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I am very pleased to publish another thoughtful guest blog by EY. If you are concerned about retirement funding adequacy and if you wonder how it could be achieved in a risk free manner, you should read this:
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| What can we learn from squirrels? |
A big part of my retirement planning revolves around optimising my CPF-SA to generate at least $2,000 of monthly cash flow at 65 years old. With this in mind, I set the target at 32 years old to meet the CPF Minimum Sum by 40.
I hit 40 more than a week ago and have managed to accumulate $161,671.23 in my CPF-SA which coincides with the CPF Minimum Sum of $161,000 effective 1 Jul 2015.
Assuming that I continue to contribute $4,800 (based on approx. 14 months of income) to CPF-SA till 55 years old, my CPF-SA balance would grow to $391,833 by then.
In 15 years’ time at 55, I would expect the CPF Minimum Sum to be adjusted to $200,000. After setting aside this amount in the CPF-RA account to participate in the CPF LIFE plan, I would have $191,833 left in my CPF-SA.
If I stop contributing to my CPF-SA at 55 years old and leave the balance to earn 4% interest, my CPF-SA would have grown to $285,991 at 65 years old.
At 4% interest, I could collect $11,652 per year or $971 per month, without touching the principal amount.
For the CPF-LIFE plan, I intend to participate in CPF LIFE Basic which allows me to leave a larger bequest for my family. With $200,000 in RA at 55 years old, the monthly payout at the draw down age (DDA), currently at 65, is $1,316 - $1,467.
This would mean I would have a life time monthly income of $2,287 - $2,438 each month.
When I kick the bucket, my family will receive the following bequest:
Now, the pertinent question – ‘Would $2,000+ of income a month be sufficient to meet my retirement needs in 25 years’ time?
I don’t know. Really. What I do know is not putting all my humpty dumpties in one basket. Besides this fixed income plan, I will be actively building up other income sources.
Related posts:
1. Level 1 financial security for Singaporeans.
2. The best insurance to have in life (is passive income).
3. Millionaire or not, plan early for retirement.
Bloggy Award
56 comments:
Hmm . . . Good plan.
But . . . I prefer to supplement the state retirement plan with private retirement plans. We do not know if the state retirement plan will go bust when we are grey and feeble.
Click the like button here if this is facebook :)
Oh happy belated birthday! You have reach age of wisdom to resist temptation (四十不惑）
Aiyah shucks...I checked w my colleague. SA doesn't overflow to OA once min sum reached. I thot I read somewhere that it wld. Anyways, need to re plan.
you cannot contribute to your SA once you hit the limit ie $161k
working on the assumption of the 4% is quite risky.
Hi Rebel,
This is one cornerstone in helping us to plan for retirement adequacy. I think EY got it right in building other income sources. It is risky to depend on only one source. :)
Hi Mike,
There is a "like" button at the end of the blog post. ;p
Is 40 the age of wisdom? I still cannot resist being tempted by ice cream and chocolates. I am 43 already. Cham... :(
Hi pf,
Yes. Only funds in excess of the ceiling in the MA can overflow into the OA. Feel free to share your new plan with us here. :)
Hi Jimmy,
I think EY is referring to regular mandatory contributions.
I have exceeded the MS for my SA but, every month, I still see a part of my CPF contribution going into my SA. :)
Hi Victor,
Yes, it is 2.5% which is guaranteed but I doubt very much that 4% is going away anytime soon, especially not after such high profile talks this year at the IPS Forum on the CPF. However, you have provided food for thought. :)
Yup agreed!
I have said, most of the PMET can achieve the Minimum Sum easily. This is yet another classical example. Very well in line with my expectation ! :)
Just to confirm, after setting aside the required minimum sum, any extra money in RA can still earn 4% interest and can be withdrawn anytime?
My concern with CPF Life is the Draw Down Age DDA. It has been pushed back one year for every two years. 15 years from now, the DDA could be 72 or 73.
My original plan was to do cpf min sum top up until I hit min sum in 7 yrs time...coincidentally that would be when I am 41. Thereafter, I thot I cld hv more cpf in OA to finish repayment of my hdb. Then the 4% interest from SA could lead me to meet min sum by the time I am 55. Oh well...
