Buy the CPF-RA and win win!

Reader said...

Hihi, thank you for taking the time to answer my query. I was trying my luck and wasn’t really expecting a reply! Excuse me while I have a fan girl moment! 😍😍😍

The post which you recommended for my reading was the post that got me started thinking about my parents cpf! I tot it was a really brilliant idea! Would never have occurred to me 😂

We’re thinking to get the best of both worlds by converting my mom to CPF Life and ‘buying’ over my dad’s RA.

We’ll pay him the $XXXX in his RA by topping up my mom’s RA with $XXXX. And then convert my mom to CPF Life at 70 so they can get a fixed payment for the rest of my mom’s life. 

Not sure if hopefully is the right word to use in such situations, but statistically speaking, women usually outlive men, so that’s the bet we’re taking.





At the same time, we’ll top up my dad’s RA to eventually hit $30k while leaving him on the old scheme (i.e. Retirement Sum Scheme) so that we can get the 6% interest. This 6% will also be able to help us provide more for them if needed.

Would like to run it by you to see if there are any insights/ different perspective that we missed.

AK said...
You have cracked the code. Haha. 😜





It is a win win situation for the parents and for the child.

Brilliant, she is!

Related post:
CPF to help fund our retirement...

60% higher interest income from age 55?

Reader:
Would you leave your money in CPF-OA (beyond 55)? 

I can understand CPF-SA @ 4%. 

Wouldnt it be better to move into CPF Life for better returns? 

Noted that leaving it in CPF-OA will provide more flexibility. Thanks.

AK:
We have the option of moving more funds into the CPF-RA up to the prevailing ERS (1.5x the prevailing FRS) at age 55. Is it better? 

If what you want is a higher payout from CPF Life, yes.

However, do note that you will be required to move funds from your CPF-SA first and not from your CPF-OA. 

Only when the CPF-SA has insufficient funds, then, the CPF-OA is tapped.





So, let us say we have quite a bit of money remaining in our CPF-SA after our CPF-RA is created and FRS requirement met at age 55, it is not all that more beneficial for us to move more funds into the CPF-RA because we are not getting a higher interest. 

It is the same 4%, assuming things were to remain unchanged.

However, for someone whose CPF-SA is depleted after the creation of his CPF-RA, if he wants to have the ERS in his RA, he would be moving funds from his CPF-OA and the funds would then be receiving 4% instead of 2.5% interest. 

That is 60% more in interest income!





Like you said, flexibility is sacrificed but, in my opinion, the loss is well compensated.

Sweet but not available for everyone.

I have the happy problem of having much more in my CPF-SA than the prevailing FRS. 




So, will I move more money into my CPF-RA at age 55 to meet ERS? 

I will decide when I turn 55.





To anyone who just dropped in, another blog on the CPF was published earlier today. 

See:
CPF Life Escalating Plan.

Thinking of topping up CPF-SA with $130K.

http://singaporeanstocksinvestor.blogspot.sg/2014/08/how-to-upsize-100k-to-225k-in-20-years_4.html?showComment=1481415040678#c7130698713317820054



Hi Marcus,

Firstly, you are still young! You still have 20 years before you hit 55. Time is still on your side and your own calculation proves it. ;)

What you are thinking of doing (i.e. $130K lump sum contribution to you CPF-SA) is called a Minimum Sum Top Up (MSTU). This is meant to help us meet our retirement adequacy. My understanding is that it (together with interest earned) cannot be withdrawn for any other purpose. At age 55, the money will go to our CPF-RA and we will get a monthly payment for life from age 65.

I would suggest doing a gradual top up to the SA over a number of years. This is because the first $7K of top up each year will allow you to enjoy income tax relief. Unless you do not pay income tax or pay very little income tax, this makes good sense. 

Enjoy many years of income tax relief in this way? Sounds good to me.

So, now, you have ($130K - $7K) $123K left. You might want to put the money in some fixed deposits with promotional interest rates for 12 months. There are many offers available. Go take a look. Next year, take $7K out for MSTU and lock the rest up again in fixed deposits. 

Why fixed deposits? 

You have already decided that this is money you want to use to help fund your retirement. So, I feel that it is best not to take too much risk with it.

Actually, if you believe in having an annuity that will pay you for life from age 65, you could also opt for ERS which is 50% more than FRS. You decide when you are 55. 

