SINGAPORE – We all know that the Central Provident Fund (CPF) is a national retirement scheme but many people still have some doubts about its efficiency and prefer to focus on the ways it prevents them from using their own money.
But if you study the CPF objectively, you can see that its acronym can also stand for “Cash Protection (for your) Future”, because this is precisely what it does.
It goes without saying that you need a decent nest egg for your retirement. After all, if you feel you never seem to have enough money while you are still working, imagine how you are going to get by once you stop working when you are much older.
Invest looked at eight ways in which the CPF can play an important role in your retirement planning in the latest askST @ NLB panel discussion.
In the virtual session, which is available on ST’s Facebook page, AIA Singapore chief customer and digital officer Melita Teo also gave her insights on common retirement myths and how you can do better in your old age.
Why can’t I withdraw all my money from CPF at 55?
With the exception of the Medisave Account (MA), which is a compulsory healthcare savings plan, you actually have an option to empty all your other CPF accounts at age 55, including the Retirement Account.
But you need to show the CPF Board that you are wealthy enough to have your own private annuity that pays better than CPF Life, the board’s lifelong payment scheme.
The idea is if you have a higher lifelong retirement income, you can choose not to join the CPF scheme which can pay about $1,500 monthly for life.
Frankly, if you have bought a private scheme that pays more than this, you would probably have paid much more than the $186,000 for CPF Life this year.
From age 65 to 85, CPF Life would have paid you about $360,000 in total, or almost double of your initial capital. Private funds can never match such returns at such a low “joining fee” because the CPF has an exclusive backer – the Singapore Government.
Indeed, if you opt to join CPF Life at its highest tier this year – $279,000, or $93,000 more than the $186,000 level – the monthly payout would increase to about $2,300.
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Why does the CPF still ‘lock up’ my money after 55?
Once you hit 55, only the full retirement sum – $186,000 now – will be set aside for CPF Life. But you can withdraw half of this amount if you pledge your property.
Of course, if you set aside less, you will also receive less later because the sum that is “locked up” is used to generate good returns that pay the monthly payouts at 65 for life.
No investment can produce good returns without requiring money to be locked up. For instance, you will need to lock up your money for up to 30 years for some long-term bonds. Even then, most bonds pay lower than OA’s 2.5 per cent interest now.
The returns of CPF Life are much higher if you compare dollar for dollar with other products. Once you have set aside the retirement sum, the remaining funds in the Ordinary (OA) and Special (SA) accounts can be withdrawn any time, to your designated bank account. But you should not in a hurry to take your money out from CPF because it will continue to earn 2.5 and 4 per cent in the OA and SA.
Why do I need to plan for my retirement?
AIA’s Ms Teo noted from a recent survey conducted by her company that more than half of Singaporeans might not have enough money after the age of 70 because most do not save enough.
Singaporeans on average will require at least 25 years of retirement income if they intend to quit work at 60 but more than two-thirds underestimate the actual amount needed by more than $900 a month. Parents who have to spend on their children fall short by more than $1,000 a month.
Ms Teo advises everyone to include the CPF as a key asset when they do their financial planning: “Personally, CPF to me is a form of forced savings and I treat my CPF savings as portfolio diversification in safer assets. This allows me to take more risk when I use cash for other investments.”
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How can I plan with my CPF?
If you are an employee, the good news is you don’t really need to do much because every month, your employer will place a portion of your salary into your CPF. The sum will go to OA, SA and the Medisave Account (MA).
There is an annual cap of $37,740 for such contributions – along with your annual bonus, you are likely to hit this limit if you earn more than $6,000 a month.
If you are self-employed, you should contribute to your own CPF so that you don’t miss out of the benefits of having healthy savings that earn good interest.
The full retirement sum will be automatically transferred to your newly created Retirement Account (RA) when you reach 55. But you need to top up the RA yourself to the prevailing enhanced retirement sum (ERS) if you want to enjoy the highest monthly payout of about $2,300 for CPF Life.
You can use the balances in your SA and OA to do the top up but you should consider using cash so that you retain more money in those accounts to earn the high interest on offer.
You don’t have to top up to the ERS in one lump sum but can do so gradually any time after your RA is created. All workers should aim to achieve the ERS for CPF Life because having about $2,300 as your lifelong monthly income after 65 will help pay for many essential expenses.