Now, I suppose I cld adopt EY's strategy. Hee hee....probably need to be more prudent in my spending to pay my mortgage in future.
Hi Mike,
Thanks for your birthday wishes!
女人四十不 ’祸’。 红颜变黄颜，祸水不再，只留肥水几滩！LOL~
Hello everyone,
Thanks for your comments. :)
Some additional information about the distribution of funds in the CPF account.
1. Contribution to CPF-SA after meeting MS – our monthly CPF contribution from employment (self: 20%, employer: 16%) is credited into OA/SA/MA according to the percentage allocated for the age bracket we fall under. For instance, age 35-45: OA: 21%, SA: 7%, MA: 8%. After hitting the MS, the monthly contribution of 7% will still continue to be credited into SA but we are not allowed to do cash top up or transfer from OA. Currently, there isn’t any ceiling or Maximum Sum for SA, unlike MA which is subject to the Maximum Contribution Ceiling (MCC), currently at $48,500.
2. Contribution to CPF-MA - Any amount in excess of the MCC will be credited into the SA if the MS has not met. If the MS has been met, the excess will go to OA.
As for whether 4% is risky assumption, it is based on SA interest rate. I share the same view of AK- if the low interest environment in the past few years didn’t impact the SA interest, I’m inclined to think that downward adjustment is not likely, however not impossible. That’s why I try to increase my savings in SA as much as possible to take advantage of the interest rate while it lasts.
Likewise for the risk on the state retirement fund going bust – it is unlikely but not impossible. We have to ask ourselves if we have hedged the risks adequately. Weighing the pros and cons is important. :)
Ak 不惑，not 无惑。
U resist many temptations liao. Everyone has a weak point.
Since we are on the topic of CPF, I would like to share this from the CPF website:
"Any Medisave contribution in excess of the current Contribution Ceiling will be transferred to the member’s Special Account, if he is below age 55, or to his Retirement Account, if he is above age 55 and has a CPF Minimum Sum shortfall."
Those who use medisave to buy expensive private shield plan may want to take note.
Hi Wei Ler,
I believe money in our RAs will ultimately fund payouts to us through CPF Life. I don't think there will be any excess funds at all in our RAs.
However, any money in excess of the minimum sum in the SA or OA (whichever it may be) can be withdrawn at any time if we are no longer working from age 55.
The blog title is misleading. It should read "Get a lifetime income of >$2K a month from 65 onwards". Please, it attracted me to open this post.
Hi AK & EY,
I think having a maximum sum for CPF (referring to the MS) makes it really useful to employ such a strategy.
It allows one to have substantial savings in the SA even after 55. That amount is liquid (can be withdrawn anytime) and yet accrues 4% of interest. Such a risk-free and liquid investment is really hard to beat. =p
Hi athulican,
Thank you for the feedback. Point taken. I do not think that there is any intention to mislead but if the title has attracted many more people to read the article, I hope they have picked up something useful. :)
Hi 15HWW,
Isn't it a great way to help ensure retirement funding adequacy? :)
I know some people don't believe in this approach. Some say they could get better returns investing in the STI ETF but they are not comparing apples with apples. Some say they cannot trust the system and there isn't anything we can say that will change their minds. :(
I chose to believe the system and decided to help the system to help myself. So far, so good. I will know when I am 55, 12 years from now, if my faith in the system is misplaced or not. ;p
Hi AK,
There's no reason not to trust the system for now. After all I haven't heard any stories as to anyone who fulfilled all the rules and conditions can't withdraw their money.
If that day does come, I wonder how much would our local equities and properties be worth. Singapore is largely a country built on confidence and if the govt can't fulfill it's obligations, I really think all hell will break loose.
Hi 15HWW,
I share your sentiments. :)
Singapore issues AAA rated government bonds. If our government are not able to deliver on their promises and honour their debts, we are in big trouble. The S$ would probably decline in value and real estate in the country could see their values plunge as more people here move on to greener pastures.
If we cannot believe in the system, is believing in Singapore based assets much better? I wonder.
Hello Endrene,
Welcome to the fabulous 40s!
Just treat CPF as the fixed income part of our portfolio and we are good ;)
Just like the song Mambo No. 5, we can add a bit of equities, a little bit of property, and a teeny weeny bit of shinny metals...