Then, let's say the FRS by then is $261K as per your estimate, ERS should be $391K. This will grow to a much larger figure, compounding for 10 years, at age 65. Your monthly annuity payout will be a larger number then.

If your CPF-MA has yet to hit the ceiling, you could consider making a voluntary contribution to it. You could max it out and you, the recipient, will receive income tax relief too. 

Of course, savings in the CPF-MA will also enjoy 4% per annum in interest. In the following year, interest earned would flow into the CPF-SA if your CPF-SA has yet to hit the prevailing FRS. Otherwise, it goes into the CPF-OA.

Your plan is definitely viable and, so, remember, it doesn't matter what others (including AK) might say. Not all of us are comfortable with taking on more risk and I would go along with those who are risk averse to a point. 

To a point? 

As long as your plan is able to meet your financial needs now and in the future, it is should be good enough.

Best wishes,
AK
To read about the BRS, FRS and ERS, go to:
Changes to the CPF.
Related posts:
1. Did CPF Top Ups and denied lump sum payment.
2. Mom stunned by what happened to her CPF-RA money.
3. Worried you won't live to enjoy all your CPF savings?
Our national annuity scheme:

CPF OA to SA transfer or MS Top Up to SA?

Reader:
"I would like to make transfer from OA to SA so I did a check with CPF. Assuming that I reach the full retirement sum at age 55, they mentioned that I cannot withdraw cash top up to SA and its accrued interest but I am allowed to withdraw the OA to SA funds transfer and its accrued interest. I am confused however. My initial understanding is if my combined sum in OA and SA exceeds the full retirement sum, I am allowed to withdraw the access funds. If that is the case, whether it is cash top to SA or OA transfer to SA, should not make any difference. If you could clarify on this issue, I will be greatly grateful. Thank you."

AK:
"MS Top Up is a cash top up meant to help us with funding our retirement. It is an additional input and not part of the of the annual contribution limit (mandatory + volutary).The OA to SA transfer is money that is already in your CPF account.

"The OA money is from mandatory contributions and voluntary contributions (if any). These are made within the annual contribution limit and not in addition to the limit.The CPF is meant to help every member with retirement adequacy.

"Whether we choose to do OA to SA transfer or MS Top Up will depend on our circumstances. Whatever those circumstances might be, the MS (or the FRS) will go to our CPF-RA at age 55 and cannot be withdrawn (unless we choose the BRS by pledging a property) until age 65 at the earliest in the form of an annuity (i.e. CPF Life).

"Unless our CPF savings are made up entirely of cash through MS Top Ups to the SA, it is unlikely that we won't have a more meaningful lump sum withdrawal at age 55 if we should exceed the prevailing MS (FRS) significantly by then."

Related post:
1. Almost 55 and worried about CPF.
2. Did CPF Top Ups but denied lump sum payment.

He did CPF top ups but is denied lump sum payment.

Reader:

Hi AK, I'm one of your readers.

With respect to the Retirement Sum Top Up Scheme, I checked with CPF and they mentioned that all funds made under this scheme cannot be withdrawn in lump sum. That is to say that all funds under this scheme and the associated interest earned will be ring-fenced into the RA upon reaching 55.

Neither can such funds be used to meet the FRS /BRS requirement.

If a person wants to withdraw lump sum upon reaching 55, he would need to have at least the BRS sum solely from his Mandatory contributions, then the amount over this sum can be considered for withdrawal as lump sum. (Assuming property pledge)


AK:

That is not what I understand.

When we discussed this with Christopher Tan from Providend who is on the CPF Advisory Committee, we were told that any amount above the FRS is available for withdrawal (except for money from MS Top Ups and the interest earned).


Reader:

Right, so the point here is that the funds from the MS TopUps are not allowed to be considered as part of the BRS or FRS.

My dad wanted to do a withdrawal but they told him that he needed to clear the BRS threshold and funds under the MS top ups are not considered in this regard.


AK:

It doesn't make sense because we are not allowed to have more than the ERS in our CPF-RA. If the MS Top Ups to SA is ring fenced for the CPF-RA, we could end up having much more in our CPF-RA.

This is especially if the person does this regularly and hits the FRS early on in life and continues to contribute to his CPF whether mandatory or voluntary.

