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 (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 www.cpf.gov.sg
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.
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