By Mok Fei Fei
Why it's wise to keep money in CPF
Proposed changes to the Central Provident Fund (CPF) promise more choices on how your retirement savings will be managed.
Instead of having all CPF members meet a standard Minimum Sum at 55 to receive a monthly payout for the rest of their lives upon reaching 65, they will soon be able to choose the level of payouts and savings needed.
It's not a small sum by any means. At $155,000 now, the amount rises to $161,000 for those turning 55 from July this year.
An advisory panel set up to explore enhancements to the CPF system has made recommendations that have been accepted by the Government. Those turning 55 next year will be given three choices.
One is to opt for the Basic Retirement Sum of $80,500, which would give monthly payouts of $650 to $700.
A person with the Basic Retirement Sum at age 55 would be able to see it grow to about $126,500 by the time they turn 65.
The second option is to keep it at the Full Retirement Sum of $161,000 for monthly payouts of $1,200 to $1,300. The Full Retirement Sum will grow to some $245,500 over 10 years.
Third, you can choose the Enhanced Retirement Sum of $241,500 for monthly payouts of $1,750 to $1,900. The Enhanced Retirement Sum will grow to around $364,500 over 10 years.
A lump sum withdrawal of up to 20 per cent of your retirement savings will also be allowed when you reach 65.
If you defer your payout starting age, you will get 6 to 7 per cent higher monthly payouts for every year deferred, up to the age of 70.
With greater flexibility, you need to take more care in making choices.
The Sunday Times checks out some sums you should be working on before deciding on a plan.
Know which plan you are eligible for
An important part of the "retirement adequacy" equation is the role of home ownership in complementing your CPF retirement savings, with a big part of your CPF savings used to buy your property.
The value of the home can be unlocked, for instance, by leasing it out to earn rent, downsizing to a smaller unit or enrolling in a Lease Buyback Scheme.
Those without a property face challenges.
They would struggle for "retirement adequacy" - a phrase used to mean having enough funds for retirement - as they would not have income options and may need to fork out money for accommodation.
It also means they would not be able to go for the Basic Retirement Sum and would need to set aside the Full Retirement Sum.
A Central Provident Fund member can withdraw his savings above the Basic Retirement Sum if he has pledged his property or has enough "CPF charge", which is the amount of CPF savings used to buy the property.
If you do not have a property or do not wish to pledge your property, you can withdraw only your savings above the Full Retirement Sum.
Essentially, the pledge or charge means you have to return the pledged amount or charges plus interest to your CPF account when you sell your property.
Your ownership of the property is not affected by the pledge or the charge and when you die, it will remain as part of your estate.
Data showed that for active CPF members who turned 55 in 2013, about 55 per cent could meet the Basic Retirement Sum requirement.
Some 35 per cent had enough for the Full Retirement Sum while 21 per cent could meet the Enhanced Retirement Sum.
By 2020, however, those who can meet the Basic Retirement Sum is expected to rise to 70 per cent.
Those who have lower CPF savings than the Basic Retirement Sum will have lower monthly payouts.
Check both returns and risks
If you have the means, you may be thinking of opting for the Basic Retirement Sum to withdraw the rest of your CPF savings.
After all, some may look at the promises of higher returns from other asset classes and feel they have a better chance of growing their nest egg while taking into account any increased risk.
Past performance is not a certain indicator of the future, but historically, stocks in the United States have provided an average annual return of nearly 10 per cent going back to 1928.
US government bonds have given an average annual return of some 5 per cent over that period.
CPF savings, meanwhile, earn guaranteed interest rates of 2.5 per cent in your Ordinary Account and 4 per cent in your Special Account and Medisave Account.
An extra 1 per cent interest will be paid for the first $60,000 of your combined savings, of which up to $20,000 can come from your Ordinary Account.
When you turn 55, the savings from your Special and Ordinary Accounts will be transferred to a newly created Retirement Account, which also earns 4 per cent interest, with an extra 1 per cent on the first $60,000.
