You may have heard that when it comes to CPF, there are two portions – the one you can withdraw in one lump sum at age 55, and the other that you can’t.
There’s a perfectly good reason for locking up this latter portion, known as the retirement sum – these funds ensure your monthly cash payout from the age of 65, for as long as you live.
What’s more, you have control over how much these guaranteed payouts are because their size depends on how big a retirement sum you have. So let’s kick things off by explaining the retirement sum and how it relates to your retirement.
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You can think of the retirement sum as a savings target to hit by age 55.
There are 3 different targets. Each unlock different tiers of guaranteed payouts 10 years later:
Basic Retirement Sum (BRS) -
Full Retirement Sum (FRS) - $186,000 SGD
Enhanced Retirement Sum (ERS) -
These payouts are possible with CPF LIFE, a national annuity scheme that is funded by the retirement sums of everyone.
The FRS is the default option for everyone. CPF sets aside your retirement sum by creating the Retirement Account (RA) when you turn 55. Money from your Special Account (SA), followed by your Ordinary Account (OA) will be transferred to your RA until you hit the FRS. For those turning 55, the FRS is $186,000 SGD, but the amount is adjusted each year to account for inflation.
Those who turn 55 and hit the FRS in 2021 will be guaranteed a monthly payout of $1,430 SGD to $1,530 SGD when they turn 65.
If you wish to receive a higher monthly payout, you can top up your RA to hit the ERS of $279,000 SGD, which is 1.5 times the FRS.
Those who turn 55 and hit the ERS in 2021 will be guaranteed a monthly payout of $2,080 SGD to $2,230 SGD when they turn 65.
There is the third option of the BRS, which, at $93,000 SGD, is half of the FRS.
If you own a property which has a lease until you turn 95, you can withdraw your RA savings above the BRS. But, this will lead to a drop in your CPF LIFE monthly payout.
Those who turn 55 and choose to have only the BRS in 2021 will be guaranteed a monthly payout of $770 to $830 when they turn 65.
This isn’t an option we recommend, and we’ll explain why in the next section.
For a comprehensive look at the different retirement sums and payouts you’ll receive, check out the table below:
Basic Retirement Sum (BRS):
Retirement sum at age 55 in 2021: $93,000
Monthly payouts from age 65: $770 - $830
Full Retirement Sum (FRS)
Retirement sum at age 55 in 2021: $186,000
Monthly payouts from age 65: $1,430 - $1,530
Enhanced Retirement Sum (ERS)
Retirement sum at age 55 in 2021: $279,000
Monthly payouts from age 65: $2,080 - $2,230
*All amounts are in SGD. Payout figures are estimates, based on the CPF LIFE Standard Plan and calculated as of 2020. They may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments, if any, are expected to be small and gradual. See the full table.
CPF LIFE is designed to give you peace of mind because it guarantees a monthly sum for as long as you live. In other words, you won’t ever run out of money.
However, standard of living is still important. As such, the larger payouts from FRS or ERS gives you a better chance of enjoying the life that you were accustomed to in your working years.
The stability of the monthly payout is also important in our later years, when we have less time to ride out volatility in investment performance. Hence, it’s smart to maximise this stability by aiming for a higher CPF LIFE payout.
Conversely, if you don’t hit the FRS or ERS, you’re putting more pressure on other assets (that may be more volatile) to provide for your living expenses, thereby taking on more risk at a lifestage where lowering your risk appetite makes more sense.
Likewise, if you opt for a lower retirement sum with the BRS, you’re increasing your chances of having to rely on more volatile assets to provide for your living expenses. That’s why the FRS or ERS is more suitable for giving you financial peace of mind in your later years.
As mentioned earlier, your retirement sum is made up of funds from your OA and SA. Your OA earns at least 2.5% interest per annum. That’s decent, but you can earn better returns elsewhere.
To make your CPF money work harder, you can transfer your OA funds to your SA to earn a higher interest rate of at least 4%. (Just remember that this move is irreversible, though!)
In addition, you can also use money from outside CPF to boost your retirement sum:
Use cash to top up your SA and earn some along the way. The maximum relief per year is $14,000 (at a maximum of $7,000 SGD for self top up, and $7,000 SGD for topping up family members’ accounts).
(Note that you can top up your SA, by cash or OA fund transfer, only if your SA is below the current year’s prevailing FRS figure.)
Not sure if you’re on track to hit the FRS or ERS? Use our StashAway CPF planning tool to deep dive into your CPF savings and track your progress, available in the app.
If you turn 55 and don’t have enough CPF savings to hit the FRS, don’t hit the panic button. Even if you don’t make cash top ups to reach the FRS, CPF LIFE payouts will be pro-rated accordingly.
Having said that, you should still consider topping up. Remember, payouts start only at 65. That means you have at least 10 years to accumulate more money in your RA before the RA funds go towards your CPF LIFE.
During this period, you can continue to top up your RA by using cash or by transferring funds from your OA or SA.
The only limit to the amount you can top is the prevailing ERS for the year. Just remember that this amount is adjusted for inflation annually.
If you take away just one thing from this article, it’s this – the more you set aside as your retirement sum, the higher your monthly CPF LIFE payout will be for the rest of your life.
A higher payout essentially gives you more peace of mind in your retirement years, especially when financial stability is most important.
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