Financial Planning for Merdeka Generation Part 3: Your Safe Retirement Income Floor

Providend

In this third article, we explore how CPF, specifically, CPF LIFE forms the foundation of your retirement plan by providing you with a stream of income for life. A retirement income that covers daily expenses is the second Must-Have in retirement, alongside a home to stay in and a medical safety net.

The age at which you can start your CPF monthly payout is based on your year of birth.

MG-Part-3-Graph-1

Arriving at the Payout Eligibility Age comes with a list of decisions. These are:

  1. Should I join CPF LIFE if I am on the Retirement Sum Scheme?
  2. Should I start my CPF LIFE payouts now?
  3. Should I make a lump sum withdrawal from my Retirement Account (RA)?
  4. Which CPF LIFE plan should I choose?

To answer these questions, it would be useful to have a gauge of what percentage of your retirement needs would be funded by your CPF savings and consequently, how much you may need to supplement with other income sources.

At Providend, we advocate that all retirement plans comprise an annuity as a base. An annuity is a stream of income that pays for life and hedges against longevity risk, i.e., the risk of outliving one’s assets. CPF LIFE is the best annuity in the Singapore market, all else being equal, in terms of payout versus capital, return and risk. It is thus well placed to form the Safe Retirement Income Floor for all Singaporeans. This Safe Retirement Income Floor is a “die die must have” level of income to fund a basic level of retirement lifestyle.

Based on the Household Expenditure Survey 2012/3, we know that a retiree household in the second quintile of expenditure spends on average $518 per month in 2013 on food, transport and other goods and services excluding accommodation. This is enough to support a basic standard of living (excluding rental of a place to stay) and is the basis on which the Basic Retirement Sum (BRS) under CPF LIFE is set – the BRS provides for a payout under CPF LIFE that is close to $518 in 2013 dollars, adjusted for inflation. This is also the reason why you can choose to set aside the BRS only if you own a property as the payout corresponding to BRS assumes you do not need to rent a place to stay.

If you do not own a property, you should have the Full Retirement Sum (FRS) that is double of BRS, because the need to rent a room on top of paying for basic necessities can cause monthly expenses in retirement to double. For those whose Safe Retirement Income Floor is even higher, there is the option of topping up your RA to the Enhanced Retirement Sum (ERS) which provides an even higher level of payout.

For CPF members who turn 55 in the year 2019 (who are not Merdeka generation), the current BRS, FRS, and ERS are $88,000, $176,000 and $264,000 respectively. In 10 years’ time, these would provide payouts that are, in today’s dollars, roughly $600+, $1,100+ and $1,600+.

For Merdeka Generation members who turn 65 this year and start their payouts, the amount you need to have in your RA to generate a corresponding monthly income today is shown in the table below:

MG-Part-3-Graph-2

*Payout figures are estimates, based on the CPF LIFE Standard Plan and computed as of 2019. If you choose to top up to your RA, the top up limit is the current Enhanced Retirement Sum less your RA savings excluding interest earned and government grants.

You can use the CPF LIFE Payout Estimator on the CPF website for your own projection based on your current RA balances.

Now that you have a sense of how much your CPF savings will contribute to your retirement income, we can start to address these questions.

1. Should I join CPF LIFE if I am on the Retirement Sum Scheme?

Before CPF LIFE, CPF members receive their monthly payouts from the savings in their Retirement Account until it is depleted under the Retirement Sum Scheme (RSS). With Singaporeans living longer, the risk of retirees outliving their savings is becoming very real. Hence, CPF LIFE, our national annuity plan, was introduced in 2009 and made mandatory in 2013 to protect against this longevity risk. If you are born 1958 or later and have at least $60,000 in your RA when you turn 65 years old, you will be placed on CPF LIFE instead of the RSS.

If you are on the RSS, you can also choose to join CPF LIFE before your 80th birthday. The question is, should you? Ideally, you should have a retirement plan that pays you for life because the last thing you want is to go back to work when you are in your 80s or hope that your children can support you when they are already in their 60s. Better to age with dignity with the assurance of a lifelong income. Nonetheless, there are scenarios that CPF LIFE is not suitable, i.e., very old members or those with very low RA balances, as you may end up with a very small monthly payout that is not meaningful. In comparison, the RSS gives a minimum payout of $250 per month.

2. Should I start my CPF LIFE payouts now?

Since 2016, you can choose to defer your payout start age up to 70 years old. For every year you defer, your monthly payout will increase by 6 – 7% more. For example, if your payout is $600 per month if you start at 65 years old, delaying the payout till 70 years old will increase it to about $800 per month for life. If you are still working or have other sources of income, this is one way for you to increase your payouts without having to put more money in your CPF.

3. Should I make a lump sum withdrawal at Payout Eligibility Age?

If you were born after 1957, you have the option to make an unconditional withdrawal of up to 20% of your RA balances (excluding top-ups and grants) when you reach your Payout Eligibility Age. While such a withdrawal option provides you with the flexibility to fulfil some lifelong wish upon retirement, the effect of this withdrawal reduces your monthly payout.

Based on a current payout of $600 a month, making a 20% withdrawal will reduce your payout to $490 per month on the Standard plan. It is important to decide if the reduction of the monthly payout is worthwhile and would lend to a more meaningful life. In addition, you don’t have to withdraw the 20% in a lump sum, it can be done so in parts and even after your Payout Eligibility Age. So, if you don’t have an immediate use for the money, why not treat this as some sort of emergency funds instead?

4. Which CPF LIFE plan should I choose?

There are currently 3 CPF LIFE plans you can choose from – the Standard, Basic or Escalating plan, each catering to those with different priorities. For those who want to enjoy the highest payout, Standard plan is for you. For those who are more concerned with leaving behind a legacy, Basic plan could be more suitable. Lastly, if you are concerned about the rising cost of living, you can also consider the Escalating plan which starts with a lower payout but increases by 2% per year.

Here is a comparison of the payouts across the three plans.

MG-Part-3-Graph-3

*Payout figures are estimates, based on a male member and computed as of 2019.

All CPF LIFE plans come with a bequest feature, which means the monies used to join CPF LIFE which was not paid out to you in monthly payouts by the time you pass on, will be returned to your loved ones. The payouts while stable are not guaranteed as it is subject to changes in CPF interest rates [1]  and mortality experiences.

Perhaps the easiest way to decide between the three plans is to check if the $100 per month difference in payout between the plans is important to you, as the main objective in any annuity is to provide an income stream. If yes, you may want to consider the Standard plan to maximise your payouts today or the Escalating plan to maximise your payouts in future. If no, the Basic plan could be more suitable as it would leave behind a larger bequest for your beneficiaries.

What if you do not manage to actively take any of the above decisions? Have no fear. If you do nothing, you will by default start your payout when you turn 70 years old on the CPF LIFE Standard plan. This combination will give you the highest payout for life, based on your RA balances.

Do stay tuned for our next article where we will explore the options that are available to you to boost your retirement income.

This is an original article written by Lena Teng, Lead Of Solutions at MoneyOwl, Providend’s associate company. Providend and MoneyOwl have a shared wealth management philosophy.

[1] Interest on your Special, Medisave and Retirement Accounts is either the current floor rate of 4% p.a. or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is higher. The floor rate of 4% is reviewed annually by the government. The current average yield of the 10YSGS plus 1% is 3.38%.


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