You will be able to list the ways to increase your guaranteed income and what each one costs.
Jasmine now has two numbers from Lesson 2.1. At 65, CPF LIFE pays for a little over half of her essential spending, and by 85 it pays for less than a third (example figures). She wants to know whether she can raise that floor, and how much it would cost her.
Your floor is the income you can count on to cover essential spending. You can raise it in only a handful of ways. Each one asks you to give up something you have today, usually a lump of capital or some flexibility. In return you get more income you can count on later. Each option below comes with a rough price.
The most direct route is to put more money into your Retirement Account before payouts start. Your CPF LIFE payout depends on the balance in that account when payouts begin, so a bigger balance gives you a bigger monthly payout for life.
The CPF Board sets limits on how much you can top up. The rules for cash top-ups, and for transfers from your other CPF accounts, change from time to time. Some cash top-ups also get tax relief, up to limits that IRAS publishes. Before you put any money in, check the current top-up limits on cpf.gov.sg and the tax relief rules on the IRAS website.
The cost is control. Money in the Retirement Account stays there to pay life income. You can't take it back out later for something like a renovation or a medical bill. It also can't help with the bridge years, which are the years before CPF LIFE payouts start. In return you get income, backed by the national pool, that lasts as long as you live.
You can test a top-up in the CPF LIFE estimator before you commit. Enter a top-up amount and see how much the monthly payout rises. Then divide the top-up by the yearly increase in payout. The result is roughly how many years of payouts it takes to get your money back. You can compare that number with the other options.
Insurers sell life annuities too. You pay a lump sum, or a series of premiums, and the insurer pays you a monthly income for life or for a set term. Terms vary from product to product. Some guarantee only part of the payout, some return part of the premium if you die early, and some pay for a fixed number of years instead of for life. The Insurance Decoded course covers how to read a policy. Here the only question is whether an annuity helps your floor.
Suppose Jasmine pays S$100,000 at 65 for a life annuity of S$520 a month, which is S$6,240 a year (invented figures that do not describe any real product). Dividing S$100,000 by S$6,240 a year gives a plain payback of about 16 years, so she gets her money back at around age 81. After that, the insurer is paying her partly with money pooled from people who died earlier.
The fair comparison is with keeping the S$100,000 invested and drawing the same S$6,240 a year yourself. At an assumed 3% a year, the invested pot lasts about 22 years, to around age 87. So 87 is her break-even age, and the annuity pays more in total only if she lives past it. If she died at 80, keeping the money would have been better, and some of it would have gone to her children. If she lived to 95, the annuity would keep paying for eight years after the pot would have run dry (95 minus 87).
A life annuity takes your capital, and the chance to leave it to someone. In exchange it removes the risk of living a long time. Whether that trade suits you depends on how much of your essential spending is already covered and how long people in your family tend to live. Before buying one, check these four things:
How the payout per S$100,000 compares with what the same sum would add through a Retirement Account top-up, where the rules allow one. Whether the payout is guaranteed or depends partly on bonuses. What happens if you die early. Whether the payout rises with inflation. Most are a level annuity, which stays fixed in dollars for life.
Rent from a room and income from part-time work can act as a floor while they last, and they're worth planning for. Each one can stop, though, so neither belongs in your floor at full value. Count them only for the years you are confident about, and at less than the full amount. If they are uncertain, count them as nothing.
Jasmine could rent out her spare room for S$900 a month. She counts it as zero in her floor, because she isn't sure she wants a lodger and the rent depends on finding one. She treats it as a backup she can switch on if markets go badly. Lesson 6.1, "Your home as a retirement asset", covers the rules on renting out part of an HDB flat.
She also expects to keep consulting three days a week for a few years after 60. That income covers part of her bridge years, which Module 3 deals with, but it won't support her essentials at 80.
The Silver Support Scheme pays extra income to seniors with low lifetime wages and little family support. Eligibility depends on factors such as your lifetime CPF contributions, your housing type and your household income. The CPF Board assesses it automatically, and the amounts and conditions are on cpf.gov.sg. If you qualify, it's a real part of your floor, and you shouldn't feel awkward about counting it. Many readers won't qualify, so check rather than assume either way. If you're planning with an elderly parent, check your parent's eligibility too, because it changes how much the family needs to cover.
The last lever works on spending, not income. If less of your spending counts as essential, the floor you already have covers more of it. You could clear the mortgage before you stop work, move to a home with lower running costs, or arrange your insurance so the premiums don't spike late in life. Each of these brings your essentials closer to your guaranteed income.
Before the activity, look at each option above against your own situation: what you can top up, whether an annuity fits, which income you'd count, and whether any support applies. Then decide which ones are actually open to you.
List the ways you could raise your floor, and write the trade-off for each in one line.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).