Changes to the CPF system and how it affects my retirement

As someone who is planning for retirement, it is obvious that any change made to the CPF system can easily throw a wrench into the gears of a smooth sailing retirement plan. Therefore every time the government makes a change into the CPF system, it warrants a close examination on the impact it makes to my retirement plan.

A new name for Minimum Sum and breaking it down further

In the past, whenever CPF publishes new information about retirement policies, they struggle to explain the details because it’s not a clear cut story about whether you meet your Minimum Sum or not. There are also options to meet only 50% of your Minimum Sum as well and it does get confusing at times.

Moving forward, we have new names in place of the CPF Minimum Sum which I feel, would help better explain CPF retirement schemes a lot easier.

Basic Retirement Sum

The amount you need to have in your CPF Retirement Account after pledging your property to CPF. Now we have a proper name for this instead of repeatedly saying “50% of your Minimum Sum” all the time. As of 2016, the Basic Retirement Sum will be $80,500. Meeting the Basic Retirement Sum and pledging your property will allow you to receive a monthly payout of $650-$700 at the age of 65 for life.

Full Retirement Sum

The Full Retirement Sum is the new name for Minimum Sum. It is essentially double the amount of the Basic Retirement Sum and stands at $161,000 as of 2016. For Singaporeans who do not own a property (or do not wish to pledge his/her property), he/she will need to meet the Full Retirement Sum in their Retirement Account. This will allow you to receive a monthly payout of $1,200-$1,300 at the age of 65 for life. Considering that the Full Retirement Sum is double of the Basic Retirement Sum, I’m surprised that the monthly payout for the Full Retirement Sum is not double of the monthly payout for the Basic Retirement Sum.

Enhanced Retirement Sum

The Enhanced Retirement Sum is for Singaporeans who want to receive a higher monthly payout for life. They can opt to top up their Retirement Account to three times the Basic Retirement Sum, which is $241,500 as of 2016 and receive a monthly payout of $1,750-$1,900 at the age of 65 for life.

Predicting your Basic Retirement Sum in advance

One of the recommendations made by the CPF Advisory Panel that I like is giving Singaporeans an advance notice of the Basic Retirement Sum applicable to them. The government has accepted the recommendation of increasing the Basic Retirement Sum by 3% annually from 2017-2020. This allows Singaporeans who reach the age of 55 in this time frame to have a good perspective of what they need to accumulate in their Retirement Account.

Assuming that the Basic Retirement Sum will grow by 3% consistently until I become 55 years old in 23 years time, the Full Retirement Sum that I need to accumulate in my Retirement Account would be $306,562.70. That is very close to double the Full Retirement Sum today!

While I don’t expect the Basic Retirement Sum to grow consistently at 3% (it may be even higher!), doing the math gives me a rough visibility on what my Retirement Account needs to look like when I reach the age of 55. It allows me to plan better and also work harder towards my retirement age.

Using your CPF charge instead of pledging your property to meet Basic Retirement Sum requirements

A property pledge is a commitment saying that if you sell your property, you will refund the pledged amount, as well as any CPF money used to buy the property and interest it would have accrued, into your CPF account.

A property charge is automatically applied when you use Ordinary Account savings to buy a property. The amount you used, and interest it would have accrued, must be returned to your CPF account if the property is sold.

One of the recommendations made by the CPF Advisory Panel is to allow the use of the property charge that most Singaporeans have with CPF to meet the Basic Retirement Sum requirements instead of pledging their property. For Singaporeans who don’t have a property charge, they can then pledge their property. It makes a whole lot of sense and I’m grateful for this recommendation to be approved.

By my calculations, it looks like I will be able to reach the forecast Basic Retirement Sum at my ideal retirement age of 50 if nothing changes to my employment status. As I am paying for my property using my CPF, I would have a decent amount of property charge accumulated that could be used instead of pledging my property for the Basic Retirement Sum.

Flexibility to withdraw 20% of my Retirement Account balance at the age of 65

Including the $5,000 that I could withdraw when I reach the age of 55, I can withdraw up to 20% (less $5,000) of my Retirement Account balance at the age of 65. While I don’t have any intentions to withdraw 20% of my Retirement Account at the age of 65, I think that this is a good option as nobody can predict what could happen in the future. The lump sum withdrawal could come in handy if I need to fully repay any outstanding loans.

A lump sum withdrawal at the age of 65 would naturally equate to a lower monthly payout for the rest of my life so I will have to think long and hard before making this decision.

Ability to opt to start payouts later, up to the age of 70

I bet the CPF Advisory Panel has looked the existing annuity plans provided by insurers when they came out with this recommendation. It’s a simple idea. If you opt to receive monthly payouts at a later age, you are allowing your Retirement Account to accumulate more interest. This is great for Singaporeans who don’t need the payout at the age of 65.

Personally, I plan to start my monthly payout at the age of 65 instead of deferring because I have a personal goal of retiring at the age of 50. While retiring does not equate to not working, it really does mean that I want to be self-sufficient and not fully rely on my employment income. The monthly payout could help to cover most of my monthly expenses (if not all).

What does these new changes to the CPF system mean to me

Having made a forecast on what the Basic Retirement Sum would look like when I reach the age of 55, I believe that I will be able to meet the Full Retirement Sum which is double of the Basic Retirement Sum as planned initially. That gives me the option of opting for the Full Retirement Sum or just meeting the Basic Retirement Sum and either use my CPF property charge or pledge my property to CPF. At this point in time, I feel that it is most likely that I would choose the former. My current plan of receiving monthly payouts at the age of 65 will not change as the incentive is not attractive enough for me to defer the payouts.

Having looked at the approved recommendations from the CPF Advisory Panel, what are your plans?

For more information, click here to download a summary of the CPF proposals.