Merry Christmas girl!
Keynes, our view and experience of past history is too short to inform us of what can happen to a country like singapore much less the fact that we are unique.
At this point, I hasten to qualify that I trust the system enough to contribute a far bit to it.
back to my point, few dynasties go beyond a few hundred years old much less in this information age where opinions proliferate online at a viral rate. And none of the dynasties have such a small size as singapore.
Rebel will plan for retirement by maxing the benefits of CPF. . . And work on the assumption that it may go bust when Rebel is old and grey by exploring other streams of income to get to retirement and through retirement.
=b
Some thoughts: Why the seperation of SA and OA when eventually they are the basis of CPF Life. from the CPF website:
On your 55th birthday, your Retirement Account (RA) is created by transferring the savings from your Special Account (SA) and Ordinary Account (OA). This will form the Minimum Sum (MS).
Secondly, if you are basing the set aside with what MS will be 15 years from now, perhaps you can explore being a bit more conservative, considering that for the past years the MS growth rate is close to 6%. The 155k is going to grow to 371k by then.
Wa EY,
Your chinese power lei, effective bilingual!!
It's ok. 红颜美人多薄命，better to be 才女than美女
I think cpf is just another way to improve our retirement strategy. Maybe i shouldn't have used the part of my oa to pay a downpayment for a property. But well, wats done is done. ;)
Hi SMOL,
Merry Christmas!
Only you can think of financial planning like Mambo No.5. Haha.
Hi Rebel,
We face all kinds of risks every day. Some we choose to ignore and others we choose to deal with them and move on. Inevitably, there will also be certain risks that we choose to harp on disproportionately. At the end of the day, it is really our personal choice. :)
All the best to you!
Merry Christmas and a fantabulous 2015!
Hi Kyith,
I focus on growing my CPF-SA to harness the magic of compounding so that I will have surplus in my SA and my OA won’t be touched when I turn 55. You are absolutely right that CPF-RA funds can be made up by SA and OA funds. :)
The order of transfer at 55 to RA is as follows:
1. If SA savings has met the MS, the entire sum of MS will be transferred to RA
2. If the SA savings is less than the MS, then OA will be tapped to make up for the difference
3. If SA and OA savings are not enough to make up the MS, our property purchased using CPF savings will be automatically pledged, for up to half of your MS, to make up for the shortfall
As for the MS in 15 years’ time, it is highly likely that the MS will be more than $200,000. If we based on 3% annual growth rate for MS (i.e. inflation adjusted at 3%), it would be approx. $250,000. If I use a scenario of MS at $350,000 when I reach 55, this amount will provide me a monthly payout of $2,265 - $2,532 according to the CPF LIFE Payout Estimator. That would still meet my monthly cash flow target of >$2K at 65, just that the bequest to my family will be lower. :)
Thanks for weighing in on this!
Hi Mike,
My Chinese is 骗吃，骗吃 only.
当才女变 财女， 可找整容医生拔刀相助。So yes, it is better to be 才女 than 美女. 因为脑袋没得整。:P
Merry Christmas and have a prosperous year ahead!
Hi PIB,
There are many roads to Rome. Your property investment might take you to Rome faster? :)
I have a question.
If we shift most of the OA to SA and keep about $10k in OA. Does it mean the $10k in OA will enjoy 3.5% while the remaining $50k in SA will enjoy 5%? The extra 1% earned from the $10k in OA will go into SA... correct?
P.S. $10k is kept in OA to settle the initial payment for HDB BTO. Anyone does this?
P.S. On a monthly basis, whenever the employee and employer contributions come in, the OA will be re-balanced into $10k. Does anyone do this?
Hi Maomao,
If I remember correctly, the first $20K in our OA and the first $40K in our SA get that extra 1% in interest for a total of 3.5% and 5%, respectively.
So, you want to have at least $20K in your OA to take advantage of that extra 1% interest. :)
Monthly mandatory contributions to our CPF will be apportioned according to which age group we fall into. We don't have a say in this. ;)
Hi AK71,
How about those who chose to empty the OA completely and shift all the OA money to SA? Will the first $60k in SA earn the extra 1% instead?
