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Funding XX% of our retirement with our CPF savings.

Thursday, August 6, 2015

A question I get asked pretty often is how much of our retirement could be funded by our CPF savings and I always say that it depends on the kind of lifestyle that we want.

If we would like to have a car, travel and indulge in fine dining, for sure, we are going to need much more than our CPF savings in our golden years. If we are happy with the basic necessities of life, then, our CPF savings could go a long way to providing for our old age.

Whatever our retirement expectations might be, it pays to have an idea as to what our CPF savings might be able to achieve as a percentage of total funding required for our retirement. Then, we can make appropriate plans as to how we might be able to fund the shortfall.

I am going to share an email from a reader detailing his plan on how he is using the CPF to help achieve retirement adequacy and much more.

Now in his 20s, knowing what he wants at retirement, he came up with a target monthly retirement income of $10,000 from age 65. Based on the plan which he is sharing with us here, his CPF savings should account for 20% of retirement funding:

Hi AK,

My 2c: first 60k of combined balances of which up to 20k is from OA. I interpret it as if all 60k comes from SMRA (OA having $0), then first 60k enjoys 4+1% interest.

Anyways glad to see blogs like urs around. Been working for 2+ yrs and had transferred (a month back)/plan to transfer all my OA to SA and do the 7k min sum topup till i hit the future cap (est before i turn 35). My OA has nothing and I'm ok with that as my mthly expenditure is ard $700 :) agree that one shld aim to have annual cpf interest matching/more than covering the increase(s) in MS.

Rgd the medisave int. paying for premiums; was the exact same rationale i told my dad. His interest more than covers premiums and interest from the rest covers the rider (i.e. Pay nothing out of pocket for hospitalisation). He can feel free to pick a better policy (IP) without worrying (until such time when the interest fails to cover, then downgrade). For myself, plan to max out VC MA top ups to annual contribution ceiling ($36720 from 2016) which will also be subjected to the BHS ($49500 at 2016).

Lastly, to enjoy the maximum benefits of interest for top ups, either a) top up 7k at start of year (if u've 7k lying ard) b) top up incrementally near end of mth (interest is given based on lowest balance/mth so topping up at the end mth means lower op cost for lost interest that shld have been accrued on sum).

On a separate note, retirement/financial planning personally is abt attaining a level of passive income pegged to last drawn annual package (not expenditure) as it provides a Very long term goal (if one ever reaches it) and cpf is one component/source of passive income. I wld propose the following weighted sources of passive income based on 10k mthly at 65years: cpf (20%), blue chip stock dividends (50%), srs funds (15%), bonds (10%), unit trusts/funds (15%). Noted that payouts for these sources may not be monthly (DDA for cpf likely will not be 65 for my cohort either haha) as it's used more as a guide. Dont think i'll ever enter full retirement though; nothing to do to pass time!
*cld go on about industry allocation for blue chip stocks but that's another topic altogether :D

*Wld like to stay anonymous so pls use the above pseudonym thx!

The original intention of the CPF is to help fund our retirement. The reader has shown how he is going to take full advantage of the CPF to do what it is supposed to do.

AK did CPF-OA to CPF-SA transfers for the first 4 years of his working life, providing the magic of compounding a bigger amount to start with. Compounding is magical given more time but it is even more impressive when given a larger amount to start with.

Having said this, all of us have different circumstances. Some might not be able to do OA to SA transfers because they need the OA money to pay their home loans. Some might not have spare cash to do Minimum Sum Top Ups to their SA or Voluntary Contributions to their MA.

Although I am not dogmatic about the CPF, it is reasonable to say that it is about finding what each of us can do to take advantage of the system. If we want it bad enough, we will find a way and usually it starts by being financially prudent.

Related posts:
1. A lot of money in my CPF-SA is...
2. Make CPF a part of your child's savings plan.
3. A lifetime income of more than $2K a month.
4. An annuity: Would you rather have it or not?
5. The best insurance to have in life.


Ben said...

Typo on annual limit for CPF contribution. Should read $37,740.

Mao Mao said...

I think there is no need to transfer all the OA funds to SA until the OA becomes $0. The first $20k in OA earns an extra 1%. Mathematically, it is the same as emptying the OA and letting SA earn an extra 1%. Did I miss out anything for those who chose to make the OA zero?

AK71 said...

Hi Mao Mao,

It is for people who would like to have money in their CPF account compound at 5% per annum (for the first $60K in the SA if their OA is empty) rather than a third compounding at 3.5% per annum and two thirds at 5% per annum.

Of course, we have to note that this might not be an option for everyone, notably, those who need to use money in their CPF-OA to fund their home loans. These are usually CPF members who are married and might even have children. Or they could be singles who are 35 years or older who bought resale flats.

Therefore, I feel that for young adults who have just joined the workforce and who do not need to use money from their CPF accounts to purchase a flat (yet), OA to SA transfer is worth considering. :)

Ben said...

An impt consideration is the rate at which our OA$ increases compares to SMA$. Taking the e.g. Of a new worker earning 3.2k/mth with total annual package of 15mths, the OA allocation is 23% while SMA allocations are a combined 14%. The OA increases on average of 11k/yr while SMA increases by 6.7k. Hence the extra 1% interest for OA wld have been hit by end of Y2 while SMA would take ~5Yrs to reach 40k. Hence losing out on more than just the 1% extra interest (up to 2.5%!)

Altho as mentioned by AK; different strokes for different folks. There's even a disclaimer on the CPF site advising folks to plan finances well before making the transfer...

AK71 said...

Hi Ben,

That is a very good point. Yes, most of our mandatory contributions would end up in the OA and not the SA. This makes the argument, for those who have suitable circumstances, to do OA to SA transfers more compelling. :)

admin1 said...

is there any H&S rider can be paid out from CPF interest?

koon said...

Hi AK, I don't quite understand the part on medisave. What perks are there to max out MA? I believe that all hospitalization plans from private insurers will require us to top up in cash for full coverage plans.

koon said...

Hi AK, I spend my afternoon reading up more on VC. Realized there there are 2 types of CPF topping ups , 1) VC (which is always mentioned in your blog) 2) Minumum Sum Topping Up (MSTU).

1) VC is term used for topping up of MA.
2) MSTU is for topping up of RA (members aged above 55) or SA (members below age 55)

Both topping up schemes are tax deductible, but I can't find any info on tax deduction limit for 1). Only found info on 2), which tax deduction is up till $7000 per year. AK, able to clarify on tax for 1)?

AK71 said...

Hi admin1,

I don't know about the rest but Assist Rider for NTUC Enhanced Incomeshield must be paid for with cash.

AK71 said...

Hi Koon,

Premium for private shield plans can be paid for using money in our CPF-MA. Only the riders must be paid for with cash. If we do not have any riders, then, there is no out of pocket payment required. :)

Maxing out our CPF-MA allows us to earn attractive interest which will go towards paying the premium of whatever H&S policy we choose to have. Let the government pay for our H&S? That is the idea. :)

AK71 said...

Hi Koon,

There is no limit for VC to our MA and no limit on tax incentive that I know of.

There is also VC to our OA, SA and MA which is limited by the annual contribution cap and is the difference between this and whatever mandatory contributions made. There is no tax incentive for this VC.

Ben said...

VC MA tax relief is subject to the annual contribution limit (37740 from 2016) minus mandatory contributions (employer/employee contributions).

E.g. If mandatory contributions are 30,000, max VC MA tax relief is 37740-30000 or 7740.

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