QUESTION : Which is the BEST CPF RETIREMENT SUM for me, huh ?
In essence, the retirement sum (RS) is a reference point that provides an indication of how much you need to save to meet your desired monthly payouts.
There are three levels of retirement sums to note:
1. The Basic Retirement Sum (BRS) provides monthly payouts in retirement to cover basic living needs, excluding rental expenses.
2. The Full Retirement Sum (FRS) is an ideal point of reference of how much one needs in retirement.
3 . The Enhanced Retirement Sum (ERS) provides a higher monthly payout, making it suitable for those who might require more retirement income.
● Which CPF Retirement Sum should you go for? Should you go for the Basic Retirement Sum, which is supposedly enough to cover your basic living needs?
●Or maybe Full Retirement Sum, which can give us a much higher payout is a better choice? Or with living costs on the rise, is it best to go for the Enhanced Retirement Sum, which can cover our desired lifestyle?
●That's what we'll be exploring in today's discussion. We'll be going through each of the retirement sums to find out what are the benefits and trade-offs are. Then we'll also look at statistics and studies to find out which is the best retirement sum you should go for.
Alright, let's jump right in.
● First up, what exactly is the CPF Retirement Sum?
●Basically, the retirement sum is an amount is which the Singapore government has come out with to indicate how much you need to save up for your retirement. (based on real data, of course). And depending on this amount that you've saved up in your CPF, you'll receive different monthly payouts when you turn 65 years old.
●So, there are 3 levels of retirement sums that are available to us.
●First, basic retirement sum, or BRS. The concept behind the BRS is based on the expenses of a lower-middle retiree household. It also assumes that the person owns a property that can last him up to 95 years old, and he does not need to pay any rent during retirement.
● Then, if you take BRS and multiply it by 2, you will get the Full Retirement Sum, or FRS. This higher monthly payout can be used to cover your basic living expenses, while also covering any of your rental expenses.
● Finally, the Enhanced Retirement Sum or ERS is set at 4 times the BRS amount, making this suitable for those who want a higher monthly income during retirement.
●So, with these retirement sums, how much money can we expect to receive when we retire? Check this out.
●Depending on which year you turn 55 years old, the retirement sum and the monthly payouts will be different. So, for example, if you turn 55 years old in 2024, and you manage to save up to the FRS amount, or $205,800, you will receive $1,670 per month when you turn 65 years old.
●Or if you manage to save the ERS amount of $308,700, the payout will also increase accordingly. ($2450 monthly when you turn 65 years old.)
●Now, what's interesting is that if we take the payout and divide it by the amount saved at 55 years old, it would be as though we are getting a 9% guaranteed yield on the initial amount, for as long as we live.
●Obviously, this is just a very simple calculation that does not take into account any compounding, nor any bequest payout when we pass away.
●If you want to take that into account, Kyith from Investment Moats has actually done an analysis on this, where he found that based on when you pass away, the internal rate of return would be lower.
●Next, if you defer your payouts from 65 to 70 years old, due to the magic of compounding, the payout will also increase by up to 7% for each year you defer.
●So does this mean that we should just go for the Enhanced Retirement Sum (ERS) to receive the highest amount of payout then? To answer this, let's look at some stats first.
● How much money do we need for retirement?
●According to the Minimum Income Standard 2023 study, if you are single and 65 years and older, you would need $1,492 for a basic standard of living.
●This includes food expenses of about $400 per month, housing-related expenses take up another $330, and the rest includes transportation, healthcare, recreation, and other miscellaneous expenses.
●The second study we can look at is the Household Expenditure Survey 2017/18. The study found that for non-working persons aged 65 years and above, the monthly expenditure is $1,154 in 2017/18.
●So if we apply a 3% annual inflation rate, the current amount would come out to around $1,400, which is quite close to the amount that we got from the MIS 2023 study.
●The third source is from DollarsAndSense. It's not so much a study, but instead real-life examples from 2 retirees.
●One retiree shared that her basic expenses are 50% lesser as compared to her working years, as she no longer incurs expenses as a caregiver to her parents, and she doesn't need a car or a helper anymore.
●Another retiree found that while his expenses had reduced, he did not have to change his lifestyle at all. That's because his son had finished his studies and larger expenses such as home mortgage were cleared.
