04 February 2015

A Great Retirement Offer from CPF

This is possibly one of the most important change in recent decade that will affect our retirement planning and definitely worth reading: Recommendations by the CPF Advisory Panel.

I view with much excitement the proposed option for the Enhanced Payout. With an Enhanced Retirement Sum of $241,500 giving a monthly payout of $1,750 to $1,900. For a couple that maxed this out, that would mean $3,500 to $3,800 of monthly income post-retirement at age 65. That's a hefty sum to meet retirement needs. The recommendations also suggested that this sum can be voluntarily topped up. I hope these can become tax-deductible as well.

I did a quick estimate, if I were to take the same sum of $241,500 (age 55) and achieve an annual rate of return of 6.5% for 10 years (age 65), and withdraw thereafter at 4% per year, I would only achieve $1,511 per month. Of course the difference in my model is one with a perpetual capital retention but with more market risks, whereas CPF's is comparatively risk-free and involves a draw down.

At the end of Chapter 2 of the report, there is a summary data from the household expenditure survey of retirees conducted in 2012/13 . Projected into the future, the per person expenditure works out to be $409.70, $669.70, $931.90, $1,364.90 and $3,170.10 for the respective quintile by 2026 (2% inflation assumed). Assuming at the top end, a retiree couple in 2026 would hence require $6,340. If $3,500 has been met via CPF retirement income, that leaves $2,840 to be met via other means. I figure that would mean an investment portfolio of $852,000 (i.e. $2,840 *12 months / 4%) generating 4% income per year.

Other options effectively retained the current Minimum Sum but renamed Full Retirement Sum at $161,000 with $1,200 to $1,300 monthly payout, and the Basic Retirement Sum at $80,500 (with property pledged) with $650 to $700 monthly payout. These provide options for those who are adverse to CPF holding the retirement savings and prefer to cash out.

CPF and the study team has done a great job in putting together the information packages that are reasonably easy to digest. It looks like MoM has accepted the recommendations. I look forward to the introduction of the Enhanced Retirement CPF package.

CPF - A Lifeline for Retirement


Anonymous said...

Why are u so happy with the change?
I dun see much changes actually as the whole purpose is to lock-in more money from some while allow others to withdraw in terms of lump sum.
Unless one can live beyond 90 yrs old, he/she will not benefit much.The main losers will be those that pass on before 80 yrs old.

Anonymous said...

the basic retirement sum option lock-in more money?

Anonymous said...

For me, nothing fundamental had changed. Unless they allow members to withdraw lump sum at age 55 or allow early draw down age which tie to our retirement age of 62 or earlier. Just like the same formular for defer draw down up to 70 yrs old. I dun see any meaningful changes as of now.

Lizardo said...

Dear Anonymous 1, 2 and 3,

I am happy because I see value in having a fairly safe way to lock in a hefty retirement income. This is to mitigate against the risk of "living longer than expected". At worst, if I pass on early, the balance would be bequeathed to my children. No loss.

Not true that nothing has changed. There will be a 20% that can be withdrawn for those who prefer to do so.

In any case, if you have more than the "minimum" required at age 55, the balance can be fully withdrawn anyway.

I guess we may have different preferences.

Best wishes and many thanks for leaving respective comments.