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What Does The Removal Of The CPF SA Account Mean For People Under 55 And Their Retirement Planning? How Can They Still Achieve 4%?

A discussion I have with my wife:

Wife: Hey did you watch the Budget?

Me: Yes. I watch every year. You know that.

Wife: My friend told me the government will be closing the CPF-Special Account (CPF-SA)?

Me: Yes, after turning age 55.

Wife: So what’s going to happen to our retirement planning? You know I have quite a lot in my CPF-SA. Do I have to go back to work?

Me: No. Chill. While we could have incorporated the CPF-SA as part of retirement planning, we do have other options, which we are already leveraging.

Wifey: Like? Can we still get 4%?

Many who listened to the announcement that the CPF-SA would be closed for CPF members upon turning age 55, would be caught by surprise, particularly the group which has turned age 55 and who might have enjoyed the 4% or more interest rates (the first $30,000 in the CPF-SA yield 6%) for years. While it appears this group may be the most affected, there are also implications on CPF members who have yet to turn age 55, like my wife and myself.

To recap the major CPF change announced by The Finance Minister on16 February 2024, the CPF-SA account will be closed as part of a move to ‘rationalise’ Singapore’s social security system. Money from the CPF-SA account will be transferred to the Retirement Account (or RA, created when a CPF member turns age 55), up to the Full Retirement Sum (FRS), and any balance will be added into the Ordinary Account when the member reaches age 55.

What does this mean for people who are under age 55, who have retirement in their sights and who are intending to leverage CPF-SA as part of their retirement strategy?

This group may be in their late 40s or early 50s, and have been working for 20-30 years, accumulating significant sums in CPF-SA along the way. They may be harbouring intentions of shielding their CPF-SA account before turning age 55, to keep as much of their CPF monies in CPF-SA as possible to enjoy the 4% interest rate with full liquidity.

It is only natural that CPF members, especially those with significant balances in their CPF-SA and who are continuing to build their CPF-SA balances through employment contribution, will want to use CPF-SA as a part of their retirement planning. After all, the 4% interest rate is very attractive without investment risks or volatility, and there is also liquidity after one turns age 55. That bubble has now been burst.

The positive with being under age 55, is that while the news of the closure of CPF-SA can be an unwelcomed surprise, there is still time to pivot one’s retirement planning. This group is better positioned to tweak their retirement planning given their longer runway, moderately higher risk profile, and a few more years of being economically productive. We can take this change in our stride. Policy risks are ever present and we should deal with this change by looking at a few options.

As with those who have already turned age 55, this CPF change announced will have limited impact on those who are expecting minimal CPF-SA balances when they turn age 55. But for those who are expecting to accumulate substantial resources in their CPF-SA when they turn age 55, what can they do? Given that most CPF members build their sums in their CPF accounts, especially CPF-SA, for retirement without significant investment risks, I will explore the options sans aggressive solutions. The target is to earn a return that can be close to the 4% CPF-SA pays, since some of us aged under 55, have this rate of return in our sights and hope to leverage this as part of our retirement.

I have laid out the options above, but how can we maximise our chances of meeting or exceeding the 4% target? Let me use illustrate here using Option 1, since insurance plans work on accumulation (period of waiting before payout) and that payout and yield are more predictable. Looking at a policy from a very well-known insurer, I assume two persons, one who turning 45 this year, and one who turning 50 today.

*Bonuses are based on 4.25% participating fund performance

Looking at the table, it is very possible that a person turning age 45 or age 50 this year, can achieve the 4% yield which CPF-SA currently provides, and hence such insurance solutions can fill the void CPF-SA leaves behind when turning age 55. As evident from the table, the earlier one starts taking action, the better. Make time a friend. Even insurance solutions provide compounding benefits which are normally associated with investment funds.

Conclusion

The announcement that the CPF-SA account will be closed upon a member turning age 55, has derailed the retirement plans for some, including those who have yet to reach age 55. However, there are options available, ranging from low to moderate risks, for this group to still participate in solutions which can attain 4% yield per annum. The key is to leverage time to prepare for the drop-off in yield on CPF monies upon turning age 55. We have time on our side to get the benefit of a longer runway compared to those above age 55, providing we start now. Otherwise, the advantage of being under age 55 will be eroded.

To help you get started, I have created this Guide to Understanding The Characteristics of Options Which May Yield 4% to Plug the CPF-SA Gap. Click Here to download.

My spouse retired at the grand old age of 45, using all three solutions outlined here, so she’s well placed to continue her comfortable retirement while I make a few tweaks to her retirement plans ahead of the CPF change. But before that, let me go and tell her she does not need to update her curriculum vitae.

Article by Leon Loh
Email: leon.loh@gen.com.sg

The writer is a financial consultant representing GEN Financial Advisory Pte Ltd

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2024-04-03T00:39:13+08:00
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