Preparing for Retirement – Is CPF Life Adequate?

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Singaporeans are living longer and as we age, we need to spend some time thinking about how we can finance our daily living expenses as we eventually stop work. Many of us may have the perception that we can rely entirely on our CPF to help finance our retirement, but is it enough for you to live the life you want?

CPF Life was introduced some years ago as an effort to help ensure Singaporeans have a lifelong monthly income stream when we retire. It is a life annuity plan that provides a monthly income payout from age 65 until the end of life.

How CPF Life Works

When you reach 55 years old, the money in your CPF Ordinary Account (OA) and Special Account(SA) will be transferred to a Retirement Account that will be created for you. The money in the retirement account will form your retirement sum. Currently, there are 3 levels of retirement sum you can choose from to fund your retirement. Of course, the higher your retirement sum, the more you can expect for your monthly payouts:

(BRS) Basic Retirement Sum – If you own a property with sufficient property pledge/charge

(FRS) Full Retirement Sum is 2 x BRS – If you do not own a property or wish to have higher payouts
(ERS) Enhanced Retirement Sum is 3 x BRS – If you wish to have even higher payouts

The retirement sum that you set aside at age 55 will continue to earn interest. The table below shows how much your retirement savings will grow and the specific level of monthly payout you will receive.

CPF payouts

Source: www.cpf.gov.sg

Upon reaching age 55, you can either remain on the retirement sum scheme, or apply to join CPF Life. There are 3 CPF LIFE plans for you to choose from – the LIFE Standard Plan, the LIFE Basic Plan and the LIFE Escalating Plan (available from January 2018).

The plans differ in terms of:
the amount of monthly payout you would receive; and
the amount you would leave (i.e.bequest) to your beneficiaries.

CPF LIFE 3 plans available

Source: www.cpf.gov.sg

As you can see from above, the basic retirement sum only gives you $700-$750 per month. Do you think that’s enough for your daily expenses, without taking into the effects of inflation?

Needs for Retirement

Before you jump at how little the basic retirement sum is, let us look at what might be your expenses during your retirement years.

1. Property Financing

Singaporeans are getting married later in life, which also means that you will most likely buy a house after 30 years old. With average mortgage financing stretching somewhere between 20 to 35 years, there could be a chance that you are still paying for your mortgage at age 55. This can impact your retirement sum.

From this perspective, you might want to ensure that you have fully paid up for your property nearing age 55, or you may want to choose to “right-size” your property to ensure you meet the minimum retirement sum.

2. Daily Expenses

Assuming that you stop working by the time you reach 65 years old, your monthly payout will be the only income you are getting to finance all your expenses. You may want to look at your current monthly expenses to have a gauge of how much you will need on a monthly basis.

Take into consideration the expenses for food, transport, utility bills and entertainment. My guess is that with inflation, the basic payout of $750 is not going to be enough. If you are thinking of relying on getting some allowance from your children, you should keep in mind that they are most likely in their middle age and will have quite a few financial commitments – children’s education, mortgage financing and healthcare expenses.

What’s more, you may wish to be able to travel a little, or indulge in certain hobbies that require extra money. Taking into consideration all of these, you can come up with a gauge of how much you need for your monthly retirement income.

3. Medical Expenses

As we age, we cannot deny that most of us will be plagued by certain illnesses and disease. While you can continue to use your Medisave, you will also notice that it may not be enough, especially if one needs a surgery or long term care. While we cannot predict the future, we have to keep the possibility of having to shoulder hefty medical expenses in mind when we plan for our future finances.

Now, after you’ve given some thought about the 3 major expenses you might have during your retirement, are you concerned about the gap you would need to fill after you realise the inadequacy of your monthly retirement payouts?

Grow Your Retirement Savings

  • High-risk Takers (8%< per annum)

Those with a higher risk appetite should consider investing their Cash or CPF monies into Individual Stocks or Equity funds. Stocks are considered as high risk because if the company goes out of business, the stock investors has last claim on the assets. However when a company makes plenty of money, an equity investor of the company will achieve higher returns than bonds holders because the equity investor will profit from the rise in the company’s share price.