If a person does MS Top Up to the max of $161K by 30 years old, for example, he would have $440K by 55 years old (at 4% p.a.) without any further mandatory or voluntary contribution.

If he must set aside a FRS from mandatory contributions alone by age 55, plus this $440K, it would be far higher than the prevailing ERS allowed at that time, I am willing to bet.

They allow MS Top Up to the prevailing MS (FRS) and nothing more. This stays in the CPF-RA. This makes sense.

But in addition to this, FRS must be from mandatory contributions only? That does not make sense.


Reader:

Thanks. But based on the letter which I received from CPF, it seems that they don't allow such withdrawals. My dad made significant topups under MS topup scheme but because his mandatory contributions are not much, they do not allow him any withdrawals, on the basis that the BRS needs to be from mandatory contributions.

He has more than $175k in his RA now but most of it is from MS Topups Do u think it makes a difference if the person is above 55 when they started doing their MS topups ?


AK:

When did he start doing the MS Top Ups?


Reader:

He started topups after age 55.


AK:

Mystery solved :)

The $40+K would have gone into his CPF-RA when he turned 55.

Then, his MS Top Ups after age 55 would go into the CPF-RA too.

It is all locked up for CPF Life.

If he had $175K when he turned 55, then, he would have been eligible for a lump sum withdrawal and the MS goes into his CPF-RA.


Reader:

Ok. Then that probably explains it.
In any case, I'll write in to CPF to confirm this point.

Source: CPF Allocation Rates

Worried you won't live to enjoy all your CPF savings?

Added (20 Jan 17):
Reader says:
I was talking to my colleagues today about CPF life.

They are very concerned about the payout starting at 65 and they not being able to live long enough to fully draw out their CPF money.

I tried to explain that they might outlive the $166k and receive free income for life, but they are skeptical that they will live beyond 80+...






AK says:
I rather have the assurance that I won't be old and destitute than worry about whether I would be able to enjoy all my savings before I die... chances of us living past 85 are quite good.



---------------------------------------------------------------------------


A reader's questions after reading a recent blog post of mine:

My reply:
Hi iwimsasl,
If we do not believe that having an annuity is a good idea to help fund our retirement, then, this is probably a bother. 

However, if we believe that an annuity is a good idea, then, there isn't a better annuity offer than the CPF Life out there.





CPF Life is meant to start paying out at age 65 but we can choose to defer the starting age till 70. 

The benefit is that the payout will be bigger monthly because the CPF-RA funds will have another 5 years to accumulate. 

Allowing earlier withdrawal would translate to a less meaningful monthly payout which is why it is not a good idea.




Will the minimum age be raised from 65 to 67? 

I don't know but I don't think it is a bad thing if it should happen.

It would probably mean that Singaporeans are living longer and we would receive larger monthly payouts because the accumulation period is longer.

See: 
Upsize $100K to $225K?

Insurance is about transferring risk and also the sharing of risk. 

Annuity is an insurance. 





For having the certainty of a basic level of lifelong retirement funding in my old age, I think bearing some cost is reasonable. 

What if we happen to be blessed with longevity? 

It could happen and insurance is about guarding against what we cannot foresee.




Very often, the preoccupation with trying to get back some money from buying insurance after X number of years leads many to overpay for insurance. 

This is probably why so many are under insured or pay too much to be adequately insured.

Know which insurance products are essential and get the best value for our money. 




I believe that an annuity is essential and as an annuity, CPF Life gives me the best value for my money.

FB (31/12/16)

...





Related posts:
1. Mom stunned by what happened to her CPF-RA!
2. Retirement funding for our parents.
3. Funding XX% of our retirement with CPF.

Mom stunned at what happened to her CPF-RA money!

Alamak, another blog post on the CPF?

Quick, those who are tired of the topic, close the window!





Still reading?

OK lor.

My mother is going to be 70 years old next year.

When she turned 55, $65,000 was moved into her then newly created CPF-RA. 

That was the minimum sum for her cohort, apparently.

My mother is still actively employed but is thinking of retiring soon.






Mom:
"Ah boy ah. Can help me go into my CPF account online or not? I want to see how much I have now."

AK:
"You want to see how much money government gave you, is it?"

Mom:
"Aiyoh, cannot be a lot lah. Maybe now my CPF-RA will have $80K or $90K lor."

