3 September 2024
SOURCE: DollarsAndSense
In Singapore, the Central Provident Fund (CPF) system provides financial security for Singaporeans and Permanent Residents (PRs). CPF members contribute up to 20% of their salary to their CPF accounts, while their employers contribute up to 17% of their employees’ salary into their CPF accounts. The government supports this system by providing a risk-free interest rate to help CPF members grow their savings.
One of the key components of the CPF system is the CPF Lifelong Income For the Elderly (CPF LIFE), a national longevity insurance annuity scheme to hedge against longevity risk. For members aged 55 and above, cash top-ups to their CPF account will be placed in their Retirement Account (RA). The savings in the RA will be used to pay the premium for the CPF LIFE plan that they choose.
CPF members can choose their CPF LIFE plan anytime from ages 65 to 70 years old on when they wish to receive their monthly payouts. The latest age to which CPF LIFE payouts can be deferred is 70. For each year deferred, the monthly payouts will increase by up to 7%.
A key feature of CPF LIFE is that it provides lifelong payouts. Did you know that for Singaporeans aged 65, it is expected that about 1 in 2 of us will live beyond 85, and about 1 in 3 can expect to live beyond 90? With CPF LIFE, CPF members will be assured that they would receive a lifelong income stream for as long as they live, even if they outlive their savings.
A critical decision for CPF members would be which of the three CPF LIFE plans to choose. In this article, we explain the three CPF LIFE plans to help you come to a decision on which plan might be the most suited for you.
Understanding the different CPF LIFE plans
There are three CPF LIFE plans to choose from: the Escalating Plan, the Standard Plan, and the Basic Plan.
With the Escalating Plan, the monthly payouts CPF members receive increases by 2% each year. This helps protect one’s purchasing power against inflation, allowing those on this plan to maintain their lifestyle even as the prices of goods and services rise over time.
Given that many Singaporeans may spend 20 or more years in retirement, one should expect prices to become significantly higher as time goes by.
For example, assuming a long-term inflation rate of 2% per annum, a basket of goods costing $1,000 a month today will cost about $1,500 in 20 years. By choosing the CPF LIFE Escalating Plan, one can ensure that their monthly payouts keep pace with the cost of living throughout their retirement.
For those who prefer a fixed monthly payout, the Standard Plan offers a steady amount each month. However, since the payout does not increase, CPF members may experience the pressures of inflation, making necessities more expensive over time.
Lastly, CPF members might opt for the Basic Plan. By choosing this plan, CPF members should also be prepared to lower their lifestyles, as their payouts may buy less over time. Basic plan payouts get progressively lower when combined CPF balances fall below $60,000.
Choosing the Basic Plan does not necessarily guarantee a larger amount of bequest. Due to medical and technological advancements, Singaporeans are living longer than our parents’ and grandparents’ generation. Hence, by the time one passes away, CPF savings may well be exhausted, leaving no bequest.
Regardless of whether you are on the CPF LIFE Escalating Plan, Standard Plan or Basic Plan, it’s important to point out that in the event of your passing, any unused premium, together with your remaining CPF savings, will be refunded to your loved ones.
However, interest on your CPF LIFE premium that has not been paid to you is pooled and goes towards providing monthly payouts for surviving CPF LIFE members. This is part and parcel of risk-pooling, similar to other types of insurances. It helps ensure that all CPF LIFE members can receive payouts for as long as they live.
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Start planning towards your desired retirement lifestyle
Though the three CPF LIFE Plans offer different payout levels, a common feature is that the monthly payout you receive from CPF LIFE is determined by the amount in your Retirement Account (RA) when you join. The more you have in your RA, the higher your payouts will be.
Therefore, it is important to plan towards the desired amount you need in your RA to achieve the monthly payouts needed for your desired retirement lifestyle. Planning ensures a financially secure and comfortable retirement, regardless of the CPF LIFE plan you choose.
