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Part 2: Funding Your Retirement
Welcome to Part 2 of the three-part series “Are You Ready for Retirement?”. If this is your first time reading this series, you may wish to read Part 1 first.
We talked about what retirement means to us and realise it is different for each of us. What retirement means to you affects how you go about funding it. Part 2 explores how you can fund your own retirement based on your goals and aspirations. Be warned! There will be some tough questions you have to ask yourself about how much you earn, how much you spend and how much you can save and invest. It is not fluffy-lovey-dovey I “think” I can retire but some cool calculations based on your own lifestyle and living standard.
Retirement Funding 101: Weighing Your Options
To retire means to set aside sums of money to provide for your projected living expenses when your paid employment stops. The reality of today’s world of rising inflation coupled with the inherent insecurity of jobs mean that this becomes even more challenging as we look forward to our own retirements. In simple language, “it’s gonna be tough, baby!”
You can tackle retirement funding two ways. The holistic approach would be to examine your lifestyle expenditure needs and project it into the future and then see how much you need.
I will first tackle it by looking at how much you can take out from the system taking the example of an employee who is earning a salary and has Central Provident Fund (CPF) contributions by his employer and his own which is typical for many of us salary-men and women in the Lion City.
CPF-funded Retirement
What is CPF
Your retirement funding through the CPF is actually your own money. Under the CPF system, the employer contributes a portion (currently about 14.5%) of an employee’s wage (subject to montly cap of $4,500) into his CPF account. The employee also contributes 20% of his monthly wage as a form of compulsory savings (subject to cap. of $4,500). The monies are distributed across three types of accounts with your CPF accounts, the ordinary account, special account and medisave account. The ordinary account monies can be used to purchase property as well as for investments subject to caps. The special account cannot be used for property but can be used for approved investments while the medisave account can only be used for hospitalisation expenses, purchasing approved medical insurance or for specified chronic disease management outpatient costs.
Your CPF is your main retirement vehicle since the employer “matches” your contributions into your retirement account. Under the CPF rules, you can withdraw your CPF when you reach 55 years of age. But there’s a catch. By the time you hit 55 by 2013, you need to set aside $120,000 minimum sum (from ordinary and special accounts) and $29,500 medisave minimum sum (from your medisave account) before you can withdraw your monies. The table below illustrates how much you can withdraw when you reach 55. You can also try out CPF’s tool to estimate how much can you withdraw.
CPF Minimum Sum and its impact on you
Now here’s the interesting part, if you DO NOT HAVE the minimum sum of $120,000, you can only withdraw $5,000. This applies for many of us because those who have bought their residential homes would have most of their CPF ordinary account monies inside our home equity. That’s right, you will have $5,000 out of your retirement account at age 55.
The CPF Board does not allow you to withdraw (except for $5,000) your minimum sum below $120,000 (by 2013) but you can invest this minimum sum, i.e. $120,000 or lesser in:
a. A life annuity from a participating insurance company;
b. A participating bank; or
c. the CPF Board.
But wait, here’s the more…
Previously, the CPF Board allowed you to use your property purchased with CPF monies to be pledged to make up for the minimum sum so you can withdraw more. If you have CPF balances (ordinary and special accounts, excluding medisave) from $10,001 to $212,000, you can withdraw up to 50% of the balances with the remainder using your property as a pledge. But come 2013, you cannot pledge your property and would likely be able to only withdraw $5,000 unless you have more than $120,000 in your CPF ordinary and special accounts and more than $29,500 in your medisave accounts.
What happens to Minimum Sum
Your minimum sum can be used to buy a life annuity from a participating insurance company, leave the money with a participating bank or the CPF Board. These monies will be kept by the respective organisations who will start paying you from the drawdown age - 62 currently but 65 in 2018. Hence, you would need to fund your retirement living expenses from age 55 to 65 (10 years).
This means that you cannot retire at 55 unless you have sufficient money to last you for the next 10 years when the minimum sum payout starts. Current minimum sum of $106,000 if left with NTUC Income Classic Annuity at age 55 will pay you a monthly amount of $634.95 (projected at 2% per annum interest) for life starting age 65. If your CPF monies is the only source of income, can you survive on $634.95 a month? That is the question you need to answer to determine if you need to have MORE or just sufficient at minimum sum. Remember, you still have to fund your lifestyle from age 55 to 65 so it’s likely most of us can only afford to retire at 65 when the annuity kicks in.
If you leave the money with CPF (based on current minimum sum), they will pay you about $910 for the next 20 years, i.e. from age 65-85 before your minimum sum runs out. If you think you will not outlast the average life expectancy, that’s also a plan.
