Forget high living with CPF Life payouts

The Straits Times

www.straitstimes.com

Published on Jun 01, 2014

 

Forget high living with CPF Life payouts

To fund a comfortable retirement, you will need top-ups from your own investments

By Jonathan Kwok

There was quite a reaction from my friends after the Central Provident Fund (CPF) recently raised its Minimum Sum yet again.

We may still be decades away from retirement, but there was still some irritation over the idea that part of our money will be parked in some account that we can access only after various conditions are met.

The latest change announced last month raised the Minimum Sum to $155,000 from July 1, up from $148,000. This is the amount that has to be left in our account at age 55, so it means we can withdraw less.

I was the voice of moderation, as I pointed out the rationale behind the change.

The Minimum Sum has had to go up often in recent years for two reasons, I explained: People are living longer and things are getting more expensive.

No escaping from these realities.

The Minimum Sum is used to buy an annuity, called the CPF Life, which provides monthly payouts from retirement until you die.

A higher Minimum Sum means CPF Life payouts can increase to keep pace with inflation.

In fact, my concern is almost opposite from that of some of my peers who worry about money being locked away in the CPF account.

I am less angsty about not being able to use my money whenever I want to. Rather, I tell people that we should be worrying that the payouts from CPF Life will be too low for us to maintain our current lifestyles after we retire.

This system is meant to meet the needs of a lower-middle income retiree. So you will need to save and invest separately if you aspire to live a better life, taking an occasional holiday and eating at restaurants, for example.

I did some back-of-the-envelope calculations to get a quick gauge of how much a couple will need for their retirement. It turns out, you and your partner may need about $500,000 to $800,000 in stocks to provide enough dividends to supplement CPF Life payouts.

Savings and Investment Plan

First and foremost, we need to find out how much an above-average income family spends.

I took data from the Statistics Department's most recent household expenditure survey, which was released in December 2009.

The top-earning 20 to 40 per cent of households spent $4,532 per month, the report said.

I'll assume that our hypothetical go-getting couple fall in this range and do not want their living standards to drop after retirement.

But these figures presumably capture households at a time when they are raising children, who would have grown up by the time the couple retire.

So I assumed expenditure could be cut by one-quarter to $3,399.

How much of this can be covered by CPF Life?

A Singaporean man who turns 55 this year and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the standard plan, said the CPF Life Payout estimator.

A woman's monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer. The payouts will start when they turn 65.

Taking the lower sums, a husband-and-wife team will get only $2,300 per month from CPF Life, leaving them with a $1,099 deficit from their $3,399 expenditure. That works out to a shortfall of $13,188 per year.

If our hypothetical couple fail to make up the shortfall, they will need to cancel their hotel high teas and forget about travelling further than Johor Baru.

But surely our couple deserve better after slogging for decades in the rat race?

Fear not, a solution is present if they start saving and investing early in life.

I centred my calculations on using shares to meet retirement needs, though you can probably achieve the goal via an investment property. Assuming a dividend yield of 4 per cent, a $329,700 portfolio of stocks will be able to generate dividends of $13,188 per year. This amount will be able to meet our couple's shortfall.

Inflation with no drawdown

This simple calculation discounts inflation, however. As time goes by, things will surely get more expensive and you will need more money to maintain your lifestyle.

A 3 per cent inflation rate over 30 years will lead to annual combined expenditures eventually ballooning to $99,003 for our couple. If CPF Life payouts go up in line with inflation, this would eventually come to $66,992 per year for our couple.

But the shortfall for the couple's desired lifestyle would also have widened, and they would need a combined portfolio of a whopping $800,269 to generate enough dividends for that.

Inflation with drawdown

The previous scenario assumed that the couple would use only dividends from their shares and leave the entire capital to their beneficiaries after they die.

But one way to reduce the required amount is if they are willing to draw down on their stock capital after retirement. So their yearly payouts will consist of both dividends and a drawdown on capital.

After 25 years of retirement, they will have zero shares left but they would have needed a smaller amount to start their retirement with - $520,082.

The lesson from all these calculations is that it makes good financial sense to start preparing for retirement early. Without top-ups from your own investments, CPF Life will be able to provide only a basic lifestyle.

jonkwok@sph.com.sg

Copyright © 2014 Singapore Press Holdings. All rights reserved.

