For years, CPF members were able to “shield” the money in their CPF Special Account (SA) from being transferred to their Retirement Account (RA) by investing the money in excess of the first $40,000 in their SA just before they turned 55 years old. They subsequently sell the investment and move the proceeds back to their SA after their 55th birthday to enjoy the minimum 4% p.a. interest and the option to withdraw anytime they want as long as they have their cohort’s Full Retirement Sum (FRS) in their RA. But when Deputy Prime Minister Lawrence Wong announced last Friday during Budget 2024 that the SA will be closed after CPF members turn 55 years old, this “loophole” was effectively plugged.
With this change, once CPF members turn 55 years old, their SA money (and if insufficient to meet the FRS, the Ordinary Account (OA) money as well) will be transferred to their RA. If there are still balances in SA, it will be transferred to OA (which currently earns at least 2.5% p.a.) and then the SA will be closed. Future working contributions will go into the OA, Medisave Account (MA), and RA. And if the RA has reached FRS, the portion of the contributions to RA will be channelled to the OA instead. To help Singaporeans have retirement adequacy, it was also announced that we can now top up our RA up to four times the Basic Retirement Sum (BRS), instead of just three times. This will give retirees a higher monthly CPF LIFE payout from age 65.
Why the Change?
To be honest, I have been expecting this change to come for a long while and so when it was first announced, I did not think it would cause a stir but I could not have been more wrong. Minutes after the announcement, a finance chatgroup with more than 30,000 people exploded with angry messages. While I acknowledge the emotions, in my opinion, this move is a right one. When I was with the CPF Advisory Panel 10 years ago, we had sized the BRS at age 55 years old to allow a retiree in lower-middle households to have a stable, lifelong income stream that can support a basic level of retirement expenses when they are 65 years old. This considers that most retirees own their homes and do not need to pay rent.
We have always been more concerned with the lower income group because they have lesser resources to depend on for retirement and that is why the government has put in place other policies to support them to at least reach their BRS. The RA currently attracts 6% p.a. for the first $30,000, 5% p.a. for the next $30,000, and 4% p.a. for the remaining. You will notice that the additional interest is given only for the first $60,000 so that it mainly benefits those with less resources. So, allowing balances in SA to earn 4% p.a. with liquidity after age 55 really only benefits the more affluent. Furthermore, getting 4% p.a. with guaranteed capital and liquidity is a free lunch that is not sustainable.
So, How Can One Plan for Their Retirement With These Changes?
In every retiree’s spending plan, there should always be an annuity plan to hedge against longevity risk and CPF LIFE is currently the best overall annuity plan in Singapore. At Providend, we use CPF LIFE as one of the “instruments” to meet essential expenses – the expenses that a retiree cannot avoid during retirement. One of the problems we face is that there is a limit to how much CPF LIFE one can “buy”. As such, we had to find investment-grade bonds for our clients to supplement CPF LIFE to meet their essential expenses needs. Now that we can top up more money into our RA, clients can now “buy” more CPF LIFE and enjoy a higher payout from age 65 and this just makes the income stream more reliable.
So, review your own spending plan and decide if you would like to use your OA (or cash) to top up your RA up to four times of BRS but do also remember that since 2008, the interest rate for SA, MA, and RA is pegged to the average yield of the 10-year Singapore Government Securities plus 1% but currently guaranteed at a minimum of 4%. This guarantee is reviewed regularly and can be removed. Nothing can be certain in this world, not even our CPF returns.
Next, we deal with the remaining CPF balances in your OA. There are generally 3 ways OA and SA balances are used after age 55.
1. As Cash for Immediate Drawdown to Meet Retirement Expenses:
When the SA closes early next year for those above 55 years old, you will be getting 1.5% p.a. lesser because the money in SA will now be transferred to your OA. So, you either will have to spend lesser or see the money expended faster. To illustrate, if you have $200,000 in your SA after setting aside the FRS in your RA and before this change, assuming you want to withdraw $3,000 per month adjusting for 3% p.a. inflation, your SA balance will last you about 5.7 years. But with the change, your SA will be closed and the $200,000 will be transferred to your OA earning 2.5% p.a. This same $200,000 will last you about 5.5 years instead.
If you have other resources, mitigating this near three months of shortage should not be a problem at all. Otherwise, if you still want your money to last 5.7 years, just spend about $100 lesser each month. Another option for you to consider to stretch your dollar a bit further is to “bucket” this $200,000 into various “buckets”. The first bucket can remain in the OA. The second bucket can be in a 2-year Single Premium Endowment Plan and the 3rd bucket can be in investment grade bonds with both buckets currently giving higher returns than the OA.
2. As Cash for Emergency/Reserves:
Since you may not need this money so soon, you potentially have a longer time horizon and thus have a higher ability to take risks. You can consider keeping part of your money in your OA to have that liquidity in case of emergency but consider investing the other portion into say a globally diversified portfolio of 60% equities and 40% bonds which should beat the 2.5% p.a. or even 4% p.a. comfortably. But you need to have a time horizon of at least eight years.
3. As Cash to Accumulate Towards a Larger Capital for Drawdown Later:
Similar to the cash set aside for reserves and emergencies, you do not need this money until much later and you can consider investing it into a globally diversified portfolio of equities and bonds to get a higher return than what the OA can give you.
So far, we have been discussing on how to make better and rational financial decisions. Not that this is not important but remember that money is just an enabler and if a seemingly “right” financial decision does not give you that peace of mind, then it may not be right.
The best financial decision is not one that maximises your investment returns but one that lets you live at peace with yourself and the world. Over the next few weeks or even months, you may be shown various product options to invest your CPF money. Please do not make product decisions in isolation from your life and wealth plan.
The writer, Christopher Tan, is Chief Executive Officer of Providend Ltd, Southeast Asia’s first fee-only comprehensive wealth advisory firm and author of the book “Money Wisdom: Simple Truths for Financial Wellness“. He is also a Certified Ikigai Tribe Coach.
The edited version of this article has been published in The Business Times on 20 February 2024.
For more related resources, check out:
1. How To Make The Most Of CPF LIFE For Your Retirement
2. Assets That Cannot Be Distributed Via A Will | CPF Monies & Joint Assets
3. RetireWell™ Part 1: Drawing Down Retirement Money
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