Describe how your CPF savings turn into a monthly income in retirement.
Before reading on, write down in one line what you think happens to your CPF savings when you turn 55. Keep that line in front of you while you read and check it against what follows.
People in their late twenties tend to hold one of three beliefs about CPF. Some think you get everything back at 55. Some think you can't touch the money until you die. Some think the government keeps it. All three are wrong. If you plan around them, you'll save the wrong amount privately. Usually that means you worry too much and do too little.
The real process has three parts: what happens at 55, how your savings become a monthly income, and what you can do now to change the size of that income.
At 55 the CPF Board creates a Retirement Account for you. Savings from your other CPF accounts move into it, up to a retirement sum.
The CPF Board publishes three retirement sums each year: the Basic Retirement Sum, the Full Retirement Sum and the Enhanced Retirement Sum. The CPF website lists the current amount of each. The Full Retirement Sum is the amount set aside by default. If you own a property with enough lease remaining, you can pledge it and set aside only the Basic Retirement Sum, which lets you withdraw more of your remaining savings. If you want a higher monthly income later, you can top up your Retirement Account towards the Enhanced Retirement Sum, the highest of the three.
The amount you set aside decides the size of your monthly payouts. A larger Retirement Account gives you a larger lifelong income, and a smaller one gives you less.
CPF LIFE is the national annuity scheme. From your payout eligibility age, CPF LIFE uses the savings in your Retirement Account to pay you a monthly income for as long as you live. The payout eligibility age is set by law and has gone up before.
The most important feature is that the payments last for life. Money you save privately can run out, for example if you live to 95 (an example age). CPF LIFE keeps paying until you die, however long that takes. It can do this because it pools longevity risk across all its members. Money left in the pool by members who die early helps pay the members who live a long time.
If you die early, your beneficiaries receive whatever you put into CPF LIFE that hasn't yet been paid out to you, plus any savings left in your CPF accounts. Your family is not left with nothing.
CPF LIFE has several plans:
Standard Plan: pays a level amount every month. Escalating Plan: starts lower and rises each year to keep up with prices. Basic Plan: payouts start low and then fall once your CPF balances drop below a level set by the CPF Board. The CPF website gives the current figure.
You choose a plan when your payouts are about to begin, and the CPF website compares the plans side by side. You can also start payouts later than your payout eligibility age, up to a limit set by the CPF Board. Each year you defer makes your monthly payout larger.
Every number in this system changes. The CPF Board revises the retirement sums each year for people who turn 55 in later years. The payout eligibility age is set by law and has been raised before. Your payout estimate depends on how much you set aside, which plan you choose and how old you are when payouts start. A figure from a news article or a relative was worked out for someone else under someone else's rules, so don't plan around it.
Use the retirement planning tools on cpf.gov.sg instead. Log in with Singpass, find the retirement payout planner, and let it read your balances. It projects them forward using assumptions you can see and estimates your monthly CPF LIFE payout. Note that figure. It is a snapshot, and it will change as you keep working and as the rules are revised.
Under the Retirement Sum Topping-Up Scheme, you can top up with cash. Before 55 the money goes into your own Special Account, and after 55 it goes into your Retirement Account. You can also top up for family members, such as your parents. Cash top-ups may earn income tax relief, up to a yearly limit. The CPF Board and IRAS set the rules on who qualifies, how much relief you can get and the ceiling on top-ups. These rules change, so check both cpf.gov.sg and iras.gov.sg before you count on the relief.
There are two caveats. First, once the money goes in, it is locked. It becomes retirement savings and can't be taken out for a home, a business or an emergency. Second, a top-up competes with your other goals. Lesson 1.1 showed that topping up while you have no emergency fund puts things in the wrong order. Build the emergency fund first.
Take Ben (an invented example). He is 32. His emergency fund is in place, he has closed the gaps in his insurance, and he has S$400 a month left for long-term saving. He can top up his Special Account, invest in his own account, or split the money between the two. The top-up gives him a lower but steady return, locked until retirement, plus possible tax relief this year. Investing on his own gives him access to the money and a less certain return. Neither choice is wrong. It depends on how much flexibility Ben wants. Module 6 covers the investing side of his choice. The course "CPF Mastery: every account and the choices you control" covers in detail how to plan top-ups and the timing that earns the most interest.
Before you top up, follow Ben's order. Make sure your emergency fund is in place and your insurance gaps are closed. Accept that the money will be locked in. Compare a top-up with investing on your own, based on how much flexibility you want. Then check the current tax relief rules on cpf.gov.sg and iras.gov.sg.
In lesson 7.3 you'll compare your estimated CPF LIFE monthly payout with the spending you want in retirement. Before then, log in to cpf.gov.sg with Singpass and find the retirement payout planner.
Open the CPF retirement planner, get an estimate of your future monthly payout, and write it down with the date you checked.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).