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The Central Provident Fund (CPF) is usually considered synonymous with retirement in Singapore, as it requires all working-age individuals earning more than S$500/month to set aside an amount monthly into their CPF accounts.
Most of us are familiar with the 3 accounts that we’ll hold for all of our lives – the Ordinary Account (OA), Special Account (SA), and Medisave Account (MA).
The OA receives the largest contribution as it’s often used for housing, insurance, and education, and the SA receives the least as its funds are focused on old age and investment. The MA contribution increases as you get older, and is primarily for hospitalisation and medical expenses.
The final account that’s automatically created when you turn 55 years old is the Retirement Account (RA). Funds from your OA and SA are moved into your RA to form the minimum retirement sum, and if you have enough, you’ll be automatically enrolled in the CPF LIFE plan.
CPF LIFE is an annuity plan that disburses a monthly payout to its members until their death. There are three plans to choose from – standard, basic, and escalating. All three have slightly different disbursement strategies.
The amount that you receive each month with CPF LIFE is based on how much you have in your RA upon retirement. If you have enough to reach the Full Retirement Sum (FRS), which is currently at S$171,000, you will receive a monthly payout of S$1,320 to S$1,410. The FRS changes yearly to reflect inflation rates and varies depending on your year of birth.
If you prefer to withdraw cash instead, you can leave only the Basic Retirement Sum (BRS) in your RA, which is a minimum sum of S$85,500. This will provide you with an estimated monthly payout of S$720 to S$770. The benefit is that you’ll have access to your cash, but the caveat is that you’ll have to pledge your home to CPF.
Lastly, if you wish to put more savings into CPF LIFE, there’s also the Enhanced Retirement Sum (ERS), which is the maximum amount you can have in your RA. This requires you to have at least S$256,500 in your account, and you will receive around S$1,910 to S$2,060 per month. For a specific estimation, you can use the CPF LIFE Payout Estimator to calculate your potential payout.
Now that you have an idea of what CPF LIFE is able to provide, the next step is to see if that’s enough to finance your retirement. Using John as an example, let’s see whether the payouts from CPF LIFE will really be enough for you.
John is currently 30 years old, has a gross salary of S$3,500 per month, and would like to retire by the age of 60. He recently bought a BTO flat with his wife (downpayment was S$17,000) and they’ll have to finance the loan for the next 25 years.
Assuming a wage growth rate of 2% per year until he retires, let’s see how much John will have left in his CPF account, and if it will be enough to cover his expenses.
|Desired income during retirement||S$2,500/month|
|Number of years his savings should last||25|
|Return on investment during retirement||3.5%|
|Assumed inflation rate||2%|
|Annual salary increment||2% until age 50|
|Total current CPF savings||S$30,000|
|Monthly home repayment||S$500|
|Investment returns assumed||No other investments|
|Housing (including repayment)||S$6,300|
|Family (groceries, eating out, medical, holidays)||S$9,500|
|General (insurance, income tax)||S$1,100|
Based on the information above, the CPF retirement calculator returned the following results:
|John will need a retirement nest egg of||1,124,056|
|His projected savings are||811,804|
It’s important to note that the calculator is based on standard financial calculations and doesn’t take into account CPF withdrawal rules after the age of 55 or enrolling in CPF LIFE.
Because of the deficit, John may have to:
However, if we take CPF LIFE into account, the calculations become more complex. The minimum retirement sums increase every year to keep up with inflation, so in 30 years, John’s cohort will probably have to pay twice that number to hit the minimum sums.
With an inflation rate of 2% per year, the current FRS of S$171,000 will become closer to S$310,000. That’s already more than a third of John’s projected CPF savings. Furthermore, the lump sum that John can withdraw from his OA and SA will only be around S$350,000.
That amount might sound like a lot in today’s dollars, but after accounting for inflation, that number is only worth about half of what it is today. Cost of living and monthly expenses will also rise due to inflation, and realistically, John will not be able to rely on just his CPF if he wants a comfortable lifestyle.
While CPF is a foundation for Singaporeans to plan for retirement, the example above has made it quite clear that simply relying on your CPF may not be enough when taking inflation into account. When planning for retirement, it’s important to have cash savings on hand along with other investments to tide you through.
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