For the monthly mandatory contributions, what I meant was after the employee + employer contributions had been apportioned into the OA-SA-MA, could we re-balance the OA on a monthly basis and lower it down to $0 or $10k (previous scenario) for property purchase purposes?
Hi Maomao,
This is from CPF Board:
"An extra 1% interest per annum will also be paid on the first $60,000 of a member's combined balances.
"The priority of the accounts that make up the $60,000 is as follows:
"1st: Retirement Account (RA), including balances used to pay for the annuity premium under CPF LIFE
"2nd : Ordinary Account (OA), up to $20,000
"3rd : Special Account (SA)
"4th: Medisave Account (MA)"
So, if we do not have a RA yet and if we have nothing in the OA, then, the $60K in the SA will get all the extra 1% in interest. :)
If you want to maintain only $10K in your OA at any one time, you could always do OA to SA transfer on a monthly basis. Unless CPF has a requirement for us to maintain at least $20K in our OA, I don't see why not. :)
If one have hit the yrly cpf contribution cap, would he still be to do OA to SA transfer? EY's plan is fantastic. I want to do that too by 40 but seems not possible unless i do an OA to SA transfer.
Another question is, if my MA already hit ceiling.(40something k). Would be SA be getting contribution of 7+8% instead? This would certainly speed things up.
Some of the discussions here focused on inflation and how it affects CPF. Well, two days ago, deflation was reported in the news to have hit Singapore for the first time in 5 years.
I wonder how that will affect CPF if it persists?
http://www.channelnewsasia.com/mobile/business/singapore-experiences/1545462.html
Hi BP,
From my experience, OA to SA transfer is not affected by the CPF annual contribution cap. I guess it makes sense because we are not contributing more to the CPF. We would just be moving the funds around in the CPF.
If we have hit the ceiling for the MA, the MA portion of our mandatory contribution will go to the OA instead, if I remember my case correctly.
Hi E H,
Persistent deflation will be a problem for any economy but because Singapore doesn't use interest rate as a tool, we would probably see the MAS allowing the S$ to decline in value then.
So, even if the interest rates in the CPF stay the same, we won't really be getting more bang for our buck in such a situation.
OK. That is the extent of my elementary understanding of economics. ;)
I am surprised so many profess doubts about CPF interest rates. They will atleast be what they are now. They are guaranteed to be atleast (OA=2.5%, SA=4%)
http://mycpf.cpf.gov.sg/Members/Gen-Info/Int-Rates
OA:
Savings in the Ordinary Account (OA) earn either the legislated minimum 2.5% per annum or the 3-month average of major local banks’ 12-month fixed deposit and month-end savings rates, whichever is higher.
SA:
Savings in the Special and Medisave Account (SMA) earn either 4% per annum or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is higher. The interest rate on SMA savings is adjusted quarterly, based on the interest rates on 10YSGS over a preceding 12-month period.
So the interest rates can only go up from here.
Hi EY,
May I ask how u achieve 161k of SA in 8 years?
Hi bluelite,
There are 4 factors contributing to growing my CPF-SA.
1. Regular mandatory contribution by employer.
2. Transfer of OA funds to SA. I transferred >$70K, based on my incomplete records.
3. Excess from Medisave above the maximum contributing ceiling (MCC). After I met the MCC, interest for Medisave and monthly contribution went into SA automatically.
4. Compounded interest at 4% in SA.
My case was quite straightforward. I have never made any cash top ups to my CPF accounts. I was just very conscious how I used my OA funds. I did not commit all my OA savings to service the housing loan. Over the years, when my income increased, so did my CPF contributions.
Dear all,
thanks for all the valuable financial advice! Btw, I am thinking if anyone toyed the idea of getting passive income from CPF.
Wonder if it is possible that CPF RA accumulate til 1 million (at age of 65) and at 4% return a year, we would be having $40,000 a year! That would be sufficient for most people and the best thing is the principal amount is left untouched. Is this really feasible?
Hi DQ,
I don't think that can happen because the cap on the RA is the prevailing minimum sum. So, we won't be allowed to push the balance in the RA to $1 million unless that happens to be the MS in that year.
DPM Tharman said during the IPS Forum on the CPF that the RA and the CPF Life is meant to help more the average person and not the rich. So, that is the reason why the cap exists.