To help with this, you can use CPF’s planner to help you plan the amount of retirement payouts you need.
Factoring inflation in your retirement planning
Based on the CPF planner, we can see that, given my current age (mid 30s) and my desired goal of a retirement lifestyle costing about $2,000 a month (in today’s dollar), the actual amount of monthly payout at age 65 would be $3,560 to maintain the same lifestyle. This is based on the assumption of an annual inflation of 2%.
Table 1, Source: CPF
Next, the CPF planner prompted me with a question on how I will adjust my retirement lifestyle to rising prices – would I want to maintain my lifestyle or am I willing to lower my lifestyle and buy less? Based on my decision, it will inform me on the suitable CPF LIFE Plan that best matches my needs.
Table 2, Source: CPF
I opted for the CPF LIFE Escalating Plan as I want to hedge my retirement lifestyle against the effects of inflation.
Based on my desired retirement lifestyle, the CPF planner suggests that my retirement savings goal should be $867,000. This would give me a payout of $3,560 starting from age 65, with a 2% increment in monthly payouts each year under the CPF LIFE Escalating Plan.
Table 3, Source: CPF
Next, the CPF planner asks for my monthly salary to provide a more tailored projection for my retirement needs. By keying these details, the planner will factor in CPF contributions, to provide a personalised projection of my monthly payout at age 65.
Table 4, Source: CPF
This allows me to see how much I need to save in my Retirement Account (RA) and the potential CPF LIFE payouts I can expect, helping me to plan more effectively for my desired retirement.
The CPF planner also helps you project how much you would likely have in your Retirement Account when you reach 65. This calculation takes into consideration your current salary, current age and how much savings you already have in your Retirement Account.
For example, based on my current age and a salary assumption of $6,000 a month with no additional salary/bonus and no increment, the CPF Planner projects that I will be $1,270 short of my payout goal of $3,560 a month.
Table 5, Source: CPF
How to increase CPF LIFE payouts
If like me, you wish to receive higher payouts, there are two possible strategies:
#1 top up your CPF retirement savings
By making cash top-ups or CPF transfers to one’s Special Account (for members below age 55) or Retirement Account (for members aged 55 and above), CPF member can set aside a larger amount in the RA. This increases the CPF LIFE premium paid, thereby increasing the monthly payouts received.
In addition, making cash top-ups to your CPF Special or Retirement Account also allows CPF members to enjoy tax relief.
The CPF planner helps us to project how much our cash top-up or CPF transfer can bring us closer to our goal. For example, if I make a cash top-up of $7,600 a year, the CPF planner projects that I will be able to meet my payout goal of $3,560 a month.
Table 6, Source: CPF
You can also choose to simulate making monthly or one-time cash top-up to project how much it increases your payout.
#2 Delay the start of CPF LIFE payout
CPF members have the option to start of their CPF LIFE payout at a later age, up to 70, if they do not need the funds immediately. By doing so, the monthly amount can increase by up to 7% for each year the payout is delayed. For example, if the CPF member has set aside the Full Retirement Sum of $205,800 at age 55 and starts the CPF LIFE monthly payouts at age 66, the initial monthly payouts will be $1,400, compared to $1,300 if payouts were to begin at 65. This is because the member would be commencing his CPF LIFE with higher savings in his Retirement Account due to more interest earned.
Envision and plan your ideal retirement today
AWhether you are just beginning your career or approaching retirement, it's never too early or too late to think about your future and how you want your golden years to unfold. Your desired retirement lifestyle hinges on having adequate retirement payouts to support it.
As a CPF member, you can use the CPF planner – retirement income to actively plan for how much income you would need in retirement. By doing so, you can set the necessary foundation for your retirement. Strategies such as making top-ups or delaying the start of your CPF LIFE payouts can further boost your monthly payouts, allowing you to achieve the retirement lifestyle you aspire to
This article was written in collaboration with CPF. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
This article was first published on Dollars and Sense. Information in this article is accurate as of date of publication.