●The examples from these 2 retirees coincides with a 2021 report by Singapore Department of Statistics, where it found that retired households do indeed spend less as compared to general households.
●After going through these reports, we can see that when someone retires his or her expenses would reduce to around $1.5k a month. Which means the $1,670 monthly payout from the Full Retirement Sum is good enough, right?
It depends.
●According to OCBC Financial Wellness Index 2023, all of the Singaporeans surveyed are looking for a retirement lifestyle that's above $2,665. In that case, FRS is definitely not enough. Instead, you would need ERS to get that kind of payout.
●Caveats with CPF LIFE
●However, there are a few fine prints to take note of.
●First, the biggest downside of CPF LIFE is that it's not inflation proof.
●That's because both the basic and standard plans have a fixed payout, with the Basic Plan payout even dropping further when the CPF balance falls below $60k.
●Then, while the escalating plan payout increases by 2% each year, it is still barely on par with Singapore's average inflation rate. And, spoiler alert - unless you manage to live past 78 years old, the escalating plan's payout is actually lower than the Basic and Standard plans in the earlier years.
●The average core inflation rate in Singapore over the last 30 years is 1.59%, which means, on average, your CPF payout is losing its purchasing power by this amount.
●However, that's just the average inflation. In 2022, consumer prices shot up by 6.1%, the fastest rate of increase since 2008. While the inflation rate has come back down a little, and it is expected to go back up in early 2024, why? GST lor.
●This just means that your CPF payout has just lost even more value during this period.
●Second, CPF LIFE payouts can actually decrease no matter which plan you are on. What?! That's because the payouts don't just come from your CPF Retirement Account (RA). Instead, they also come from the annuity pool, where interest earned on the annuity premium is shared among all eligible members to form part of the monthly payouts.
●This means the payout can change based on mortality rates and interest rates.
●And with life expectancy increasing, there's a chance that the monthly payouts could go lower in the future.
●Same for the interest rate, where both the Retirement Account interest and the interest floor will also be reviewed periodically.
●In the worst-case scenario, the Retirement Account floor can be reduced, especially when the economy is not doing well. For example, during the COVID pandemic, the computed rate for RetirementAccount dropped to as low as 2.22%.
●Third, one of the retirees from the Dollars AndSense article also brought up a very good point, and that is, in order to keep your expenses low during retirement, you need to have good health. Otherwise, your medical expenses would go up.
●While the payout from Full Retirement Summay be enough for a basic standard of living, it is definitely not enough to cover the healthcare costs if you have certain illnesses, such as cancer and kidney failure, etc.
●According to the Singapore Cancer Registrv Annual Report 2021, more and more people are getting diagnosed with cancer. Plus, the older you get, the higher chance you might be diagnosed with cancer. (Touch wood ah)
●If you have term insurance plans, your coverage may end after a specified term, for example, 65 years old, after that, you will no longer have any coverage.
●But what about MediShield Life? Isn't it enough to cover the medical expenses? Yes, but there's a limit to how much you can claim per month.
●For example, if you are on a prostate cancer treatment, the out-of-pocket payment amount for the drug can reach $3,360 per month.
●All these points to one thing,( bo bian lo), no choice, you can't just rely on your CPF payouts alone.
●You will also have to invest your money in the stock market to hedge against inflation, while also preparing for any unforeseen circumstances, such as health issues.
●So, what can you expect from the stock market? In the US, the S&P500 have delivered an average inflation-adjusted return of 6.37% over the long term.
●While in Singapore, dividend stocks such as DBS or REITs can give a dividend yield of anywhere between 3% and even 6%. And , the best part is that these dividend payouts will increase over time, meaning the yield for your initial investment will go up.
●This, by the way, is also called the "kueh lapis" investment strategy from 1M65. Where at the base, you have CPF LIFE giving you a steady payout and a safety net in case things go wrong. Then further up, you can add on investment to potentially give you higher returns.
●Which retirement sum should you go for?
●So with that in mind, which retirement sum should you go for?
●Personally, I would go for the FRS, as the higher payout from FRS alone is sufficient for a basic standard of living in the first few years. And it's also pretty achievable as long as you consistently top up $8,000 to your CPF SA or MA every year.
●Though, FRS alone wouldn't be enough as you would still need to cater for inflation, and any unforeseen circumstances, such as serious illnesses. In that case, you would also need to add on a layer of investment.
