Saturday, 25 February 2017

CPF Retirement Sum Scheme | Can I achieve the CPF retirement sum when I reach 55?

The CPF Retirement Sum Scheme is one of the CPF schemes for us to utilize the money in our CPF. In fact, in my opinion, it is the most important CPF scheme as it will determine the 'fate' of the savings we painstakingly built up throughout the working life.

Unless we are approaching the magic number of age 55 to be eligible for CPF withdrawal (after setting aside the Retirement Sum), chances are we will not be able to determine the amount of CPF savings we will have by then. Furthermore, there involve an uncertainty with the expected annual increase in the Retirement Sum. 

This makes many Singaporeans wonder if they will ever have enough CPF savings to withdraw a lump sum when they reach 55. Let's get down to it.


Adapted from CPF website


How much monthly payout will I receive at age 65?

The amount of retirement savings to set aside depends on a few criteria, including the amount we have in RA savings at age 55, whether there is sufficient property charge/ pledge, etc. For readers who are not familiar in this area, MoneySmart Blog has written a concise but comprehensive article here.

In brief, there are three tiers to the Retirement Sum:
  • Basic Retirement Sum (BRS), 
  • Full Retirement Sum (FRS) which is 2 times the BRS, and 
  • Enhanced Retirement Sum (ERS) which is 3 times the BRS
For this article, we will discuss mainly using the FRS as a reference.

The amount of retirement savings will also directly affect the amount of monthly payout members can receive from age 65. To compute the estimated monthly payout receivable at age 65, we can use the LIFE Payout Estimator available on the CPF website.

For a quick estimate, Max has compiled some output using the calculator with results presented in the table below. 

Graph 1: CPF LIFE monthly payout vs RA savings at age 55/65


Just for a quick illustration, if we have $200k in our RA savings at age 55, based on the CPF calculator, the monthly payout expected at age 65 will be $1,523*. Using the orange line in the chart, this information can be determined by simply referencing the RA amount on the X-axis, to the monthly payout on the Y-axis. 

*The amount shown in CPF calculator is a range from $1,523 - $1,678 using the LIFE Standard scheme. To be conservative, the lower amount is used for the chart above.

In fact, the correlation between our RA savings and the CPF LIFE monthly payout is linear, which should not come as a surprise to us. 

To get a rough estimate for the expected monthly payout from age 65 onwards, we can simply multiply 0.007 to the RA amount we have at age 55. This is also valid for the blue line for RA savings at age 65, by simply using a different multiplier of 0.005

This means that if we have $100k in our RA savings at age 65, we can expect a monthly payout of $500 (0.005 x $100k) under the LIFE Standard scheme.

How much will the Retirement Sum be when I reach 55?

According to CPF website, the retirement sum has increased yearly "to cater for long term inflation and increase in standard of living". As of the point of writing, the Full Retirement Sum (FRS) for 2020 is set at $181,000, which is about an annual increase of 3% from the $166,000 currently in year 2017.

From the historical FRS (previously known as the Minimum Sum), the average rate of annual increase from 2003 to 2020 is 5.24%. Personally, Max does not expect the FRS to continue increasing at this rate. In fact, the recent rate of increase has stabilized to around 3.0% per year

For completeness of the analysis, the chart below shows the FRS forecast based on both 3.0% (orange line) and 5.24% (blue line) rate of increase.

As we can see (assuming the 3.0% increase is maintained), the FRS will be about $300-400k in 20-30 years' time. This is not a small sum, can we even achieve it? Let's read on. 



Graph 2: CPF Full Retirement Sum forecast

Will my RA savings exceed the FRS when I reach 55?

This is the most important question of the entire article. Ultimately, annuity in the form of CPF LIFE payout will not feel as satisfying as receiving a lump sum of cold hard cash at age 55.

Fundamentally, in order to withdraw money from our CPF after years of working, our RA savings at age 55 must be more than the FRS (or BRS).

To answer this question, we must first agree that the total RA savings is dependent on
  1. Monthly income (eligible* for CPF contribution)
  2. Annual bonus (eligible* for CPF contribution)
  3. Years of active employment - some work for 40 years, some wants to retire by 40
  4. Utilization of CPF savings - for public housing, education, investment etc.
  5. CPF top ups using cash
  6. Transfer of OA savings to SA

*There is a limit to how much our annual income is eligible for CPF contribution, which is stated in the CPF contribution ceiling. This means that if your income hit a certain limit, the additional wage will not be eligible for CPF contribution (from both employer and employee).

For simplicity, let's look at the following scenario:

Joe is a 25 yo fresh graduate (with zero CPF savings) who started working in year 2017 and intends to stop working by age 55. He receive a monthly gross income of $3.0k, with an expected yearly increment of 3.0% throughout his employment, and an annual bonus equivalent to his 1 month's income. 
Joe has successfully applied for a $500k BTO, expected to be ready by age 30, with the down payment and monthly installment to be split evenly with his spouse. How much savings will Joe have in his RA account when he reach 55 yo?

This look like a Primary 6 exam question, but Max is sure most people will not be able to, or will not be bothered to find the answer (even if I change Joe to 'your name'). But to be fair, there is no simple formulas to compute the answer, so Max has added this capability into his Financial Independence Model (FIM) to 'model' the answer. The answer for Joe will look something like the table below. 




Joe will have about $433k in his RA savings when he reach 55, which is about $18-19k more than the estimated FRS at $414k. Depending on whether Joe would like to maintain his Retirement Sum at BRS or FRS, he can withdraw $18k (about $8k in today's dollar) or more from his CPF.

Joe will receive about $3.4k (slight above $1k in today's dollar) per month under the CPF LIFE scheme when he reach 65 yo. 


How to have more RA savings by age 55

To have more RA savings by 55, Joe can subscribe to the CPF OA-SA transfer to enjoy higher interest rate on his savings.

For example, if Joe transfer all his excess OA money to SA savings, while ensuring he has at least $10k (adjustable based on individual's preference) in the OA savings at the end of every* year, he will have $478k in his RA savings by 55 yo. That is an additional $45k (or $18.5k in today's dollar) by just making your CPF savings work harder for you. Who says interest compounding is overrated?

*except for the first year of working where the OA savings is still below $10k

Table below generated by the FIM shows details on the amount of money Joe can transfer from his OA to SA savings for each year. In particular, note that the recommended amount to transfer will take the expected future utilization of the OA savings into consideration, to prevent 'over-transferring' and falling into a deficit situation when the OA savings is required. 

This can be seen from age 28 and 30 when FIM suggests that Joe should not make any OA-SA transfer, to ensure that his OA savings is sufficient for the $25k BTO down payment at age 30. 






What about you?

The Retirement Sum will continue to increase to keep up with the higher standard of Singapore's living. Will we have enough CPF savings to meet the Retirement Sum when we reach 55 yo? Max knows he does, what about you?


2 comments:

  1. A very good post. I did the transfer of OA to SA funds last year. It was the best investment decision that i made. I will see a higher compound interest this year.

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    Replies
    1. Hi there, glad you like my post.

      I also made a >$20k transfer from my OA-SA account last Dec. The main barrier stopping anyone from doing so is the fear of uncertainty since the transfer is irreversible. But as long as we keep some buffer and know what what we plan to use the OA savings for, everything can be quite nicely estimated.

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