Hi DQ,
Just for the fun of a desktop exercise - how might one be able to accumulate $1mil in CPF SA + RA?
We know there is a cap to MS and let's assume it to be $161,000. If we want our SA to hit $1mil by 55 years old, then we have to meet the MS by 18 years old and continue to contribute $350 each month to SA till 55. That's a whopping 37 years! At 55, we will have $1,061,835 in SA.
However, we need to note that at 55, CPF will automatically transfer the MS into our RA account to participate in the CPF Life plan which is an annuity plan. That means the principal amount will be used up at some point. It is the savings that remains in the SA that can be kept intact if we choose to withdraw only the interest without touching the principal sum.
So back to whether we can accumulate up to $1mil in CPF. It is possible but it would mean that we need to max out the voluntary contribution (VC)of $31,600 each year. Considering that VC will be distributed to OA/SA/MA and MA savings cannot be transferred to SA, it will take roughly 6.5 years to meet the MS. If we want to meet the MS at 18, VC will have to start when we are 11.5 years old!
However, if we target to hit $1mil at 65, then we just move back the age by 10 years. It is still a tall order for a 22-year-old to meet the MS. :)
Personally, I would prefer to build alternative passive income stream than to put all the eggs in the CPF basket.
Correction - it is a tall order for a 28-year-old to meet the MS not 22.
Thanks all!
Just a few more questions, say I am 38 this year and with transfer of OA to SA i already hit $15500, subsequently every year i max out $31,000, and the money is distributed to OA/SA and MA. And my MA is already max out at $48000 this year, this means that the money and interest will flow to my SA.
Even if the minimum sum locked up from age 55 to 65 be say $300,000, wouldn't the rest of money compounded all these years inside my CPF account that make me a millionaire by the time i am 65?
maybe not 1 million but at least 800 to 900k?
Thanks!
Hi donquixote514,
It is indeed possible for someone to have $1m in all his CPF accounts combined by the time he is 55 after working for 30 years. :)
Here's a report from DBS on "Retirement Planning in Singapore"
One of the findings highlighted:
1. 85% of respondents expect to receive an average of S$3,500 per month for 15-20 years or more. Depending on the age group, they estimate they need about S$480,000 to S$700,000
to retire.
2. This may be an underestimation.
Calculations made by financial
experts on retirement suggest an even higher level of total funds required – S$900,000 – for retirement at 65.
http://www.posb.com.sg/iwov-resources/pdf/retirement/retirement_report.pdf?pid=sg-posb-pweb-others-retirement-research-report-btndownload-pdf
hi AK & EY,
I have some queries about the RA and CPF LIFE, hope u guys can advise. Like both of you, I had achieved the MS in my SA. From what I calculate, in 15 yrs time when I am 55, my combined OA & SA will almost certain exceed even the enhanced minimum sum by then which I assume a $7k increment from now which is about $270,000. The enhanced M.S will be around $400,000. My questions are:
i) Will all our OA & SA go to RA? or is there a cap for the RA because CPF LIFE payout estimator only allows up to $350,000 in the calculation?
ii) If there is no cap for the RA, will all the RA been used up to purchase the annuity? I prefer to keep some cash in RA and treat the RA as a saving account with gd interest rate for the flexibility to use cash in certain events.
iii) If not all our OA & SA will go to RA, and we continue to work after 55, we should be able to transfer all our OA contribution to SA and let it compound at a minimum 4% and since we had achieved the M.S, we should be allowed to withdraw at any time we want although we need to fill up a form.
Pls correct me if I am wrong on my understanding. Thanks
Hi kiawee,
At age 55, the MS or the FRS will be earmarked for the RA. The money will come from our SA and if it is sufficient, our OA is untouched. If there is money remaining in the SA after the FRS has been put into the RA, that remaining sum stays in the SA. The RA and the SA currently are paid the same base interest rate of 4% per annum.
If we continue to work past age 55, we will continue to contribute (i.e. mandatory contributions) to our OA, SA and MA. However, we are no longer allowed to do any OA to SA transfer if we have hit the MS (FRS) in our RA. We will still be allowed to do voluntary contributions (with no tax incentive) as per annual contribution limits set by the CPFB annually.
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