Investors whom are high risk takers and yet wish to diversify such risk might want to look into equity funds. An equity fund, also known as stock fund are usually managed by a fund manager who can provide investors with exposures to a basket of different companies shares. However, equity funds depending on its  securities are still volatile by nature and will be sensitive to macro economic factors such as inflation, tax rates, currency fluctuations, government policies etc.

If you are inexperienced and wish to be a prudent and successful high risk investors, you will need to consult an MAS licenced representative to provide you with advice. It is proven that more than 80% of the investors will never make more than what they lose in their entire lifetime by doing their own stock pickings, this applies to even the most savvy investors.  Here are a few reasons why:

  1. They have no time to manage or monitor individual counters
  2. They are emotionally irrational
  3. They are gambling/trading not investing
  4. They buy whatever their friend tells them to buy without doing much research
  5. Their investment time horizon is too short (less than 3 years)

If you would like to find out how to achieve sustainable high risk/return strategy, please Contact Us

  • Mid-risk Takers (5% – 8% per annum)

Medium risk takers can look into diversifying their investments into a mixture of assets, such as a combined stock and bonds investment portfolio. This investment strategy provides investor with the volatile feature of a company share price and a fixed interest income payout yet less volatile movement of the company’s bond price. By investing into both equity and debt, it reduces the investors risks, but their returns are often lower than pure equity funds.

However, due to regulatory and budget constraints, most retail investors are unable to achieve good diversification if they would like to invest into bonds. This is because, usually, a minimum capital outlay of SGD250,000 is required to buy to a single company bond certificate. As such, investors may be better served looking into balanced funds which provides a minimum initial lump sum investment requirement of no more than SGD$1,000. Investors can also enjoy greater diversification among companies in different sectors, countries and regions via such collective investment schemes which are widely available in the market.

If you would like to find out how to achieve sustainable medium risk/return strategy, please Contact Us

  • Low-Risk Takers (2.5% – 5% per annum)

Low risk takers may well look into topping up their CPF. Our CPF is well-known to provide a rather high amount of low-risk interest compared to the various bank deposit schemes available in the market. To enjoy higher monthly payouts in retirement, you can start making cash top-ups to your SA up to the current Full Retirement Sum or Enhanced Retirement Sum. Doing this not only helps you accumulate interest savings, you may also be able to enjoy higher tax relief. However here are three factors that you might want to consider before topping up your CPF.

1. The top-ups to your CPF accounts are irreversible.

CPF contributors will not be able to withdraw their money if they need it before 55 years old. However, even after the age of 55, only the amount that is above the minimum sum requirement in that year can be withdrawn. Because of this, most people may not be able to retire early and may continue working until age 65 to start receiving their CPF Life payout.

2. You may not survive long enough to break even or fully enjoy your CPF Life payout

While we can all agree that human lifespan has steadily increased over the years, the CPF Life scheme only starts paying out at the minimum age of 65. Some recipients may not be able to live long enough to break even on their minimum sum through the CPF Life payout scheme.

3. You may want to retire earlier

The minimum age to start receiving your CPF life payout is at Age 65 and thus if you would like to hang up your boots earlier, you may want to look into other methods to prepare for that early retirement goal you seek

A Retirement Plan

Even by meeting the Full Retirement Scheme might make you live on the edge during your retirement years if you consider the fact of inflation

An additional or alternative measure is to consider getting retirement plans from notable insurers to supplement your retirement income. Most of these come with a guaranteed benefit portion, which means that not only your capital is protected but your interest can be guaranteed as well. There is also a non-guaranteed portion which can help you enhance your retirement income which is much needed to beat inflation.

On top of that, most retirement plans are flexible in that it lets you decide on your retirement age, how long you wish to receive your income for, how much you would like to receive and how many years you would like to save for.

Keen to find out what are your other options? You can download the  “Retirement Plan Guide” below for better understanding of 3 different plans that can help you grow your retirement nest egg.

Retirement Plans to Supplement your CPF LIFE Payouts

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