●For example, if we expect our monthly expenses to be $2,665 like in the OCBC study, using the 4% rule, we would need to add on at least a $298,500 portfolio for the additional returns.
●Plus what's nice is that investment will also give you the potential of early retirement and while also giving you additional liquidity during emergencies.
●But what about the Basic Retirement Sum? I feel that it's ok to go for it if you expect your monthly expenses to be low during retirement.
●So, your house needs to be paid off, your kids have already "spread their wings" and leave the nest, and you are perfectly healthy.
●But because the payout is so low, you won't have any margin for error in case things go wrong.
●That's why you'll need to have a bigger investment portfolio to cater for any additional expenses.
●How big are we talking about? Let's say if we expect our monthly expense to be at $1,500. The BRS has taken care of the initial $900. So, using the 4% rule, we would need to have a minimum of $180,000 portfolio, which is quite achievable.
●Or if we want a better retirement lifestyle of maybe $2,665 per month, our portfolio would then have to be at least $529,500.
●Finally, what about the ERS? ERS is good if you prefer an even higher guaranteed income stream from CPF Life. However, you will be locking up an additional $102,900 into your CPF.
●If you had just invested that money over 10years with an 8% annual return, the money would grow to $222,153. And that money is totally liquid instead of being locked up in CPF.
●So, here's a tip for you, keep your options open and don't rush to aim for the ERS. At 55 years old, once you have met your Full Retirement Sum, you can withdraw any amount that's leftover in your OA.
●This means, your OA now turns into a high yield savings account. In that case, you can keep the OA money in your CPF to continue earning interest, or you can choose to withdraw the money if you have a better use for the money.
●Conclusion:
Anyway, that was a quick analysis of which retirement sum you need for your retirement. Hopefully, you found it useful.
□■ Q & A.
●Q1:
How does the closure of my Special Account affect my retirement payouts?
●If you are receiving monthly payouts, your payouts will increase if some or all of your Special Account (SA) savings are transferred to your Retirement Account (RA) when your SA is closed. You will be notified to check your monthly payouts after the transfer and closure of your SA in early 2025.
●You can also transfer your Ordinary Account savings to your RA, up to the prevailing Enhanced Retirement Sum, to increase your monthly payouts.
●Q2:
I am aged 55 and above. What will happen when my Special Account is closed and what is the rationale for doing so?
●Today, members aged 55 and above have two CPF accounts that hold savings intended for retirement payouts: the Special Account (SA) and the Retirement Account (RA). Both SA and RA savings earn the same long-term interest rate. However, some SA savings can be withdrawn on demand from age 55. As a principle, only savings that cannot be withdrawn on demand should earn the long-term interest rate, and savings that can be withdrawn on demand should earn the short-term interest rate.
To better align CPF interest rates to the nature of CPF savings in each CPF account, we will close your SA if you are aged 55 and above from early 2025. SA savings will be transferred to your RA, up to your Full Retirement Sum (FRS). These savings will continue to earn the long-term interest rate. If you have met your FRS, whether fully in cash or with a mixture of property and cash, any remaining SA savings will be transferred to your Ordinary Account (OA), where they remain withdrawable and will earn the short-term interest rate.
You can choose to transfer your OA savings to the RA at any time, up to the prevailing Enhanced Retirement Sum (ERS) to earn long-term interest rates and receive higher retirement payouts. Once transferred, the RA savings can only be streamed out to you in retirement payouts. With the raised ERS from 1 January 2025, more than 99% of the members aged 55 and above today would be able to transfer all their SA savings, that were channelled to the OA due to the closure of SA, to the RA.
You will be notified after the transfer of all SA savings to your RA and/or OA, and closure of your SA in early 2025. You will also be able to check the amounts transferred from your SA to your RA and/or OA from your CPF statement. No action is required from you now.
●Q3:
Do I have to join CPF LIFE?
You will be automatically included if you are a Singapore Citizen or Permanent Resident born on 1 January 1958 and after*, and have at least $60,000 in your CPF retirement savings when you start your monthly payouts.
*If you are born between 1 January 1958 and 30 April 1961, and had at least $40,000 in your Retirement Account when you reached 55, you would have to join CPF LIFE.
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