How CPF LIFE can give you a passive monthly income worth the median salary - $3,000 - when you retire in Singapore

When we retire, we can rely on CPF LIFE to provide us with a monthly payout – for as long as we live – so we never run out of money in our old age. This is what makes CPF LIFE such a unique, powerful and important retirement planning tool for Singaporeans and PRs.

Compared to investments, which can be risky and have unpredictable or uneven returns, CPF LIFE is administered by the government. This makes it virtually risk-free.

In addition, while building up towards our CPF LIFE payouts, we earn a minimum of 4.0 per cent (and up to 5.0 per cent) per annum on our Special Account savings and 4.0 per cent (and up to 6.0 per cent) per annum on our Retirement Account savings.

How much do we need in retirement?

In a previous article, we wrote about how we can receive the average retiree’s expenses with CPF LIFE. We found that an average retiree in Singapore spends about $1,214 each month, and would need about $215,000 in their Retirement Account (RA) at 65 for an equivalent CPF LIFE monthly payout.

In this article, we want to explore how much CPF savings we will actually need in order to live on a decent monthly payout. To represent a “decent monthly payout”, we took the current 2020 median wage in Singapore – which is $4,534.

This figure includes both the employer and employee CPF contributions, and taking these away, it amounts to approximately $3,000 in take-home pay.

How much do we need in our CPF LIFE to get $3,000 each month?

We can simply use the CPF LIFE estimator – a calculator tool by CPF Board – to figure out how much we’re going to need in our CPF Retirement Account (RA) to get a monthly payout of $3,000.

Note that this is more than double of what the average retiree spends today – which, to recap, is $1,214.

* There are also Basic Plan and Escalating Plan that we can aim for.

For someone aged 65 today, they would have needed $386,900 in their Retirement Account (RA) when they were 55 in order to receive a $3,000 CPF LIFE monthly payout.

This might be difficult to manage if we were only aiming for our Full Retirement Sum (FRS) when we turn 55.

Firstly, the Full Retirement Sum for such people would have been $123,000 in 2010 (when they turned 55). Setting aside this amount would give them approximately up to $1,091 a month in their CPF LIFE monthly payouts.

For those who turned 55 in 2010, the effective Enhanced Retirement Sum (ERS) would have been $184,500 – or 1.5x the Full Retirement Sum – which would have provided them with a CPF LIFE monthly payout of up to $1,572.

This is still about halfway short of the $3,000 monthly payout we’re targeting to get out of CPF LIFE.

ALSO READ: How to invest using your CPF

Saving beyond the Enhanced Retirement Sum (ERS) in our Special Account

To make up for the shortfall, we should try to top-up our Special Account (SA) via the Retirement Sum Topping-Up (RSTU) Scheme as early as possible. This will help us get to the Enhanced Retirement Sum (ERS) and build even more funds above it.

This pot of money will continue compounding at 4.0 per cent to 6.0 per cent per annum, and will potentially be able to cover the shortfall from CPF LIFE to give us $3,000.

Using the case study for those turning 65 this year as an example, if they were able to hit their “Enhanced Retirement Sum” of $184,500 at 55, they would need to save another $202,400 in their Special Account.

This might seem like a lot of money, but there are many case studies on how we can accumulate $1 million in our CPF accounts by 65. We just need the long-term discipline to save towards our target amount.

Drawing down money from our Special Account (SA) after 65

Those who turned 65 this year need a remaining sum of $202,400 in their Special Account, after contributing the Enhanced Retirement Sum to CPF LIFE.

At this point, they can use their Special Account like an ATM – withdrawing the remaining $1,428 each month. On top of that, they still continue to earn an interest of 4.0 per cent to 6.0 per cent per annum on the remaining amount in their Special Account.

Doing this, their $202,400 will last till they are about 83 years old – which is around the current life expectancy in Singapore at 83.6 years.

Age	Special Account (SA) Remaining Balance
65	$202,400
70	$158,311
75	$104,670
80	$36,668
81	$19,832
82	$3,886
83	-$13,017

*Assumptions:

• Withdrawal of $17,136 ($1,328 x 12) at end of each year
• Interest of 6per cent earned on first $30,000, 5 per cent on next $30,000, and 4 per cent on remaining balances in Special Account

ALSO READ: Beginner's guide to CPF Retirement Sums (and how to get there)

Replicating this for our own retirement needs when we turn 65

Obviously, the figures stated in the article are for those who turned 65 this year. While it’s not going to be easy, it is doable to achieve a monthly payout worth the median salary in Singapore.

If we work towards saving our target amount by the time we stop working, we will be able to start withdrawing a sum that is more in line with the median salary of that year rather than what the average retirees are spending.

This article was first published in Dollars and Sense.