CPF Life (aka Lifelong Income Scheme, aka Compulsory Annuity, aka zhenghu chope your money)
To complicate issues, the Government announced CPF Life Scheme which is a compulsory (i.e. NO CHOICE LAH!) annuity for all intents and purposes. Under the minimum sum, if you opt to leave your monies with the CPF, after 20 years, the payouts will cease and you will be a burden to the rest of tax paying residents if you cannot support yourself. Such a fiscally imprudent situation will prevent the gahmen from buying another batch of F-15 Eagles or develop more high-tech SAF so you must not develop a “crutch” mentality by relying on gahmen (who incidentally did nothing much to put $$$ into your CPF accounts except for occasional top-ups since CPF is YOUR OWN MONEY!)
You are automatically included in CPF Life if you are aged 50 and below in 2008 and have at least $40,000 in your CPF minimum sum at age 55. You need to chose which Refundable Premium (RP) plan which makes a difference to payout and how much you will leave your beneficiary. Generally speaking, if you are live for now and no need to give ah-boy/ah-girl a cent, just go for RP65 where payout will start at age 65. This means you get more payouts but “lugi” or lose if you kick the bucket early as a higher portion of your minimum sum is deducted for the RP and is NOT GIVEN BACK to your estate when you pass away. But if you wish to give as much to your beneficiary, you may consider opting for RP90, i.e. the smallest portion of your minimum sum is locked and your estate benefits from the higher bequest should be pass away. You need to weigh the pros and cons between your lifestyle needs and the thought of letting your own CPF monies go back to the raykat (people) should you be unable to make outlast the CPF Life Scheme.
In summary, the CPF-funded retirement basically requires you to continue working until the drawdown age of 62 or 65 unless you have more than minimum sum and medisave minimum sum in your CPF. The economic reality for many of us working employees is that our properties suck out most of our CPF ordinary accounts and hence, we would have to do our sums to see if the excess over minimum sum can sustain us until the drawdown age occurs. If it cannot, you have to be resigned to work until 62 or 65.
Self-Funded Retirement
If CPF not enough, what is enough?
The discussion about the CPF-funded retirement possibly makes some of you realise, CPF is “Money Not Enough”. So to truly retire, you have to build up retirement monies OUTSIDE of CPF. In order to do that, you have to live within your means, i.e. spend less than you earn monthly, and invest the savings in investments that grow to fund your retirement.
My ideal retirement planning without taking into consideration CPF is this - I would like to retire at around $30,000 per annum. To generate $30,000 per annum, at a realistic 5% returns, I would need to have a capital sum of $600,000. It’s that simple. Of course, the mechanics are more complicated but the concept is simple. Plough back savings, interest, dividends, yields, capital gains into investible capital. Grow that capital to $600,000 and invest in portfolio that yields 5% per annum. There you go, instant retirement!
You can also consider converting insurance plans into annuities as you approach your 50s to 60s as by then your children should have grown up or you would be less concerned about protection. My own take is to start developing my blog monetisation as well as to grow my means in order to semi-retire way before age 65.
Having just finished reading and reviewing my thoughts to “Your Money or Your Life” by Joe Dominguez and Vicki Robin, I realise that the more I simplfy my life and live a frugal AND fulfilling life, I may not need that $30,000 a year. This is because my mortgage has been paid up and thus my CPF is now fully building up as a true retirement vehicle without the encumbrance of having the deductions for mortgage instalments. In addition, as I learn how to cook and live simply, I realise now my small luxuries in life can get smaller with me feeling just as happy knowing I am healthy and my family is happy.
Retirement as an age is increasingly an out-moded concept because it traps us into this time-money trade-off we call the rat-race. It presumes working and working and working until 62 or 65 and then being at the mercy of your payouts from CPF or CPF Life. It’s all right if your working life is challenging, exciting and fulfilling. But not many of us live to work. We work to live.
Right now, I work to live but at the same time with an eye on working to retire because every cent that does not go into current lifestyle funds my future retirement regardless of the retirement age.
What type of retirement funding model would you choose?
Be sure to check out part 3 - Can I Truly Retire where Panzer examines the reality facing many of us by complicating the entire retirement issue by the assumptions we hold from now until the retirement age/amount/time.
Be well and prosper.
Related Posts:
Are You Ready for Retirement [Part 1 of 3] - What is Retirement?
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14 Comments to this entry.
look like the revised scheme is targeting yet the 1960’s babyboomer like me who will be in our late 40s by then.
I can easily conclude that most (unless you belongs to the high wage earners) will not be able to get any money from CPF except the token sum of 5k when reach 55.