Financial planners, however, say it may be wise to keep your money in CPF and to go for the Enhanced Retirement Sum if you can afford it.
"In the current interest rate environment, CPF Life offers the best and safest annuity rates, which the private sector is unable to match," said Manulife Singapore chief marketing officer Hitesh Shah of the national annuity scheme.
Risk is another factor to consider. The vagaries of the stock and bond markets mean there could be big fluctuations in your returns and you may suffer losses in some years too.
"They need to be mindful that all investments come with associated risks," said NTUC Income field division vice-president Kwek Chok Wen.
"This option (of private investments) will only pay off if they are able to achieve better returns from investing on their own."
Age should also play a part in your decision, as you would have less time to accumulate wealth after withdrawing your CPF savings at age 55 or 65.
Prudential Singapore chief marketing officer David Ng said: "One also needs to be aware of how their monies are invested.
"Private investments and annuity plans are usually subject to market forces and at this or a later stage in life, (they must consider) if they want to take chances with the possibility of volatility of markets."
You can also use your CPF savings to invest in approved financial instruments like bonds, stocks or insurance policies under the CPF Investment Scheme (CPFIS).
Decide how much you need
Aside from maximising returns from your savings, retirement adequacy very much depends on your level of spending as well.
Aviva Singapore director of product and marketing Daniel Lum said: "Understand the retirement lifestyle you want and assess how much you need to fund it.
"There are also individuals who prefer to have more cash at the beginning of their retirement years as they transition into a different lifestyle."
As a gauge for how much you need, you could look at the latest Household Expenditure Survey for 2012 and 2013, released last year.
The report found that the average monthly expenditure per member among retiree households was $623.60 if you live in a one- or two-room Housing Board flat.
The spending rose to $2,021.90 if you live in a condominium.
You can then work out if the monthly payout from your CPF savings is sufficient and make up any shortfall.
Manulife's Mr Shah noted: "Many people are starting to realise that they cannot rely solely on CPF alone for their retirement needs.
"From our latest Manulife Investor Sentiment Index survey, the findings revealed that running out of money in retirement is the top financial concern for Singapore investors."
Complement CPF Life with private plans
Assuming the amount you receive from your CPF Life payouts is not enough for your daily needs, you may want to set up a similar sort of arrangement where you can get stable sources of monthly income.
Financial planners say private retirement or annuity plans may be alternatives to complement your CPF Life scheme.
Tokio Marine Life Insurance Singapore chief executive Lance Tay said: "People should use their CPF accounts to earn high guaranteed returns and have cash, through which they can purchase private retirement plans to supplement their (CPF) retirement plans.
"We must advise people to do financial planning with a financial adviser to determine their needs and risk profile."
Such private plans could offer more flexibility in terms of liquidity, where you can withdraw your money for urgent needs.
Payouts could also come at an earlier age, with additional perks like annual bonuses and insurance coverage for disabilities and illnesses.
More people have been buying such private retirement plans, said Great Eastern Life chief product officer Lee Swee Kiang.
"We have definitely seen a greater interest in Great Eastern's retirement plans, which include both endowment plans and annuities over the last few years.
"We have seen a healthy double-digit growth year-on-year in terms of sales and are confident this trend will continue as the public's awareness of retirement planning has increased due to social media and efforts by the Government to educate."
Note that the returns of the products usually comprise a guaranteed portion as well as a non-guaranteed portion that is dependent on the investments' performance.
Guaranteed returns of private plans typically are around 2 per cent. Including the non-guaranteed portion, projected returns are estimated to be between 4 per cent and 5 per cent.
You could also cast your sights farther, said United Overseas Bank head of personal financial services Dennis Khoo.
"Other than annuity plans, investors with a moderate risk appetite can consider investing any excess funds in a range of assets comprising stocks, bonds and real estate investment trusts, which can potentially generate total returns above 5 per cent per annum."