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Why CPF LIFE May Be Insufficient For Your Retirement

Planning for retirement isn’t fun. Nor will it give you any near-term gratification. This is why many people prefer to prioritise other, more satisfying, goals such as saving up for a holiday and buying a new car, or more urgent needs such as buying health insurance and saving up for their home down payment.

This mindset is underscored by the OCBC Financial Wellness Index, which found that 65% of its respondents claim to be behind in accumulating enough funds to maintain their lifestyle after retirement.

Should CPF be your only retirement plan?

In Singapore, you automatically set aside a portion of your monthly salary for your retirement – through CPF contributions from your salary and employer contributions. These funds also earn a base interest rate of 4.0% per annum in your Special Account (SA).

While the scheme has merits, it may also lead to procrastination against further retirement planning because of the perceived safety net CPF already provides. According to a 2019 poll by Blackbox research, 43% of its respondents claim to rely mainly on CPF for their retirement planning. If you haven’t sat down to crunch the numbers, you can be forgiven for thinking that your CPF funds will be enough. However, the reality is that CPF LIFE is only able to provide a basic level of retirement income – as it states on the CPF website.

On a personal level, it is easy to take for granted that you can live a simpler life during retirement.

Unfortunately, this is easier said than done, as downgrading from a lifestyle that you are already accustomed to can be painful. In fact, there’s a real possibility you may end up incurring higher expenses in your golden years as you have more free time to socialise, take up hobbies and travel. The Standard Chartered Retirement Ready Study 2019 found that 73% of respondents in Singapore aspire to travel in their retirement. Interestingly, the same study also found that 29% want to run their own business when they retire in Singapore – which is likely to be capital-intensive as well.

As you age, you will also become more susceptible to health conditions as you age, likely requiring costly medical treatments.

You cannot rely on just your CPF LIFE for retirement

According to Singapore’s latest Report on the Household Expenditure Survey 2017/18, an average retiree may spend close to $1,154 per month. The next question then is – will your CPF LIFE be able to provide this amount? As it turns out, anyone who turned 65 when the survey was published – in 2018 – would not receive enough in CPF LIFE monthly payouts even if they had set aside their relevant Full Retirement Sum (FRS) when they had turned 55 in 2008.

In this example, the FRS was $106,000 in 2008 – when this person would have turned 55. Using the CPF LIFE Estimator, the person would be receiving approximately $884 to $972 each month, on the CPF LIFE Standard Plan. While this is not far away from what the person would have required, the survey also highlighted that households (not individuals) received just $361 from annuities and monthly payouts from CPF Retirement Sum Scheme, CPF LIFE.

This is quite far off from the amount they could have received by setting aside the FRS at 55, although, you can argue that the CPF system may have been less robust in the past, and most are contributing more today for their retirement today. In any case, you still need to sit down to crunch the numbers for your own future retirement. For example, the number stated in the survey is how much retirees are spending today. In the future, inflation will likely increase this amount.

CPF LIFE – your retirement “Pay Cheque”

How much you may need in retirement can be hard to predict, especially if you are in your 20s or 30s with about three to four decades till retirement. Regardless of how long you have till retirement, you can take proactive steps today to secure your retirement. In this regard, CPF LIFE, providing you with a stable income for as long as you live, acts as a good way to build your retirement “Pay Cheque”. You can use this pay cheque for your basic living expenses, which includes utility bills, internet and handphone bills, and groceries.

Take actions to grow a “Play Cheque”

If you want to enjoy some luxuries in your retirement, you need to be proactive in building a “Play Cheque” to afford the occasional indulgences. This can be going out to restaurants, socialising, planning overseas vacations, and give you some free play in your retirement. In the Standard Chartered Retirement Ready Study 2019, people who felt on track to achieve their retirement goals cited investing in stocks, bonds and unit trust (75%), investing in more government retirement savings scheme (47%) and purchasing insurance retirement plans (46%) as the reasons. This shouldn’t come as a surprise. The more we invest for our future, the more secured our retirement is going to be.

These are all options open to you in Singapore. You can start investing in stocks, through DIY investing, robo-advisory platforms, investment-linked policies or unit trusts. For those less willing to take on investment risk, you can choose to fatten your CPF LIFE payouts by making additional CPF contributions via the Retirement Sum Topping Up (RSTU) Scheme.

Don’t neglect an “Emergency Cheque”

Having an “Emergency Cheque”, which may be often overlooked, is equally important. This forms your cash savings to tide you over unexpected expenses, including an emergency home repair, replacing an essential home appliance, paying for a car breakdown or certain medical expenses not covered by insurance.

If you have a healthy “Emergency Cheque” you can also use it to potentially buffer against a market downturn. In the current COVID-19 landscape, many blue-chip counters and REITs, and even property investments, may not be able to provide you the cash flow they used to be able to. Instead of being forced to sell some of these investments, at depressed prices, your “Emergency Cheque” can ease the short-term income shortage while allowing you to remain on sound financial footing with your long-term investments.

* The information in this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or recommendation of any sort offered or endorsed by Autumn.

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