How certain are you on the removal of pledging your HDB property to the minimum sum ? Was it shown on CPF’s website? Anyway I will check
if yes, then many will be in deep deep shit !!
Hi theunfortunatebabyber
It was reported in the following news release on the CPF Board website.
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_16June2008.htm
“Phasing Out 50% Withdrawal Rule
Currently, members who are unable to meet the full CPF MS at age 55 are allowed to withdraw the first $5,000 or 50% of their savings in their CPF Accounts1, whichever is higher. Members who are able to meet the full MS will be allowed to withdraw the remaining monies in their CPF Accounts.
As announced in 2003, from 1 January 09, the percentage for withdrawal will decrease from the current 50% to 40%, and thereafter be further reduced every year by 10 percentage points. Therefore, from 1 January 2013, CPF members must meet the CPF and Medisave Minimum Sums first before they can withdraw their remaining Ordinary Account and Special Account balances at age 55. However, CPF members can continue to withdraw the first $5,000 from their Ordinary Account and Special Account balances.
The change in the withdrawal rule will enable members turning age 55 from 1 Jan 09 to set aside more savings for their retirement.”
I have check with cpf board and apparently the pledging of minimum sum (50%) by property paid thru cpf still stand.
No changes as yet. you may want to get the facts right before posting . Thks & gd day
Hi the unfortunatebabyboomer
I actually mentioned that the change takes place in 2013.
“Previously, the CPF Board allowed you to use your property purchased with CPF monies to be pledged to make up for the minimum sum so you can withdraw more. If you have CPF balances (ordinary and special accounts, excluding medisave) from $10,001 to $212,000, you can withdraw up to 50% of the balances with the remainder using your property as a pledge. But come 2013, you cannot pledge your property and would likely be able to only withdraw $5,000 unless you have more than $120,000 in your CPF ordinary and special accounts and more than $29,500 in your medisave accounts.”
Just to clarify, did you check on the current rule, where it IS still allowed because the withdrawal percentage is being phased in from 1 Jan 2009 by 10% each year until 2013 when it will be removed or about the rule in 2013?
Would be helpful if you could clarify.
Cheers.
CPF rules keep adjusting, it will be even more stringent in another 5-6 years.
If property cannot be factored in, it is really difficult to meet the minimum sum of $120,000. Most people can only contend with $5000 at age 55.
The Special Accounts is no longer a fixed rate, it will be pegged to the 10-year Singapore Government Securities plus 1 percentage point.
Will it benefit us in the long run?
jeflins last blog post..Inflation Of Money Supply Responsible For Speculative Bubbles
[...] I will first tackle it by looking at how much you can take out from the system taking the example of an employee who is earning a salary and has Central Provident Fund (CPF) contributions by his employer and his own which is typical for many of us salary-men and women in the Lion City. Read more… [...]
Hi jeflin
Yes, the problem is that the Government changes the rules ever so subtly over time. Majority of folks do not really sit down and think through how this impacts them in 10-20 years’ time.
Even for me, I only realised the full impact as I was writing the article and thinking about the issue.
It’s the proverbial cooking the frog illustration. How do you cook a frog? By putting it in water and slowly turning up the fire. That’s what’s happening in the CPF rule changes.
Factors that affect our retirement:
1) Employer CPF contribution rates go down during periods of economic slowdown, meaning there is less money for retirement.
2) Salary caps on CPF contributions by employer at $4,500. Even for those who are earning relatively high salaries that are affected by the cap, they lose out on employer’s part of contributions and unless they develop their own retirement savings, the higher take-home pay could be spent on lifestyle expenses
3) Pegging of SMRA accounts to long-term Singapore Govt bond interest. As you pointed out, this was lower than the previous 4% and thus the govt has introduced the 1% extra (subject to cap of first 20k for ordinary account and next 40k for special, medisave accounts). But this cushion could be withdrawn come 2010 as government did not guarantee this 1% extra beyond the 2 years (which will by then take us to GE 2010/11)
In short, retirement planning should be done NOW not later when we near 55.
[...] Retirement?”. If this is your first time reading this series, you may wish to read Part 1 and Part 2 [...]
hi panzer
in comment2, the paragraph you pasted doesnt say anything about pledge of property?
http://mycpf.cpf.gov.sg/CPF/my-cpf/reach-55/Reach55-2.htm
”
If you are unable to set aside your full Minimum Sum in cash, your property, bought with your CPF savings, will be automatically pledged for up to half of the Minimum Sum.
