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Why do I need to set aside a retirement sum? Financial blogger Investment Stab explains

21 May 2020 
SOURCE: Investment Stab



Some money experts have advised people to save in a bank account that they have no easy access to (i.e. no ATM cards) to reduce the probability of them spending that money. 

But often people would come out with “justifications” like “I need a car for work”, “I need to renovate my home”, or the most common one, “I need to fund my child’s education”.

But these are not good reasons for you to dip into your retirement savings! 

Yes, including your child’s education! 

Your retirement is more important than their education.

In the same note, we may feel restricted by the idea that we cannot touch our retirement (CPF) money, but this is not just a Singapore thing. 

Many retirement plans/pensions in other countries, as well as most insurance plans you buy, also do not allow you to withdraw any time you feel like it. 

It is called “prudent retirement planning”.

But, like most people, we still question why we need to have such a high amount set aside in our CPF.

So today, we will be addressing the 2 common complaints Singaporeans have when it comes to their CPF.

Complaint 1: Why do I need to set aside a retirement sum?
The retirement sum is set aside so that you have a retirement egg nest to support you during your retirement. By setting aside a sum of money and using that to subsequently join the CPF LIFE scheme, you ensure yourself of a steady stream of income every month for life.

If you do not have these savings in place, how would you support yourself during your retirement years?

Are you going to rely on your children? In that case, how would your children be able to plan for their retirement? 

Having a lifelong income in retirement would reduce your dependence on your children and prevent them from becoming the next sandwich generation.



Can I Not Set Aside a Retirement Sum?
For starters, the retirement sums are reference points for the monthly payouts you can expect to receive from your payout eligibility age (which is currently at age 65).

If you are not able to meet the retirement sum, there is no need to top up with cash.

However, the more you set aside as your retirement sum, the higher your future monthly payouts will be.

If you do not wish to set aside the retirement sum in your Retirement Account, there are ways for you to do so. As long as you can prove you have a steady stream of income every month for your retirement.

That stream of income can come from private annuity insurance plans or pension plans.

You may be fully or partially exempted, depending on the lifelong monthly payout amount from your private annuity or pension.

But you might want to consider this path carefully.

First of all, CPF pays really attractive interest of up to 6%, risk-free and hassle-free.

Even the base interest of 4% is still significantly higher than what banks offer for deposits.

Furthermore, the Singapore Government guarantees 100% of your CPF money. In contrast, only $75​,000 of your money with the banks are guaranteed by the Singapore Government via SDIC.

Lastly, on average, the interest CPF pays on your money is actually higher than what most private annuity insurance plans offer. CPF only loses to their private counterparts IF the private annuity’s non-guaranteed returns performed well that year.

Conclusion to Complaint 1
Regardless of whether you choose CPF LIFE, an annuity plan, or any other means, you still have to save up for your retirement.

Why not do it with CPF, which has higher interest rates that are much more consistent than the varying rates provided by private annuity insurance plans.

Complaint 2: I contribute so much (20%) of my monthly salary into CPF. Why am I getting only $1,000+ per month when I retire?
This is actually a math problem.

Current Structure:
The current Full Retirement Sum (FRS) is $181,000 for those turning 55 in 2020.

If you live till 85 years old, you will spend 21 years in retirement.

We derived the CPF LIFE Standard Plan monthly payout via the CPF LIFE Estimator for a member who turned 55 in Jul 2020 and has $181,000 in his/her RA.

We compared that against how much the member would get if they do not have CPF LIFE.

  Without CPF Interest# & calculating payouts for 21 years
With CPF Interest# 
& CPF LIFE## 
(Standard Plan)
RA balance at
age 55
$181,000.00$181,000.00
RA balance at
age 65
$181,000.00$272,900.00*
Monthly payout
till 85
$718.25**
$1,425 - $1,573 (Male)
$1,326 - $1,468 (Female)
Monthly payout
after 85
$0.00
$1,425 - $1,573 (Male)
$1,326 - $1,468 (Female)
#4% p.a. base interest on RA/SA balance. 1% p.a. extra interest on the first $60,000. Another extra 1% p.a. interest on the first $30,000 for CPF members age 55 and above.
##All CPF LIFE plans’ payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
*Our own estimated value based on CPF interest rates and reverse engineering our own CPF statements to derive the most likely calculation method.
**$181,000 / (21 x 12) = $718.25

Without CPF interest or CPF LIFE, the $181,000 you have will only provide you with around $718 in monthly payouts for 21 years.

