CPF Retirement Sum: How much should you choose to set aside in the Retirement Account? Should you do the pledge?

Consider the following real life scenario :

A couple, Husband age 61, Wife age 58 with no children and house loan has the following assets breakdown:

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

Their CPF payouts are based on 1) the Husband has the Basic Retirement Sum ($88,000) and; 2) the Wife has a Full Retirement Sum ($120,000) when they each reaches age 65 :

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

They will receive $600 per month when the Husband reaches age 65 (in 4 years time), followed by $1,800 when the Wife reaches age 65 (in 7 years time). As I sat down to review their financial plans with them, they raised a question on whether the sum will be enough for them to retire comfortably in.

If you are in this situation, will you and your spouse have the confidence to retire?

This can be a common scenario that many find themselves in. To plan for such situations, we will first, need to understand what is being provided.

Central Provident Fund (CPF) : What is it make up of?

Central Provident Fund,also known as CPF, is a “social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. It also addresses healthcare, home ownership, family protection and asset enhancement.”

CPF comprises of four different accounts: Ordinary Account (OA), Special Account (SA), Medisave Account (MA) and Retirement Account (RA). Below is a summary of what each account is for based on the CPF website :

Click the above image to enlarge. Source: CPF Website

Retirement Account : What does it do?

At age 55, the Retirement account is automatically created. Retirement account is used to hold your Retirement sum earning an interest of up to 5% per annum. Retirement sum “is the amount of retirement savings which provide you with monthly payouts from your payout eligibility age, which is currently 65.” The amount of Retirement sum can be further broken down to Basic, Full and Enhanced, each having a specific amount that you need to set aside in the Retirement account. Singapore Citizen and Permanent Residents who are born in the year of 1958 onwards will be place under CPF Life Scheme which is a Life Annuity Scheme.

There are various plans to choose from for CPF Life Scheme and here is a simple illustration from CPF website :

Click above image to enlarge. Source : CPF Website 

Estimated Monthly Payout from Retirement Account

The two factors affecting the Monthly Payouts : The Retirement Sum that is being set aside at age 55 and the choice of CPF Life Plan. The table below, which can be found in the CPF website, shows the estimate of the monthly payouts one will receive in retirement based on the two factors.

Click above image to enlarge. Source : CPF Website

Criteria for Retirement

After understanding what is being provided, we will explore the conditions for Retirement to take place. Here are in my opinion, the four conditions that are required for a person to retire comfortably :

Click above image to enlarge
*The diagram above is purely for illustration purposes only.

1. A place to stay – A roof over the head is a must.
2. Debt Free – Upon going into Retirement, one should have minimum liability and commitment
since one would have already passed the income generating phase of life.
3. Regular Income – A regular stream of income that is predictable and certain. It is like having a
monthly allowance for yourself and ideally, your lifestyle has to be sustainable by this stream
of income. This is also what CPF Life does and help to provide for.
4. Medical Care & Long Term Care – Eventually, we will all grow old and our health will slowly
deteriorate. If we do not take care of this aspect, we will have to use the money we accumulate throughout the years to fund for our medical needs. CPF also provides scheme for medical expenses which is known as MediShield Life. It provides coverage for medical inpatient treatment and the level of benefits is based on the costs of staying in B2 or C ward of a Public Hospitals. It is also subjected to deductible and co-insurance. ElderShield is the long term care scheme provided by CPF. ElderShield offers a monthly payout in the event of severe disability.

Scenario Analysis based on the Criteria for Retirement

1. A place to stay – In the above scenario, the couple still have a house loan of $70,000. They
have $195,000 in their CPF Ordinary Account, which can be use to pay off the housing loan if
needed to. Therefore, we can safely say that their house is taken care of.
2. Debt Free – The couple currently have an outstanding motor loan of $50,000. They have
$150,000 in their bank account which allows them to pay off the loan if they want to. Hence,
this is not a major concern as well.
3. Regular Income – This is where CPF Life payout come into play. The first stream of regular
income will start in 4 years time at $600 per month. Eventually, the couple will have a combined monthly income of $1,800 per month when the Wife reaches age 65. To determine if this payout is sufficient, we have to understand the desired lifestyle that the couple want in retirement. The couple had two lifestyles in mind : One with owning a car and one without a car. Below is a simple illustration of the two different lifestyles :

Click above image to enlarge.
*The diagrams above is purely for illustration purposes only.

Based on both illustration, CPF Life payout alone will not be sufficient to sustain their ideal lifestyle. Eventually, the couple will either have to make adjustments to their lifestyle or start using their savings. If they use their savings, the next question will be how long can their savings last them?