The Straits Times

www.straitstimes.com

Published on Jun 01, 2014

 

Which to go for - CPF Life Basic or Standard plan?

It depends on whether you prefer to collect payouts from age 65 or you want to wait until you are 90

 

By Goh Eng Yeow Senior Correspondent

 

Many of my friends in their 50s are facing a major concern - whether they have saved enough to last them through retirement.

For my parents' generation, the norm for a married couple was to raise a large family which would, in turn, look after them when they grow old. But times have changed, and many of us either have small families or stay single so we have to be financially secure to ensure our money does not run out.

But getting to our objective of financial wellness needs a careful strategy.

The cornerstone of any retirement planning should start with the savings we are accumulating in our Central Provident Fund (CPF) accounts. That at least ensures that we can still pay our monthly grocery and electricity bills when we are old and not working, if we have already paid for the roof over our heads.

Then how comfortable we want to make our retirement will depend on the other aspects of our financial planning such as squirrelling money away into a Supplementary Retirement Scheme (SRS) account or even buying a house for investment in the hope that property prices will keep going up.

Take a Singaporean who reaches 55. As a CPF member, he must set aside a Minimum Sum in his Retirement account from money in his CPF Ordinary and Special accounts. From next month, the Minimum Sum will be $155,000. Currently, about half of them meet this requirement.

Once he reaches 65, he will get a fixed monthly payout for about 20 years from the savings set aside in his CPF Retirement account. Between 55 and 65, the money in his Retirement account will enjoy an interest rate of up to 5 per cent per annum - which is far higher than what the banks are offering for fixed deposits.

But what happens if our Singaporean lives past 85 and the money runs out? It is not a hypothetical question as people are living longer. My parents are in their 80s and I have a 104-year-old aunt in Hong Kong.

Since last year, it has been compulsory for Singaporeans and permanent residents who turn 55 to be part of the CPF Lifelong Income for the Elderly (Life). Yet most of them are ignorant about its details. CPF Life offers two plans - Standard and Basic.

The Standard plan is essentially a traditional annuity scheme. People taking up this option will use the entire sum in their Retirement accounts to buy the annuity. They will get a monthly payout for the rest of their lives once they reach 65.

Wage-earners may like to opt for this plan since they are used to getting their salaries credited into their bank accounts every month. This ensures that when they retire and hit 65, the salaries they are used to getting will be partly replaced by the monthly CPF Life payout.

Calculations from the CPF Life Payout estimator show that a male Singaporean who turns 55 from next month and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the Standard plan. For a woman, the monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer.

Indeed, the norm for most of the 400,000 people who retire in Britain every year is to buy an annuity similar to CPF Life Standard.

One merit about CPF Life is that it is run by the Government. That removes the big worry of retirees as to whether their insurer is financially strong enough to withstand the next global financial crisis in order to keep making the monthly payouts.

But buying an annuity is a relatively new concept here and there are people who gripe about why they should have to buy one when it takes Herculean efforts to live past the age of 85.

One issue raised by a friend is the possibility of "mortality cross subsidy", whereby those unfortunate enough to die early effectively subsidise those who live longer than the average.

My reply is that the purpose of buying an annuity is to achieve some income certainty when we are old. Trusting our investments entirely to achieve that goal is too much like relying on the roll of the dice, given the regularity with which financial crises have been occurring.

Still, I am glad that CPF Life has another choice - the Basic plan - which gives a lower monthly payout and a higher bequest. Essentially, it works like a deferred annuity - an insurance product that is very popular in the United States.

Under this plan, a CPF member will have premiums deducted from his Retirement account to pay for the deferred annuity whose payouts will only start when he reaches 90. After he turns 65, what he gets is a monthly payout from his CPF Retirement account.

In essence, the CPF Life Basic works like an insurance plan for those with longevity concerns but who may have other sources of income. If he lives past 90, he will get a payout - and he does not have to worry about subsidising people who live longer than the average.

I believe that the Basic plan will appeal to the financially literate and to the self-employed who may not have much CPF savings.

That, in a nutshell, sums up CPF Life: The Stan-dard plan offers an annuity scheme similar to what retirees in Britain opt for. The Basic plan is commonly adopted by US retirees. Choose wisely.

engyeow@sph.com.sg

Copyright © 2014 Singapore Press Holdings. All rights reserved.