With CPF interest, this $181,000 you set aside will increase significantly to $272,900.

But, with CPF LIFE, males will get an estimated monthly payout of around $1,425 - $1,573 for life while females will get a monthly payout of around $1,326 - $1,468 for as long as you live!

With CPF LIFE, your monthly payout will never run out.

This is important as we are living longer – in fact, 1 in 2 Singaporeans aged 65 today is expected to live beyond 85 years of age.

Are you now partially convinced that CPF LIFE is a good scheme? 

From this illustration, we hope you can also see that your payouts are determined by how much you have set aside as your Retirement Sum.

If You Earned A Median Income Your Whole Life:
Based on MOM’s statistics, the median income of Singapore residents in 2019 was $4,563 (including Employer CPF contribution).

Let’s say you just came out to work, and are getting the median salary, your CPF contribution and allocation would be as follows.
Why do I need to set aside a retirement sum 

Assuming you started work at age 25 and your salary never increases, you would have contributed $109,278 in your SA by the time you are 55 years old.

For simplicity sake, we will ignore your accumulated OA and MA balances since, like most Singaporeans, you probably max out your OA to fund your home purchase (almost everyone I know maxes out their CPF OA to buy their house - it’s a stupid idea we will touch on in the future), and your MA is for medical purposes only. 

Hence let’s assume that you are only going to have your SA to fund your retirement.

We derived the CPF LIFE Standard Plan monthly payout via the CPF LIFE Estimator for members who turned 55 in Jul 2020 and have $109,278 in their RA.

With $109,278 for your retirement, that works out to about $433 a month. [$109,278 / (21 x 12 months)] 

But, with CPF LIFE, males will get an estimated monthly payout of around $911-1,002 while females will get a monthly payout of $849-$936 for life!

 
Without CPF Interest#
& calculating payouts
for 21 years
With CPF Interest#
& CPF LIFE##
(Standard Plan)
RA balance at
age 55
$109,278.00$109,278.00
RA balance at
age 65
$109,278.00$168,800.00*
Monthly payout
till 85
$433.64**
$911 - $1,002 (Male)
$849 - $936 (Female)
Monthly payout
after 85
$0.00
$911 - $1,002 (Male)
$849 - $936 (Female)
#4% p.a. base interest on RA/SA balance. 1% p.a. extra interest on the first $60,000. Another extra 1% p.a. interest on the first $30,000 for CPF members age 55 and above.
##All CPF LIFE plans’ payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
*Our own estimated value based on CPF interest rates and reverse engineering our own CPF statements to derive the most likely calculation method.
**$109,278 / (21 x 12) = $433.64

Question: You only contributed a maximum of $448.48 per month into your SA, how do you expect to withdraw more than $1,000 per month during your retirement?

Hint: With CPF LIFE, you almost can! 

Conclusion to Complaint 2
Moral of the story: if you want a higher monthly payout, you need to have more in your retirement savings.

One way you can do that is by topping up your CPF account

Also, the math has shown that CPF LIFE is an excellent scheme for providing us with a steady stream of monthly income during our retirement years.

Side Note:
I am not sure if you noticed, but after you factor in that CPF interest, the monthly payout that you get when you retire is more than double as compared to without that interest.

Why do I need to set aside a retirement sum

So if you think that 4% p.a. as a base interest is nThe 4% Shortfall In Your CPF Retirement Fundt a lot, you might want to think again.

Because a 4% interest compounded over just 10 years, would already have doubled your CPF monthly payouts!

 
Recommended Read: The 4% Shortfall In Your CPF Retirement Fund

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change.

 

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