”
unless they announce any new plans, it seems you still can pledge ur property in 2013. =)
but i do agree, with the interest change ( the peg ) and contribution caps and rates for employers, it does not seem to be in our best interest.
AND the most important liner would be “retirement planning should be done NOW not later when we near 55.”
i think this is very very important.
Be Well and Prosper.
Hi Bairen
The CPF’s web information is somewhat opaque. I read the CPF website’s FAQ (reproduced below):
=================
CPF Withdrawal
1.
How much can I withdraw from my Special and Ordinary Accounts when I reach 55?
If you reach 55 between 1 July 2008 and 30 June 2009, the following rules apply:
CPF Balance at age 55 (excluding the amount in the Medisave Account) Amount which can be withdrawn
$5,000 or less
*
The member can withdraw all his savings
$5,000 to $10,000
*
The member can withdraw up to $5,000 and set aside the remainder in his Retirement Account*.
$10,001 to $212,000
*
The member can withdraw up to 50% of the total balance in his Special and Ordinary Accounts. The remainder will be set aside in his Retirement Account.*
Above $212,000
*
The member can withdraw all his savings after setting aside the Minimum Sum of $106,000 (as at July 2008) and the prevailing Required Amount ($14,000 for 2008) in the Medisave Account [see Question 2].
*The Retirement Account is created when a member reaches age 55.
From 1 January 2009, members who reach 55 can only withdraw 40 percent of their Special and Ordinary Account balances, and then the remaining balances, if any, after they have met the CPF Minimum Sum and the Medisave Required Amount in the Medisave Account. This percentage of withdrawal will go down by 10 percentage points each year.
Please see the table below:
Withdrawal of Special and Ordinary Account Balances at age 55
Until 31 Dec 2008
50%
1 Jan 2009
40%
1 Jan 2010
30%
1 Jan 2011
20%
1 Jan 2012
10%
From 1 Jan 2013
Only the Special and Ordinary
Account balances after setting
aside both the CPF Minimum Sum
and Medisave Minimum Sum
can be withdrawn
From 1 January 2013, members who reach 55 can withdraw their Special and Ordinary Account balances only after setting aside the CPF Minimum Sum and Medisave Minimum Sum. However, members can still withdraw the first $5,000 at age 55 (see Question 2 below).
Please refer to Annex B for examples on CPF withdrawal.
======
Basically, while the CPF website did not outright say that you CANNOT pledge your property after 2013, the fact is that the website clearly states that CPF is phasing out the 50% withdrawal of CPF monies from OA and SA after 1 Jan 2013. So from now until 2013, you still can pledge but the % of amount to be pledged is reduced, i.e. you can withdraw lesser and lesser portion of your MS even after meeting it.
By 2013, the information is silent on the CPF pledge. I actually emailed my query to the CPFB (after being put on hold twice for more than 5 mins) and CPFB answered my query.
The reply also has cleverly omitted any mention of the pledge but the figures are undeniable. If you do not have MS by age 55 from your CPF OA + SA, you can only withdraw $5,000 by 2013.
Be well and prosper.
Below is the 2 emails I sent to CPFB and their official reply. It’s official. Come 1 Jan 2013, If you do not have MS (est. to be at least $120,000 by 2013), you can only withdraw $5,000. So be prepared to fund your retirement from age 55 to 65 with $5,000 unless you continue to work or have personal retirement funding ON TOP OF your CPF.
If you still are not convinced, PLEASE CALL CPF BOARD’s hotline or email to RETIREMENT @cpf.gov.sg for clarity.
========
RETIREMENT @cpf.gov.sg
to rod.loh @gmail.com
date Mon, Jul 7, 2008 at 9:11 AM
subject Re: CHANGES IN CPF MINIMUM SUM, MEDISAVE MINIMUM SUM AND MEDISAVE CONTRIBUTION CEILING FROM 1 JULY 2008
mailed-by cpf.gov.sg
hide details 9:11 AM (43 minutes ago)
Reply
Dear Mr Loh
Thank you for your email of 4 July 2008.
From 1 January 2013, members who reach 55 can withdraw their Special and Ordinary Account balances only after setting aside the CPF Minimum Sum and Medisave Minimum Sum. However, members can still withdraw the first $5,000 at age 55.
Based on the figures you have provided,
Ordinary Account + Special Account = $80,000
You would be eligible to withdraw $5,000.
The remainder would be set aside in your Retirement Account.
If you have further enquiries, you may call our hotline at 1800 227-1188 (press 1, followed by 2) from Monday to Friday, 8am to 6pm.