4. Medical Care & Long Term Care – The Husband has upgraded his MediShield Life to a Private Integrated Shield plan that covers himself fully for any inpatient treatment at any public hospital. The Wife, however, has only upgraded her MediShield Life to a Private Integrated Shield Plan, which does not cover the deductible and co-insurance. This means that she would have to bear a portion of the medical bills in the event of hospitalisation. Both of them are also under the Eldershield 300. There will be a payout of $300 per month for five years in the event of severe disability.

Facing the reality, covering the gap

Given the above analysis, it is highly unlikely for them to go into retirement now as they have no regular stream of income. Given their situation, the earliest retirement is when the Husband is at aged 65 where CPF Life will pay out $600 per month. On top of that, the couple will need to set aside a sum of money for medical needs as the Wife will need to bear a portion of the medical bills in the event of hospitalisation. Hence, cash flow would be one of their major concerns as well.

After consideration of their liabilities, this is how their assets allocation will look like:

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

Removing their liabilities will result in a reduction in their cash on hand.

How to increase Cash Flow on hand?

Under the CPF Life Scheme, there is the option to do a pledge of property to free up a sum of money from the Retirement Account. However, this will reduce the monthly payout. This option is only available if you have the Full Retirement sum in the Retirement Account. Furthermore, upon the sale of property, the pledged amount will have to be returned to Retirement Account to restore the Full Retirement Sum. In their circumstance, the pledge will free up $90,000 of cash. If they take up this option, their CPF payout will be as followed :

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

Although this option increase the couple’s cash assets, there will be a reduction in their monthly payout, which based on the analysis, there is still a shortfall.

What to do with the $90,000 from Retirement Account?

A private annuity was proposed to them to enhance their Retirement planning. CPF Life and private annuity are similar products designed for the purpose of Retirement planning. However, there are some differences between them. Below is a simple illustration of their differences :

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

Imagine the money you set aside is in a water tank. Upon Retirement, you will turn on the tap and let the water flow out. For CPF Life, it is a tank that will eventually run dry. CPF Life will pay you a monthly income for life. However, upon death, there may be nothing left to pay out for bequest as the payout would be the remaining of the Retirement sum minus the monthly payouts that have been withdrawn. Furthermore, once the monthly payout commences, you would have no access to the money in the Retirement Account.

There are a few different types of private annuity provided by insurance companies. The example used in the illustration is just one type. For private annuity, you will have more control over when you want it to start paying out and the frequency of payout (Monthly or Yearly). On top of that, the cash value of the annuity will increase over time, allowing access to a sum of money if needed in the form of a policy loan or surrendering of the annuity.

The couple needs both regular income and accessible cash for emergency. However, if the $90,000 was to be left in the bank, it will eventually run out due to their lifestyle and low bank interest rates. With the inclusion of the private annuity using the money from the pledge to Retirement Account, they will be able to minimise the decrease in their monthly payout and have access this particular sum of money when necessary .

Below diagram is an illustration of their monthly payout with the inclusion of private annuity:

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

The table below will further compare their asset allocations before and after of implementing the private annuity :

Click above image to enlarge.
*The diagram above is purely for illustration purposes only.

Money in the Retirement Account are not taken into consideration as that sum of money is being locked up by CPF upon receiving the monthly payout. Cash value of the private annuity is being taken into consideration as the couple maintains control over it.

Conclusion

Making a decision on the amount of retirement sum should not be based purely on the amount of income that you can receive. Taking into consideration the other needs of retirement such as having a place to stay, being debt free, medical and long term care needs or perhaps, legacy motives will provide a more holistic consideration.

In this case, the couple has no issue on having a place to stay and being debt free. They have sufficient money on hand to clear off these liabilities. Having a reasonable regular income and maintaining a healthy cash flow is the gap that they will have to cover in their retirement. With the addition of the private annuity, they are able to enjoy the best of both worlds (A reasonable regular income and a healthy sum of money under control in bank, CPF OA and cash value of private annuity).

At the end of the day, everyone of us has a different comfort level regarding our finances. Some prefer more accessible cash, some prefer higher monthly payouts. Whichever the case is, the responsibility of an ideal/comfortable retirement will still fall onto the individual’s planning.

The scariest part of retirement planning is that we have only one chance to get it right and we will never know if we got it right till we have been been through it. To help you get started in your Retirement Planning, you can use this “Fit For Retirement Checklist” to have a better understanding of your own situation.

We have only one chance to get our Retirement right. Are you prepared for it?

Article by Samuel Koh
Email : samuel.koh@proinvest.com.sg

Need any help?

If you want to know more about Retirement Planning or any other enquiries, you may contact me through whatsapp, schedule an appointment with me or fill up the form below and I will get back to you as soon as possible.

SAMUEL KOH

Financial Services Consultant
GEN GROUP
RNF No. KPK300060855

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