How to earn good lifelong income from your CPF

CPF Life is a far cheaper and better annuity than private annuities because its return is much higher dollar for dollar, more stable and will pay you for life. ZAOBAO FILE PHOTO

Invest Editor

Updated

Retirement planning for many people here just got a boost, thanks to some participants of the Forward Singapore dialogues who shared their views on the importance of having continuous and stable income in old age.

Their input has prompted the Government to look at tweaking the voluntary component of the CPF Life annuity scheme to allow members to increase their savings in readiness for their golden years.

As it stands now, when members reach 55, the full retirement sum ($198,800 this year) will be moved from their CPF accounts to their Retirement Account (RA) to form the seed money for the CPF Life scheme.

If you set aside this sum in your RA then, you can start to receive monthly payouts of about $1,620 once you turn 65.

But if you feel that this sum is not enough, you can voluntarily increase it to $2,370 a month by opting to set aside the enhanced retirement sum ($298,200 in 2023) when you hit 55. This can be done by topping up your RA with a further $99,400, either by transferring cash from your bank account or from funds in your CPF Special and Ordinary Accounts.

Lifelong income is critical

One of life’s hard truths is that our savings alone may not be enough to fund a comfortable retirement unless we have an unusually large pot of cash or are astute investors who know how to keep growing our money.

The better way is to plan for a stable and continuous income that can last a lifetime so that you can continue to pay for your expenses, which certainly don’t stop once you finish working.

If you need $3,000 a month, for example, you must have at least $720,000 to last you from age 65 to 85.

If you have set aside the enhanced retirement sum (ERS) for CPF Life when you hit 55 in 2023, you can receive payouts of $2,370 a month from 65, which would have reached a total of $568,800 when you hit 85.

If you have such payouts, you will need to withdraw only about $600 more from your savings every month, or about $150,000 during those two decades.

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Given a choice, you would likely want to narrow the gap between your expected expenses and lifelong income. This is probably why some participants of Forward Singapore wanted the option of being able to save more for their CPF Life in order to get bigger payouts.

The Forward Singapore report that covers the initiatives to “ensure seniors retire with peace of mind” noted that there are groups of people who would like to put even more into their RA so that they can benefit from higher CPF Life payouts.

“We will therefore review and raise the enhanced retirement sum to enable more Singaporeans to receive higher payouts in retirement,” the report added.

Pending the announcement on how much more you can save, you should take note of these three tips on CPF Life that will help you plan.

Increasing payouts with annual top-ups

Those who turn 55 in 2023 are setting aside retirement sums that are about 3.5 per cent higher than those paid by the cohort in 2022. The sum goes up annually so that members can receive gradual increases in payouts as a way to counter inflation.

While it is not compulsory to keep up to date with the required annual sums for those who are already 55 or older, you can make annual top-ups with every increase so that your payout gets a small boost.

For instance, setting aside $298,200 for 2023’s ERS will get you a monthly payout of $2,370 from age 65. When the ERS becomes $308,700 in 2024, you can choose to top up the difference, or $10,500, to get a monthly payout of $2,450.

That additional $80 a month may not seem a lot at first glance but if you keep topping up annually, the payout would be $2,690, over $300 more, if you match the ERS in 2027, which is $342,300.

The difference is quite significant for seniors who have not kept up to date with the increases over the past decade.

For instance, those who turned 55 in 2016 could set aside only $241,500 for the ERS then to get up to $1,900 in monthly payouts. For a start, these seniors could make over $50,000 in top-ups to hit the limit set for this year.

Doing so may not automatically increase their payout to $2,370 when they reach 65 because they have missed out on the extra earnings in the last seven years. But it is worth booking an appointment with the CPF Board to learn how they can catch up and get more lifelong income.

It pays to plan as a couple

Couples get more bang for their buck than singles because they can enjoy two sets of CPF Life payouts, which will be quite decent if both are in the ERS tier.

A couple who both turn 55 in 2023 and set aside the ERS of $298,200 each, or $596,400 in total, will get a combined payout of about $4,700 when they hit 65.

So setting aside about $600,000 will enable you and your spouse to get lifelong income of close to $5,000 a month when you turn 65. In 20 years’ times, both of you would have received more than $1.1 million in payouts.

Many people think that having an extra property to generate rental income in their old age is the way to go. In doing so, they deplete their CPF savings and miss out on the opportunity to earn such good income as a couple.

Consider this instead: Make sure both of you can hit the ERS tier for CPF Life to get a good lifelong income. If you still have ample cash, you can consider your two-property dream.

CPF Life before private annuity

Some people prefer buying private annuities instead of putting more money in CPF Life because they are not aware that it is the best deal in town.

CPF Life is a far cheaper and better annuity because its return is much higher dollar for dollar, more stable and will pay you for life. This is possible only because the non-profit scheme is backed by the Government.

So it makes absolutely no sense, especially for those in their 50s, to ask financial institutions about products for retirement planning if you have not even maxed out your CPF Life contributions. This is akin to paying for a more expensive product that will pay less because you don’t realise that there is a far cheaper and better scheme that pays more.

The good news for seniors below 80 who have missed out on this deal is that it is never too late to get back into the game as you can make cash top-ups directly to your RA.

Before you do so, invest the time to visit the CPF Board and learn for yourself why CPF Life is so desirable. After all, many savvy Singaporeans are actually telling the Government that they want to put more money in there.