AK:
"You will be pleasantly surprised."


After 14 years, what has happened to the money in her CPF-RA?





This happened:

Click to enlarge.

$118,709.04

Mom:
"I so stunned like vegetable! Haha."

Stunned already can still laugh?

OK, no need to call ambulance.





If there is a need for it, this will provide her with a monthly income.

What? 

People say don't be stupid to top up your CPF-SA?

OK lor.

Related posts:
1. Get 6% from CPF?
2. Financial strategy for elderly?
3. Retirement funding adequacy.

Extra 1% interest for CPF savings and MSTU.

The following is contributed by a reader:

 

The CPF Board's response is appended below. I've edited the questions and part of the response to mask personal information hence, the flow of CPFB's reply may not make sense but I trust that the key points of interest are in there. Feel free to reproduce it:
 

Question: How would the extra 1% interest earned on OA + SMRA be earned? 

 

The extra 1% interest per year is currently paid on the first $60,000 of a member’s combined CPF balances.

 

The priority of the accounts that make up the $60,000 is as follows: 

 

1. Retirement Account (RA), including balances used to pay for the annuity premium under CPF LIFE

2. Ordinary Account (OA), up to $20,000

3. Special Account (SA)

4. Medisave Account (MA)

 

In general, CPF interest is computed monthly, and will be credited and compounded to your respective accounts yearly.

 

Any excess of the FRS will remain in the OA/SA which the member can apply to withdraw.  

 

There are no restrictions on when a member, age 55 and above, can make the withdrawals throughout the year. Now, they can apply for withdrawal at any time as long as they have the withdrawable monies and the Board will assess their applications.

 

 

 

 

 

 

 

Question: Assuming FRS of $X and MSTU of $(X + Y) including interests. At age 55, can $Y be withdrawn? 

 

No, the top-up monies of $Y cannot be withdrawn as these are meant for recipient’s retirement needs. Hence, the member cannot apply to withdraw the top-up monies:

(a) for payment of education, investments, insurance, housing, etc;

(b) by pledging his property in lieu of the Full FRS; and

(c) via exemption from the Retirement Sum Scheme.

 

Related posts:

1. Retire with a bond and an annuity.

2. CPF MS Top Up and interest computation.

Is it too late to plan for retirement at age 57?

This is in reply to a reader's comment: here.

Hi hosea,

Welcome to my blog. :)

I am not allowed to give advice to individuals and I don't. ;)

However, if I were 57, I must recognise that I cannot be too adventurous with my money. I need to be more conservative.

Being more conservative, the returns might be lower but there is less chance of a massive or total loss of capital which a senior can ill afford. 




I want to consider investment grade bonds which includes Singapore Savings Bonds and also possibly maxing out my CPF-RA to benefit from a risk free 4% to 6% per annum return. This will provide a guaranteed monthly income in future.

Of course, I would have to make sure that my lifestyle is adjusted according to how much I expect to have coming in at retirement. 

It is not just how much we have coming in that is important. It is also how much is the outflow.

Now, at 57, if I think there is going to be a mismatch in what I need and what I would have coming in, then, postponing retirement to a later age beyond 62, which is only 5 years away from now, might have to be considered. This will also allow my CPF savings to continue growing.




What about investments? 

Well, I could consider blue chips which are less volatile and which have a good dividend paying history. 

I might want to consider ST Engineering, SATS and VICOM, for examples. 

I might have a few REITs which are more conservatively geared in my portfolio but I wouldn't want them to be a major part of my portfolio because I might not have the resources to take part in rights issues if they should happen.




If I have a HDB flat, there are many ways to monetise my flat. I could sell some of the remaining lease to HDB or I could rent out a spare room or two. I could choose to downsize too.

Finally, I remember that I have some savings in my SRS account which I can start drawing from at age 62 over a 10 years period. As long as I must pay income tax, I want to consider continuing to make contributions to my SRS account to pay less in tax.

I don't think it is too late to plan for retirement at age 57 but we have to be realistic with the options which are available. 

Related posts:
1. NDR 2014: Retirement adequacy.
2. Tea with Matthew Seah: Lifelong income with SRS.
3. CPF Life Payout estimator.

Retirement funding for our parents: An idea.

