Monday 28 October 2013

Steady income source for the rest of your life

In the third of a four-part series on ways to better utilise your CPF money, The Sunday Times looks at how you can plan for retirement with a focus on the annuity scheme, CPF Life
By Mok Fei Fei, The Sunday Times, 27 Oct 2013

Don't rely on just CPF LIFE payouts

For young people, growing old seems a world away. But as we mark off the various milestones of life, our senior years seem to approach very rapidly indeed.

And there is no phase of a person's life for which financial planning is more crucial - especially now that Singaporeans are living longer than ever.

Prudent planning can mean golden years spent travelling and enjoying the grandchildren - rather than worrying about health-care costs and watching the pennies.

A vital tool that will aid you along this journey is the Central Provident Fund (CPF).

With effect from January, it is mandatory for Singaporeans and permanent residents born in 1958 or after to be part of the CPF Lifelong Income For the Elderly (CPF LIFE).

You will be placed on CPF LIFE if you have at least $40,000 in your Retirement Account at age 55, or $60,000 in your Retirement Account when you hit 65.

Under the scheme, you will get a monthly payout for the rest of your life when you reach 65. The more you put in, the higher your payout.

About 62,000 CPF members will turn 55 this year.

If you do not have enough in your Retirement Account to be placed on CPF LIFE, you will stay on the Minimum Sum Scheme, where you will get a monthly payout for about 20 years when you reach 65. But you can opt to join CPF LIFE, although the monthly payout may not be meaningful.

The drawback of remaining on the Minimum Sum Scheme is that you may outlive your savings on this scheme, said Associate Professor Chia Ngee Choon from the National University of Singapore (NUS) economics department.

"The Minimum Sum Scheme has no provision for longevity risks, so you would have to find alternative means of supporting yourself at an old age," she said.

Ms Tan Chui Leng, director of retirement income at CPF Board, said: "Singapore has one of the highest life expectancies in the world. For Singaporeans who are aged 65 today, about half of them are expected to live beyond 85, and a third are expected to live beyond 90. A growing proportion of retirees would, therefore, outlive their CPF savings if they were on the Minimum Sum Scheme."

If you are born before 1958, you can also choose to be part of CPF LIFE, any time up to one month before you turn 80.

There are currently 93,000 people under CPF LIFE.

While CPF LIFE offers a steady stream of income till death, financial advisers caution that you should not be overly reliant on CPF for your retirement. Here are some things you should take note of.

1 Check how much you have in your CPF retirement savings

When you hit 55, a Retirement Account will be created from your CPF savings in your Ordinary and Special accounts. If you turn 55 between July 1 and June 30 next year, you need to set aside a minimum sum of $148,000 in your Retirement Account.

Promiseland Independent managing partner Patrick Lim does not think many in this group of CPF members would have the full minimum sum when they turn 55.

"The problem here is that the most popular choice of CPF members is to invest their CPF funds in housing," he said.

Research has also shown that people tend to procrastinate and downplay the need to save, noted NUS' Prof Chia.

"In the first two years of their retirement, people tend to overspend on home improvements and holidays because they want to reward themselves," she said.

Even if the minimum sum is attained, experts say the amount may not be enough to sustain your pre-retirement lifestyle.

Depending on your age, gender, CPF LIFE plan and other variables, setting aside the full $148,000 under CPF LIFE will probably get you monthly payouts of around $1,100. The monthly payout may be adjusted for changes in life expectancy and investment income, for example.

Lower CPF savings in your Retirement Account will also mean lower monthly payouts. You can check how much you would likely get via the CPF LIFE calculator at

2 Calculate how much you need

Your needs and wants are likely to change upon retirement. For example, you might not need to spend as much on food and transport as you no longer commute to work.

Financial Alliance associate director Chenise Lim said you should decide on the kind of lifestyle you want so you can figure out if your retirement income is enough.

"Different scenarios will affect the level of funds you need when you stop working. If you want to continue to travel overseas, that could set you back by a few thousand dollars a month," she said.

Independent financial adviser Roy Varghese said planning ahead for the kind of life you want, at a young age, preferably before you are 40, would help.

"You can't just depend on CPF LIFE because most CPF members would have their savings tied up in their homes. You may have to prepare for part-time retirement employment," he said.

Ms Lim noted that as you grow older, you may also become more risk-averse, which will impact your investment portfolio and the amount of retirement funds you have.

Mr Varghese advises prudence in using your CPF savings for investments like gold and unit trusts so that your capital is preserved.

3 Choose a CPF LIFE plan that best fits you

Currently, there are two CPF LIFE plans to choose from: the standard plan and the basic plan, down from the previous four plans when CPF LIFE started as an opt-in scheme in 2009.

CPF's Ms Tan said: "Members had given feedback that they found it difficult to choose from four plans. We have, therefore, streamlined the plans to make it easier for members to make a choice."

The standard plan, which is the default option if you do not make a choice, gives you a higher monthly payout, and a lower bequest for your beneficiaries.

The basic plan does the opposite, giving you a lower monthly payout and a higher bequest.

As at the end of August, of the members who joined CPF LIFE this year, seven in 10 are on the standard plan while the rest are on the basic plan.

Besides the amount of bequest, Promiseland's Mr Lim says you should also take into account your health. "Those with existing medical conditions should opt for the CPF LIFE standard plan with higher monthly payouts as compared with the CPF LIFE basic plan," he said.


MADAM Linda Chen turned 55 this month, and apart from celebrating the occasion with loved ones, she faced an important decision.

She had to choose which CPF LIFE plan was best for her needs.

The mother of two, who also has two grandsons, attended talks conducted by the CPF on the two annuity options available.

In the end, she set her sights on the CPF LIFE basic plan, which will give her about $1,000 a month based on her putting in the applicable minimum sum of $148,000.

Opting for the other plan would have given her slightly more but would have meant leaving less inheritance for her children.

"I did my maths and felt the difference between the two plans of around $70 a month is not that big. And I wanted to leave more money to my children. It will be harder for them to cope in future with costs going up."

The amount that Madam Chen will receive from CPF LIFE is unlikely to be sufficient for her when she retires, given that she has regular household expenses, and household bills to pay.

Also, she does not want to cut back on her donations to charity, so her monthly expenditure could easily top a few thousand dollars.

Thankfully, she has other sources of investment income, including rentals from properties, when she retires.

Madam Chen has this advice: "Start making it a habit to save, even if it's just a little bit. Otherwise, you will suffer later."


Even though it is not mandatory for legal secretary Shanta Krishnan to sign up for CPF LIFE, the 60-year-old chose to join the scheme anyway.

In fact, Ms Shanta, a divorcee, was among the first Central Provident Fund members who opted in for the LIFE Balanced Plan in 2009. She was 56 at the time.

That was one of four options available to CPF members then, but with the consolidation of the plans to just two now, Ms Shanta has gone with the standard plan.

"I need more for myself, so that I don't have to trouble my son, who's now working in Australia, for an allowance," she said.

She saw how her parents benefited from a private annuity scheme that gave them a stable stream of income till their deaths and jumped at the chance to join CPF LIFE.

With about $49,800 in her retirement account, Ms Shanta can expect a monthly payout of some $350 a month.

She expects the payout to be enough to cover her expenses, as she spends between $200 and $300 a month now.

"I'm very frugal and just spend on my food, utilities and transport. But it's scary, prices of things keep going up, who knows if it is enough in future," she said.

Ms Shanta intends to work for as long as her health permits, and is building up her nest egg by renting out a room in her four-room flat in Bedok.

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