Tea with EY: Is our CPF LIFE payout going to be sufficient?

It has been a while but here is another wonderfully crafted guest blog by EY as she asks some questions which we might be afraid to ask ourselves:

Is having a CPF LIFE payout of $2500/month sufficient?

Which do you prefer?

Let your desired quality of life determine your retirement sum?

or

Let your retirement sum determine the quality of your life?

In Singapore, quality of life does not come cheap. More so if we are projecting decades into the future.

Based on 3% annual inflation rate, what we can buy with $2500 today will cost us $5234 in 25 years’ time, $6068 in 30 years’ time, and $8155 in 40 years’ time.

Those of us intending to depend solely on CPF LIFE payout for retirement should do a reality check. Even in the case where we could set aside the Enhanced Retirement Sum (ERS) which is 3 times the Basic Retirement Sum (BRS) and 1.5 times the Full Retirement Sum (FRS).

I have produced a reference table detailing the CPF LIFE payout using the CPF LIFE Payout Estimator based on the FRS and ERS that are adjusted for 3% inflation each year. To derive a more conservative payout projection, I have chosen the uppermost range for ‘Annual Value of Property’ and ‘Annual Assessable Income’.

CPF LIFE Payout

(https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/lifecal/Life_Estimator.asp)

Annual Value of Property (AV): More than $30,000     Annual Assessable Income (AI): More than $60,000         Gender: F

From the table, the FRS will likely be around $236,000 and ERS around $354,000 in Year 2029 when I turn 55 years old. Considering that my current SA balance is >$170,000, and if I continue to be economically active for at least another 5 years, I should have no problem achieving the ERS. This would translate to a CPF LIFE payout of approximately $2300 - $2600 per month at my drawdown age of 65. (NB: The CPF LIFE payout of $2300 - $2600 is extrapolated from the Year 2028 ERS payout as the CPF LIFE estimator caps input for calculation at $350,000)

At 65, what I receive from the CPF LIFE Payout is likely worth only $1131 - $1279 in today’s dollars.

Fast forward to 80 years old in Year 2054, my CPF LIFE Payout is probably worth only $726 - $821 in today’s dollars.

So, if I wish to maintain a quality of life equivalent to $2500 in today’s dollars, I would need an increasing income stream to make up for the loss of value due to inflation. The table below outlines the additional income I need at the various age to combat the 3% inflation that is chipping away the value of my money.

Looks like the comfortable retirement that I desire will have to be fuelled by a lot more hard work now and in the next 10 or even 20 years!

Related posts:
1. Changes to the CPF system. BRS, FRS and ERS.
2. Achieving Level 1 financial security.
3. Upsize $100K to $225K in 25 years.

How much should we have in our emergency fund?

Having an emergency fund is important. 

No rational person would ever say an emergency fund is unimportant. 

Rationally, we know that bad things happen sometimes and we might need to have more liquidity at hand for such situations.

Whatever our persuasion might be in our journey as an investor, we cannot deny that cashflow is important. 

There could be times when cashflow is negatively affected and slows to a trickle or it could even dry up. 

That is when an emergency fund is drawn upon.




If our cashflow is a like a stream of water, an emergency fund is like a water tank that will dispense life giving water in the event of a drought.

The question of how big an emergency fund is enough is more difficult to answer because there isn't any one size fits all amount, obviously. 

Then, is there any guideline which AK could offer? 

Well, I could talk to myself, I suppose. 

Remember, however, AK is just sharing what he has done in his life. 

He is not a trained financial adviser.

Whether an individual's emergency fund is sufficient depends very much on his lifestyle, the number of dependents he has and how old he is.

Lifestyle

We could have a simple lifestyle or a lavish lifestyle or somewhere in between. 

Of course, what is considered simple or lavish would differ from person to person. 

No matter what our definition, we will have certain expenses which are fixed or routine and some which are discretionary.




Fixed expenses are mortgages, Telco bills, loan repayments, insurance premiums etc.

Discretionary expenses are holidays, birthday parties, visits to restaurants etc.


Of course, there is some room for debate as to what is fixed and what is discretionary. 

However, I will say that fixed or routine expenses are those that cannot be eliminated as easily as discretionary expenses.




Number of dependents

For those of us who are still single, some of us might have to take care of elderly parents or young siblings. 

For those of us who are married, some might have children who still need to be cared for. 

Our dependents will have routine expenses (and discretionary expenses) too.




Age

As we grow older, it is harder to find employment if we should be retrenched. 

If we manage to find re-employment, we might have to take a pay cut. 

Well, I am just taking my own advice to be pragmatic and not be overly optimistic or pessimistic. 

So, I think a bigger emergency fund as we grow older, all else remaining equal, is sensible.

So, bearing the above points in mind, is there a formula we can use to arrive at an amount that we should have in our emergency fund? 

Forgive me that I do not know how to express this in a neat equation. 

I offer you neat paragraphs:

If we take all our monthly routine expenses (our own + our dependents') into account, we will know what is the minimum amount of money we must have each month in order to maintain our current lifestyle. 

If we are in our 20s, multiply this amount by 6 to determine the size of the emergency fund required. 

If we are in our 30s, multiply by 12x. 

If we are in our 40s or older, multiply by 24x.




Someone once denounced me for being fake when I said I maintained an emergency fund enough to cover 24 months' of routine expenses. 

He didn't believe that I still needed an emergency fund because my passive income stream was strong enough to replace my earned income. 

Do you feel the same way?




If we remember my earlier analogy that our cashflow is like a stream and that our emergency fund is like a water tank, we will understand why I think an emergency fund is a must even if we should have a passive income stream.

So, how much should you have in your emergency fund? 

I hope this blog post has given you an idea.




Related posts:
1. Why a meaningful emergency fund is important?
2. Emergency fund: How much is enough?