Use CPF Life to cushion inflation in old age

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SINGAPORE - The Central Provident Fund (CPF) is back in the news after the Budget statement last month because the compulsory retirement sums that need to be set aside for those hitting 55 will go up by 3.5 per cent a year for the next five years.

 

Those who criticise the CPF for "locking up" their money will cry foul and say that the goalposts are being moved yet again because this change means more money will need to be set aside.

 

Yes, the goalposts are being moved, but if you take a closer look, you should see that this is being done to make the target wider so that you stand a better chance of scoring your retirement goal.

 

Let's face it: Inflation is going to affect everyone and something needs to be done today so that you can have more to spend tomorrow.

 

When it comes to financial planning, many people tend to grumble about the amount of the initial investment that is needed to generate future returns.

 

But there is no free lunch in this world; if you want more money in your old age, you have to start planning for it now.

 

This is what the Budget announcement is all about - giving all citizens and residents here a chance to enjoy higher and sustainable lifelong income from 65 by making CPF Life, the national longevity annuity scheme, pay out more.

 

The changes are actually not "new" - CPF retirement sums have been increasing over the years to factor in inflation as well. The new rule means these amounts will continue to go up marginally until 2027.

 

The increase means the future cohort of retirees will also get more money: By putting more money into CPF Life, you will also get higher monthly payouts from age 65.

 

How much more will you get?

 

About $150 to $400 more than the current monthly payments now, depending on the total sum that you are setting aside.

 

The changes mean people who are prepared to top up to the maximum - the Enhanced Retirement Sum (ERS) - will receive about $2,700 a month, up from $2,300 now.

 

This does not seem significant at first glance but if you add it up over the years, the payment looks enormous - you stand to receive a total of $324,000 by age 75, and $648,000 by age 85. These monthly payments do not stop so long as you are around.

 

To enjoy such payments, you need to set aside $342,300 (ERS for 2027); you would have recouped this sum by age 76, and twice the amount by 86.

 

No other private investments can give you these returns for such "low" capital. You can buy a private annuity that can give you $2,000 a month but this product will likely cost you about $700,000, if not more. Even so, its payment is dependent on the prevailing interest rate and economy, and so the amount will drop if conditions are not favourable.

 

What if you don't have so much in your CPF? You can aim for the Full Retirement Sum ($228,200 by 2027) which gives you $1,840 monthly, or the Basic Retirement Sum ($114,100 by 2027) which gives you $980.

 

Contrary to unfounded claims by critics, CPF Life is not a ploy to lock up your money because it works like other annuities in the market, which also require you to set aside the funds for a certain number of years before you see the returns.

 

But dollar for dollar, CPF Life is unmatched because it is guaranteed by the Government, which sees it as a valuable contribution to many citizens' retirement.

 

This is why it is even providing matching annual grants to encourage those who have insufficient savings to at least aim for the Basic Retirement Sum.

 

So here are three things to note if you want to use CPF Life to cushion the rising cost of living.

 

Planning starts at 55 but it does not end there

 

The new limits will apply only to those who turn 55 next year and beyond.

 

At the 55th birthday, a sum equivalent to the prevailing Full Retirement Sum (FRS) will be deducted from the CPF Special Account first. If this is insufficient, funds will come out of the Ordinary Account.

 

This money will form the seed for CPF Life in the Retirement Account.

 

If you want a lower amount to be set aside, ask for the Basic Retirement Sum (BRS) if you have a property to pledge. Once approved, the difference between the sum that has been deducted earlier and BRS will then be paid to you in cash.

 

It is not compulsory to set aside either the FRS or BRS if you don't have enough money. But you have the option to top up any time after 55 if you want to have more money in old age.

 

People who want to enjoy the highest monthly payment have to take the extra step of topping up their FRS to the ERS with cash or their balances in CPF.

 

Older folk can choose to benefit from the changes

 

If you are already over 55, the new limits will not affect you.

 

But you can choose to make voluntary annual top-ups to the prevailing FRS or ERS if you want to enjoy the higher monthly payment. Is it worth doing so?

 

Assuming you have set aside the ERS for this year ($288,000), which allows you to receive about $2,300. The ERS would be $298,200 in 2023, $308,700 in 2024, $319,500 in 2025, $330,600 in 2026 and $342,300 in 2027.

 

This means that you can top up the difference between the old and new ERS, which works out to be about $10,000 to $12,000 annually, at the start of the new year.

 

If you do this, you will need a total of about $54,000 for the top-ups over the five years. Doing so would entitle you to get about $2,690 a month instead of $2,300 from 65, or $390 more.

 

If you just do the sums based on the additional amount, in just 15 years you would have received $70,200 more, or $93,600 extra in 20 years. These are decent gross returns of 30 to 70 per cent, considering that you only need put up the additional sum of about $54,000 over five years.

 

You can find out the amount you can top up in your Retirement Account by logging on to the myCPF portal and checking your limit in the retirement dashboard. The interest earned in such accounts will not affect the amount that you can top up.

 

Those who miss out on the benefits

 

Many people believe they can do better than the returns they get from the CPF and avoid having more of their money "locked up" by depleting as much as they can by using it to pay their mortgages.

 

Self-employed folk can even choose not to build up their savings in both the Ordinary and Special Accounts.

 

Yes, such people can do their utmost to avoid putting money aside for CPF Life, but doing so means they will miss out on the benefits. Of course, some believe they can get better returns on their own, but what if they fail?

 

The good news is that CPF Life is an inclusive scheme for all residents.

 

So long as you are keen, you have until the age of 80 to decide whether you want to benefit from the best longevity annuity that your money can buy.

 

Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.

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