Why CPF plays an important role in your retirement income plan
From next year, CPF members who are receiving payouts or will start to receive payouts under the Retirement Sum Scheme (RSS) may see an increase in their payout amount of up to $50. As part of the change, all extra interest earned from age 55 till the start of payouts will now be used to increase the payout amount, while extra interest earned after payouts start will be used to extend the duration up till age 90. The move was made in response to feedback that extending payouts to age 95 was too long.
Lianhe Zaobao approached MoneyOwl’s Solution Team Lead, Lena Teng, to give her views on the impact of this policy change and whether it is a good thing for CPF members.
On whether the marginal increase in payouts of $20 – $50 is meaningful, this really depends on the person’s financial situation in retirement. If you are receiving or expect to receive about $500 per month, a $50 increment is going to be more meaningful to you compared to someone whose retirement income is $5,000 per month.
In addition, it is important to strike a balance between getting higher payouts and extending payout duration to cover one’s life expectancy. Getting higher payouts at the expense of a higher risk of outliving your retirement savings may not be suitable for everyone.
The threat of outliving our retirement savings is especially pertinent to Singapore as we have one of the longest life expectancies in the world, an average of 84.8 years. Based on statistics, about 1 in 2 Singaporeans aged 65 today are expected to live beyond 85, 1 in 3 beyond 90, and 1 in 5 beyond age 95. Setting the maximum payout duration at age 90 is a good middle ground as it caters to the situation of 65-70% of the population. For those who are concerned about living beyond 90, they can and should choose CPF LIFE.
In retirement planning, it is important to have an annuity plan as the foundation of your retirement income. An annuity will provide you with a payout for as long as you live to guard against the risk of outliving your savings. One can choose CPF LIFE or any of the private providers in the market. However, based on our research and comparison, we are convinced that CPF LIFE is the best annuity in the market currently, so we do encourage our clients to use this as their first port of call.
If I Am Currently On Retirement Sum Scheme, Should I Switch To CPF LIFE?
If you’re not already familiar, CPF LIFE is our national annuity plan which provides monthly payouts for as long as one lives. Unlike RSS which functions much like a bank account, CPF LIFE is an insurance scheme. Simply put, it shares the risk of anyone of us outliving our savings across a common pool of funds. This pool of money is funded by the interest earned on the retirement sum that is used to join CPF LIFE.
There are four main factors to consider before switching to CPF LIFE:
1. Potential drop in monthly payout
All else equal, under CPF LIFE Standard Plan, the payouts are about 10% lower than Retirement Sum Scheme. Do consider if this drop is of much consequence to you.
2. Amount left behind to loved ones
Under RSS, the amount left behind to your loved ones is potentially higher than under CPF LIFE. This is because, under RSS, your bequest (the amount left for loved ones) includes interest earned on your RA savings while under the CPF LIFE Standard Plan, all the interest earned is shared with the common pool so it does not get distributed to your loved ones.
Nonetheless, if this is your only concern, you can consider the CPF LIFE Basic Plan instead. The Basic plan provides both lifelong payouts and a higher bequest by design as the bulk of interest earned is credited to your RA. In exchange, your payouts are lower compared to CPF LIFE Standard Plan.
As Asians, it is understandable that we want to leave something behind as a token of our love for our loved ones. However, in focusing too much on legacy planning (for our next generation) rather than on our current needs, we might inadvertently come up short and end up needing support instead.
3. Your health status and family history
This will help you gauge if you will live to your ripe 90s. If you foresee a longer retirement, going for CPF LIFE would certainly be the better solution as it eliminates the risk of outliving your retirement savings.
4. Current CPF RA balance
If you have very low CPF RA balances, it may be better to remain under RSS as it pays a minimum monthly payout of $250 while there is no such minimum for CPF LIFE. As such, you may end up receiving a monthly payout that is not meaningful.
We understand that retirement planning can be complex. If you want a deeper understanding of how CPF plays a role in your retirement plan or how you can complement your CPF LIFE/ RSS payouts through other retirement income alternatives, don’t hesitate to reach out to our MoneyOwl Advisers today!
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The author, Lena Teng, is Lead, Solutions at MoneyOwl Pte Ltd.