With the cost of living going up, perhaps the most important question we have is whether this high inflation will continue and continue to erode the value of our savings. Equally, important is whether our CPF LIFE payouts, a main source of retirement funds, will be enough for us to retire comfortably.
Read Also: How Much You Need In Your CPF Retirement Account (RA) At 65 To Afford The Average Retiree’s Expenses With CPF LIFE Payouts?
Inflation Averaged Around 1.5% In The Last Decade
2022’s inflation (both Core And CPI-All Items) feels especially high for most Singaporeans because it comes after years of low inflation. This is the first time since 2012 that core inflation has exceeded 3% and CPI-All Items inflation exceeded 5%. In fact, for most of the past 10 years, inflation was firmly below 2% and sometimes even deflationary for CPI-All Items in some years.
|Core Inflation||CPI-All Items|
Source: compiled from MAS
On average, inflation was 1.50% for core inflation and 1.53% for CPI-All Items since 2012.
If we take a longer time frame, CPI-All Items inflation averaged 1.7% since 2000. While there are periods when inflation spiked above 5% (i.e., 6.6% in 2008 and 5.2% in 2011), these spikes were temporary. Thus, it is unlikely the current high inflation of above 5% to continue for a prolonged period and we can expect it to ease in the near future.
Read Also: What’s The Difference Between Headline Inflation and Core Inflation?
The Full Retirement Sum Increases Every Year
To account for inflation, increasing standards of living and longer life expectancy, the Full Retirement Sum is not fixed but it increases every year for each new cohort.
|55th birthday in the year of||Full Retirement Sum|
Based on the announced Basic Retirement Sum and Full Retirement Sum for cohorts turning 55 years old in 2023 to 2027, the FRS increases by about 3.5%. This 3.5% increase is sufficient to account for the past inflation rates of 1.5% (since 2012) and 1.7% (since 2000).
As we have previously discussed in “How Much You Will Get In CPF LIFE Monthly Payouts If You Hit The FRS In 2022”, the CPF Life payouts we received if we hit FRS are generally sufficient for a modest retirement lifestyle. As our FRS increases by 3.5%, outpacing the average inflation of 1.7%, we can expect that our CPF Life payouts should be generally sufficient for our future retirement.
Read Also: Can Average Singaporeans Hit The Full Retirement Sum (FRS) By Age 55 Using Their CPF Special Account (SA)
CPF LIFE Payouts Will Be Worth Less In The Future Due To Inflation
Assuming that you are 55 in 2023 and have set aside the FRS, your CPF payout would be about $1,620 at age 65.
Most people will assume that $1,620 sounds reasonable and think that they can live with this amount in retirement. However, this $1,620 payout will only happen 10 years later, which means that while the nominal value is $1,620, the real value of the payout will be less than $1,620 when we receive it.
Assuming annual inflation remains at an average of 1.7%, your $1,620 CPF LIFE payout will only be able to buy you $1,365 worth of goods and services in 10 years’ time.
This does not account for any lifestyle inflation where you get accustomed to a higher standard of living in the 10 years between 55 and 65 years and thus, need to spend more to avoid a drop in your lifestyle standards.
Under the Standard (and Basic) Plan, our CPF LIFE payouts are also fixed. This means that our $1,620 will be further eroded away by inflation that continues to happen after we turn 65.
Read Also: Core Inflation Vs Lifestyle Inflation: What’s The Difference and How Do They Affect Your Retirement Plans?
We Can Increase Our Retirement Funds To Counter Inflation
Thankfully, the Standard Plan for CPF LIFE is not the way we can tap on to fund our retirement. However, if we want to grow our retirement funds more and fund a more comfortable retirement lifestyle, we can also consider topping up our RA to the Enhanced Retirement Sum (ERS) or investing with either our CPF funds or outside of CPF.
#1 Choose The Escalating Plan
For starters, for those of us who are concerned about inflation, especially after 65 when our payouts start, we can opt for the Escalating Plan. The Escalating Plan provides payouts that increase by 2% each year so that CPF members can generally maintain their standard of living even as prices rise over the years. Assuming that inflation remains below 2%, the Escalating Plan should be sufficient to provide for a modest retirement lifestyle.
Read Also: CPF LIFE Standard, Basic Or Escalating Plan. Which CPF LIFE Plans Should You Choose?
#2 Topping Up To Enhanced Retirement Sum (ERS)
We can also increase our overall CPF LIFE payouts by topping up to the ERS. Before 55, the maximum we can top up our Special Account is to the limit of the Full Retirement Sum (FRS). Once we turn 55, the maximum we can top up to our Retirement Account is increased to the ERS (1.5 times the FRS).
By increasing our CPF monies to the ERS, we can increase our eventual CPF LIFE payouts for a more comfortable retirement.
Read Also: BRS, FRS, ERS: Why There Are 3 CPF Retirement Sums & Why They Increase Every Year
#3 Invest Our CPF Funds
Investing is another way to increase our retirement funds. We can invest our CPF funds via the CPF Investment Scheme (CPFIS). After setting aside $20,000 in our Ordinary Account, we can invest in a wide range of investment products that are approved under the CPFIS. Additionally, we can invest up to 35% and 10% of our investible savings in stocks and gold.
On average, CPF members who invested via the CPFIS have outperformed the 2.5% annual interest rate since 2014. In particular, members who invest for the long-term or at least 10 years have a higher possibility of generating returns that are higher than the prevailing OA and SA rates of 2.5% and 4%, respectively. We discuss more about the performance of investing via CPFIS in our analysis on Investing CPF OA VS Transferring To SA: How Much More Would You Have?
Read Also: 8 Types Of Investments You Can Make Using Your CPF OA Monies Via The CPFIS-OA
#4 Invest Outside Of CPF
Finally, we can take our retirement planning into our own hands. Instead of relying on CPF (and its structured limitations), we can invest with our own cash outside of CPF.
This opens us up to a wide variety of investment options including stocks, bonds, property and other asset classes. We can choose to invest via stock brokerages and robo-advisors. If our main goal is to hedge against inflation, we can explore investing in the 4 Investments That Naturally Hedges Against Inflation In Singapore. We can also build a passive income portfolio that generates stable investment returns for us during our retirement.
Naturally, these investments offer higher risks and higher returns. By having an investment portfolio outside of CPF, we can supplement our CPF LIFE payouts during retirement.
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