My blog, ASSI, is very fortunate to have guest bloggers and some readers who are willing to share their very thoughtful ideas generously. Their thoughts have made the many discussions on diverse topics in ASSI more engaging.

Here, we have another example of what I am talking about:

Hi AK.

My parents are 66 yrs old this yr. Dad is still working. Likely to retire by 70. He prefer to work till 70 than staying at home. My parents belong to the earlier cpf minimum sum scheme. (Last for 20yrs only)


I am considering for them to join the cpf life. My parents saving is about $200k. Instead of keeping the cash in bank for their retirement usage, i am thinking of putting $200k into their RA.


Advantages:
1. They able to earn interest 4% per annual.
2. They able to get payout for life under the cpf life scheme.
3. Money is safe and will not lose to any scam cases.


I have also checked through the annuity plan by ntuc, aviva, tokio marine etc... they cannot match with cpf life. Of course there are other options such as buying stocks, reits, property etc... but not so suitable for retired folks.


Not seeking advise from you but like to hear second options if you have any. smile emoticon

You may like to post this in your blog so as to share it with other friends. smile emoticon

Cheers,AL

AL shared this with me in a chat on FB not too long ago and I very much agree that CPF Life is the best annuity plan there is out there.

However, it would depend on whether he is able to convince his parents to accept his plan. That could be the biggest obstacle to overcome, I suspect.

Related posts:
1. Securing risk free returns for our retirement.
2. Retirement: AK bought a AAA rated bond.
3. An annuity proposal: AK does a case study.
4. EcoHouse: Questions we must ask.
5. A banker's advice on retirement income strategy.

Are we worried about retirement adequacy in the right way?

If we have a plan on achieving adequate retirement funding but have trouble executing the plan, we should be worried. If we do not have a plan on how to achieve retirement adequacy, we should be very worried.

This was a conversation with a reader on FB:

J A

Hi AK, was talking to my friend about the pros of cpf, but they were saying we will not be able to fully withdraw the amount, and if we pass on before we totally withdraw all out, it will be pass to the child and it goes on.. what do u think about it?

Assi AK

Why would we want to make a full withdrawal?

The minimum sum goes into an annuity that pays us a monthly allowance for life from age 65.

If your friends do not believe in buying an annuity to fund their retirement, then, I can understand.

A clever fellow in Hong Lim Park.

J A

They are worrying they will not be able to withdraw the full sum.

Assi AK

They should be worried that they might not have adequate retirement funding from age 65. 
They are worried about the wrong thing.

Knowing that I will have a meaningful monthly income for life from age 65 gives me some degree of assurance when it comes to the topic of retirement adequacy.

Source: CPF Board.

J A

So how do they calculate the monthly income age, from 65 till ?

Assi AK

You can share these videos with them: http://singaporeanstocksinvestor.blogspot.sg/2014/09/videos-on-reaching-55-and-what-is-cpf.html

Videos on reaching 55 and what is CPF Life? | A Singaporean Stocks Investor (ASSI)

Assi AK

There is also a very good guest blog on the CPF Life here: http://singaporeanstocksinvestor.blogspot.sg/2015/05/tea-with-ey-is-our-cpf-life-payout.html

Tea with EY: Is our CPF LIFE payout going to be sufficient? | A Singaporean Stocks Investor (ASSI)



Source: CPF Board.

..



..
J A

Ok. They reply me with a few question

 "My question is will we get our entire cpf sum back whether it's thru annuity etc"
By my friend

Assi AK

I started typing numbers and I deleted. He can go and do his own calculations to see for himself why CPF Life makes sense. Don't be lazy. LOL.

As he seems to be fixated with getting back all his savings in his CPF account, I will simply show him how most of the money in my CPF-SA is from the government. At age 55, whatever I have in my CPF that is above the minimum sum, I can withdraw.

The minimum sum which is really money from the government will go into CPF Life to fund my retirement for life from age 65.
See:
http://singaporeanstocksinvestor.blogspot.sg/2015/01/a-lot-of-money-in-my-cpf-sa-is-from.html

A lot of the money in my CPF-SA is from the government. (AK reveals his CPF-SA numbers in detail...

Ask him what would he do if he were allowed a 100% withdrawal? What would he do to ensure that the money will be able to fund his retirement for the rest of his life?

Worry about the right things in the right way.

Related post:
Proposed changes to the CPF system.