Ms Teo says the balance in your MA is also a good safety net as it can help pay $600 for your private hospitalisation plan up to age 70, and $900 from 71. You can also use the MA to defray your co-payment share of your hospital bills.
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How can I aim for high savings in my CPF?
For a start, try not to use too much CPF to pay a housing loan; let it grow with each monthly contribution.
You can also inject more money to your CPF by using cash to top up your SA up to the prevailing limit ($192,000 next year) and earn the lucrative 4 per cent interest.
You can get a tax relief of up to $8,000 for such top-ups annually from Jan 1.
The benefit of having a high SA at an early age is that you will enjoy the compounding effect of both the savings and interest earned.
For instance, if you can hit the maximum sum by age 40, you stand to have up to $500,000 or more in the SA alone at 55. Such a high balance is quite unheard of today.
You can also aim for a high balance in your OA if you use more cash to pay your housing loan. It does not make sense to use funds in the OA, which earns 2.5 per cent interest, to pay a bank loan that charges less.
You don’t have to stop using CPF totally; you can start by gradually reducing the quantum regularly so that you pay off your loan with more cash.
It seems hard to believe but if you learn to maximise your CPF, it is possible to have about $1 million there by 55. And the benefit of having such high savings? Over $20,000 of annual interest alone, which you can withdraw to spend after 55.
Should I invest my money in CPF?
Your CPF is the last line of financial defence because even your creditors cannot touch it.
So why do you want to risk such funds by withdrawing them for investments that come with risk? After all, you still earn 2.5 and 4 per cent returns by doing nothing with CPF.
Some companies have been encouraging CPF members to invest, claiming that they can produce much higher returns. If this is true, ask them to give you a capital-guarantee of your CPF money that is used for their investment since they are confident of making more, and not losing it.
By all means, if you think you can score a higher return, go ahead and invest, but with cash, not CPF. This is because money in a bank savings account is earning almost nothing.
Ms Teo says: “We found that 92 per cent of Singaporeans pivot towards bank deposits as their choice of saving instrument, and only 21 per cent supplement their bank savings with investment.”
If you use cash to invest, you can enjoy the profits instantly. But you cannot do the same with your CPF investments, unless you have hit 55.
There are other pitfalls you should know too: If you make losses with your CPF, you will have less money for your retirement. Most people who need to use CPF to invest do so because they do not have high cash savings to begin with.
Those who make losses also face other problems, such as having regular fees deducted from their CPF if their investment is suspended and cannot be cashed out.
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I am in my late 40s or 50s. Is it too late to do anything with my CPF?
It is never too late when it comes to CPF.
If you have a low balance in your OA because you have used most of it to pay a home loan, you can do the following:
1. Go to myCPF to stop or reduce the amount from CPF that is being used to pay the loan so that you can use more cash instead.
2. If you have finished paying your home loan, go to “My request” and under “property” choose “Make a housing refund with cash”. You should see the amount that you have withdrawn for your loan plus the accrued interest on the sum withdrawn.
Note that this interest is not a cost; when you “pay” this interest, the money goes back to your OA because you have taken the money out for the home loan.
The good news is that if you can refund the principal sum and accrued interest back to your OA, you will enjoy high savings in your CPF again, as if you had never spent a dollar on the mortgage.
If you are in your early 50s and do not have immediate need for cash, you should use your fixed deposits upon maturity to refund your property loan in big lump sums.
No bank will offer you 2.5 per cent interest now – just view the money in OA as a longer term “fixed deposit” which is available to you the moment you hit 55.
What’s the benefit of having a high CPF savings and being in the highest tier of CPF Life?
After 65, CPF Life will pay about $2,300 a month while the annual interest earned by other balances in CPF can be as high as $24,000, if not more.
So if you know how to use your CPF, you can stand to earn $50,000 or more from it a year for as long as you live. That’s really making CPF work hard for you so that you don’t have to.
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For more information and resources on this topic, use the keywords “CPF”, “retirement” and “financial planning” to search ProQuest Central – a database the National Library Board subscribes to.
You can sign up for a myLibraryID to access the database here.
AskST @ NLB is a collaboration between The Straits Times and the National Library Board.
The video recording of the event and past sessions can be found here.
Those who want to find out more about CPF programmes can sign up for its “Ready for Life” Digital Festival from Dec 4 to 5 at this website.
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