Yours sincerely
–Edited out by Panzer—
Retirement Schemes Department
Central Provident Fund Board
________________________________________________________________
Plan early for your retirement. Log on to http://www.retirementready.sg today.
panzergrenadier
04/07/2008 08:10 PM
To: RETIREMENT@cpf.gov.sg
cc:
Subject: Re: CHANGES IN CPF MINIMUM SUM, MEDISAVE MINIMUM SUM AND MEDISAVE CONTRIBUTION CEILING FROM 1 JULY 2008
- Hide quoted text -
Dear –Edited out by Panzer—
Thank you for your reply.
When I reach 55 after 2013, with the same scenario, i.e. Ordinary Account + Special Account = $80,000, would I be able to withdraw $40,000 or only $5,000 since after 2013, the 50% withdrawal rule would be removed by then?
Rod Loh
On Fri, Jul 4, 2008 at 5:27 PM, wrote:
Dear Mr Loh
Thank you for your email of 3 July 2008.
Under the CPF Minimum Sum Scheme, members who reach 55 between 1 July 2008 and 30 June 2009 need to set aside a Minimum Sum of $106,000 in their Retirement Account, of which $53,000 must be in cash and the remaining $53,000 may be in the form of a property pledge.
Please refer to the following table on the amount a member can withdraw:
CPF balance in Ordinary and Special Accounts at 55 (excluding the amount in Medisave Account) Amount that can be withdrawn
$5,000 or less He can withdraw all his savings.
$5,000 to $10,000 He can withdraw up to $5,000 and set aside the remainder in his Retirement Account.
$10,001 to $212,000 He can withdraw up to 50% of the total balance in his Special and Ordinary Accounts. The remainder will be set aside in his Retirement Account.
Above $212,000 He can withdraw all his savings after setting aside the Minimum Sum of $106,000 (as at July 2008) and the prevailing Medisave Required Amount ($14,000 for 2008).
The Retirement Account is created when a member reaches 55.
Based on the figures you have provided,
Ordinary Account + Special Account = $80,000
You would be eligible to withdraw 50% x $80,000 = $40,000
The remainder would be set aside in your Retirement Account.
If you have further enquiries, you may call our hotline at 1800 227-1188 (press 1, followed by 2) from Monday to Friday, 8am to 6pm.
Yours sincerely
–Edited out by Panzer—
Retirement Schemes Department
Central Provident Fund Board
________________________________________________________________
Plan early for your retirement. Log on to http://www.retirementready.sg today.
panzergrenadier
03/07/2008 03:59 PM
To: cpfboard@cpf.gov.sg
cc:
Subject: CHANGES IN CPF MINIMUM SUM, MEDISAVE MINIMUM SUM AND MEDISAVE CONTRIBUTION CEILING FROM 1 JULY 2008
I refer to the News Release dated 16 June 2008 (attached below).
I would like to clarify that as a CPF member, if I do not have sufficient balances in my retirement account for minimum sum at age 55, I would only be able to withdraw $5,000 only?
For instance, if I had $80,000 in balances in my CPF, I would only be able to withdraw $5,000 and cannot pledge $40,000 using my property and withdraw $40,000?
Thank you.
Rod Loh
hi panzer
firstly, if i came across as being picky or difficult, i apologise. i do not mean to do so. i just wanted to make sure you got your facts straight. i do read your blog now and then and its in my bookmarks. so kudos to you.
secondly, if you wanted to ask about the pledge, (email to cpf) why didnt you just ask them direct? in your emails, you did not seem to ask about the pledge.
lastly, i would like to say i enjoy your posts and do hope you continue to share and help ignoramus like me, be it here or in hwz.
thanks.
Hi bairen
No apologies needed as no offence is taken.
When I sent out my 1st email to CPFB, I forgotten to ask the question about 2013. After I had sent, that was when I realised I should ask about the time-context of 2013, and hence the second email.
It’s okay for questions to challenge the validity of facts and figures. The CPFB’s news release wasn’t exactly the epitome of clarity. I had to read it a couple of times to realise the pledge is taken out.
panzers last blog post..Standard Chartered 18 month Time Deposit Promotion at up to 2.38% per annum (terms and conditions apply)
Hi panzergrenadier,
I chanced upon your blog and I’ve being reading your blog for the past 3 weeks. It is enriching and interesting because I am also a pro financial independence person.
I asked my husband to read your blog as well and we actually checked with CPF board regarding pledging of property rule. We specifically spelled out that the 50% withdrawal rule is related to the pledging of property and CPF’s answer to us is that we still can pledge our property by the time we reach 55.
Perhaps you might want to specifically asked whether you can use your property to pledge for 50% of the minimum sum..
I don’t mean to pick but just though of sharing this with you.
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