Retirement planning is something I believe one should start as early as possible - perhaps as early as early 20s, and developing financial intelligence even earlier on. After all, time is a valuable resource and a key advantage younger people have over older people. Part of the retirement planning usually takes your CPF into account. And when we talk about CPF for retirement planning, CPF Minimum Sum would be on the mind of most Singaporeans.
Also a pretty timely moment to write on CPF, given the announcement of Budget 2020.
What is the CPF Minimum Sum
It is a sum of money one needs to set aside in your CPF Retirement Account (CPF-RA), so as to help one prepare for retirement. Your CPF Ordinary Account (CPF-OA) and CPF Special Account (CPF-SA) is transferred into CPF-RA when you reach the age of 55.
This is subsequently drawn down when you reach age of 65-70 (depending on which option you have opted for) under CPF-LIFE or Retirement Sum Scheme.
CPF Minimum Sum in broken into 3 brackets:
- Basic Retirement Sum (BRS)
- The Minimum Sum for a person owning a property with lease that can last till at least the age of 95
- Full Retirement Sum (FRS)
- 2x BRS
- The Minimum Sum for a person who does not own a property or a person who owns a property and wishes to receive the full monthly payout.
- Enhanced Retirement Sum(ERS)
- 3x BRS
- For members who wishes to receive higher monthly payout.
The table below shows the Minimum Sums required for Year 2020 to 2022, as well as the projected sum from Year 2023 to 2050, with increment of 3%, BRS rounded up to the next highest $500, and multiplying 2x and 3x for FRS and ERS respectively, assuming the format of the increment remains consistent. There will be some distortion baked-in in the form of the rounding up, but it might add a little bit of safety factor in planning so let's just roll with that.
It is possible to accelerate the accumulation of you or your loved ones' Minimum Sum by leveraging on the effects of compounding and the interest rates of CPF-OA (base of 2.5%) and CPF-SA (base of 4%).
Remember what I have said before for effects of compounding!
See old post: Effects of Compounding on Principle Amount
Some things that you can do with your CPF monies:
- Voluntary Cash Top-up to CPF account (Risk-free)
- Voluntary Transfer of CPF-OA monies to CPF-SA (Risk-free)
- Using CPF monies for investment with CPF Investment Scheme (CPFIS) (*not* risk-free)
For those who are not comfortable with taking on risks, I do think leveraging cash top-up or CPF transfer is a good way to meet the Minimum Sum.
So question for readers at this point:
Is your retirement planning on track?
Personal Sharing - Am I on track?
Relating this to myself, I am turning 32 this year. If the increment remains consistent up till I turn 55 at 2043, I am looking at an FRS of $370,000. With my current combined CPF-OA and CPF-SA balance at about 26,000, there is a sum of $344,000 to close up on. Annualising this figure, I need to achieve an average yearly compounded growth of about $15,000. This works out to a required CAGR of 11.9%.
In all honesty,
(Yes, the strikethrough bit is intentional for a bit of humour, though a bit coarse.)
I did a calculation up till age 55 with some assumptions to a particular scenario:
- CPF
- CPF Interest rate unchanged
- CPF Contribution rate unchanged
- CPF Allocation rate unchanged
- No voluntary top-ups or transfers
- Career
- Working up till age 55 in my current company, without any no-pay leaves or salary deduction.
- A base case steady salary increment of 3%, with a couple promotion increment (6% instead of 3%) in between before salary peaking mid-life.
- Yearly bonus of 1.5 months
- Gross salary peaking mid-life at 6000, and no further changes up to age 55.
- Expenses
- Owning my current home and not downgrading/upgrading
- No change to CPF-OA expenses until fully paid (Mortgage, Home Insurance)
- Investment with CPF
- Not making any investment with CPFIS
It is likely there will be a lot of deviation from this, but:
- At least I have visibility of numbers if this is the direction I chose to take and my life decides to play out as per this particular scenario
- I also have visibility how the numbers will change if I make any decisions or if there is any other events that will reduce the balance in my CPF accounts (e.g. upgrading to a more expensive property, investing with CPF-OA monies).
New Feature - Introducing Stock Database
While still in its infancy, I am excited to try out starting this project to maintain a database of stocks and personally tracking major announcement of shares.
You can check it up by accessing the the Database here! On the desktop website, you can also access the Database page via the tab on top, while you can also select the page from the dropdown box.
PRIME US REIT and Lendlease Global Commercial REIT represents my initial entries to the database, with Elite Commercial REIT being the latest entry - feel free to check it out too!
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As long as we don't overextend ourselves and get an affordable public housing for our first property, our CPF will take careful of itself and remain "relatively healthy" :)
ReplyDeleteHi Turtle,
DeleteSound advice and very true, haha. :)
Still, even if my life plays out as above, I can foresee some flexing to be done if I want to hit ERS. (Let alone possibly intending to upgrade to a 5 room BTO in the near future).
Hi there,
ReplyDeleteFirst off, I would like to wish both you (Marksman) and Turtleinvestor, all the best in your wealth building journey. The fact that both of you are earnestly keeping track of your expenses and income early in your working life is already a good sign that you have started off on the right footing.
As for my cohort, when we were your age, we did not feel that our money in the CPF was our money. And most of us were just thinking of ways to use as much of our CPF money as possible. There was no social media, no internet and basically very little awareness of what compounding interest is all about.
Many of us used CPF money to invest in rental property where we could at least collect the rental in cash! Others used their CPF money to invest in shares. At that time, there was no 35% limit on the amount we could use for stock investment. The more we used of our CPF money, the "prouder" we felt.
Today at 60 yo, and on looking lack, we still did alright. Over the last 5 to 6 years, after becoming aware of the benefits of having a well built up CPF savings, my wife and I have started to return those money that we had taken out earlier for property purchases, to our CPF. We finally returned all monies to our CPF at the beginning of 2019. This has netted us an interest of over $80,000 (combined for both of us) in 2019!
And the irony is that at 60, we could already withdraw our CPF money (excess of the FRS amount), but we did just the opposite. We not only do not withdraw any money, we even topped up and made voluntary contributions to our CPF. At our age, the risk free, and relatively high interests given by the CPF suits us just fine!
Hi Anon,
DeleteThanks for the well wishes. I think some of our cohort still thinks that way too (not feeling CPF is their own).
It's heartening to know both you and your wife are doing well, and hope that continues on! :)
Hi Anonymous,
ReplyDeleteLikewise to us (the millenniums), we felt that you are able to make such decisions easily as you are already at/near/passed the age of retirement. The deviation from the intended outcome is limited due to the shorter time frame, and thus a lower risk. We (being more than 30 years to retirement) is taking a higher risk as chances of changes to the policies through a 30 years period is more probable. Putting money into the CPF is akin to betting on the government in the next 30 years. In my future, it might be concluded an easy decision from hindsight, but definitely a considerable one 30 years ago.