Understanding CPF
Breaking Down CPF LIFE And How It Can Be Included In Your Retirement Plan
We all know that the use of CPF is to help us financially during our retirement years. And the hearsay of people saying that you cannot depend fully on CPF for retirement is always surrounding us.
If that is true, you should at least understand how the CPF funds for retirement is used and how it will be given to us upon retirement.
Understanding CPF LIFE
CPF LIFE (Lifelong Income For The Elderly) is a lifetime annuity scheme that will provide CPF members with a monthly income during their retirement years. The good thing about it is that monthly income will be paid for your whole lifetime. Yes, pays you until you passed on.
This scheme is different from the Retirement Sum Scheme.
If you are born in 1961 and above, you will have to join CPF LIFE if you have at least $60,000 in your Retirement Account. Do not panic if you do have $60,000, you can still participate in the CPF LIFE nonetheless.
How much of my CPF monies are used for CPF LIFE
Upon reaching 55, your CPF Ordinary and Special account will be combined to form CPF Retirement Account (RA). The money inside the RA is your Retirement Sum.
There are three tiers of the Retirement Sum:
- Basic Retirement Sum
- Full Retirement Sum
- Enhanced Retirement Sum
Like shown above, you have to reach the FRS by default. All the money inside your RA will then be used to pay for the CPF LIFE premium.
The next question will be, “How much money is the retirement sum?”
All of your FRS will be used for the CPF LIFE. Thus, you can say that FRS is the total premium for your CPF LIFE.
But if you are in your 20s or 30s, do not expect the FRS to be the figures shown above. You should anticipate a higher amount.
READ ALSO: Things You Should Know About CPF Retirement Account (RA)
The three types of CPF LIFE & how to choose them
Standard Plan
This plan gives you more money throughout the whole payout period. It is also a level payout that means that the figure will stay the same forever.
On the flipside, your beneficiary or nominee will not receive much of our CPF monies.
Type of people who should choose this plan:
- Does not have or have limited retirement funds elsewhere
- You have enough adequate life insurance coverage to support your family once you passed on.
- Your family is not highly financially dependent on you anymore.
Basic Plan
A complete opposite from the Standard Plan. This plan pays out a lower amount throughout the entire payout period.
But on the other hand, there will be more money given to your beneficiary or nominee.
Type of people who should choose this plan:
- You have sufficient funds for retirement elsewhere
- Your family is still highly financially dependent on you.
- You do not have enough adequate life insurance coverage to support your family once you passed on.
Escalating Plan
The newest plan. This plan produces monthly payout that increases by 2% annually. It totally makes sense that this plan was introduced. The fact that the inflation rate is increasing every year, there should be changes in the CPF scheme as well.
One thing which is a bit unclear is that the amount of money your beneficiary or nominee will receive upon your demise.
Type of people who should choose this plan:
- You want to be sheltered from the increasing inflation rate
- You have enough adequate life insurance coverage to support your family once you passed on.
- Your family is not highly financially dependent on you anymore
READ ALSO: Here Is All You Need To Know About Your CPF Account When You Reach 55
Which will suit me best?
It does not have the one size fits all kind of answer. But it all depends where you are at in your retirement planning.
You cannot solely depend on CPF to fund for your retirement but nonetheless, it can be part of the picture.
It does give some added boost to your retirement income. And the best part is that CPF LIFE will pay you for a lifetime. In a scenario where you outlive your retirement funds, you can still get some income from your own CPF account.
You can make your choice when approaching your payout eligibility age (65 if you are born in 1961 or later) till the age of 70. The plan that you will be choosing should be aligned with your financial situation at that age.
Do look at your responsibilities, debt obligation and most importantly the cost of living.
Constant Review
At the end of the day, how you choose your CPF LIFE plan will depend on the strength of your retirement plan.
If you do not have sufficient funds, you would most probably need to go for the Standard Plan. And if your total retirement fund is not up to the inflation rate, therefore choosing the Escalating Plan might be the right choice.
Nonetheless, these are just mere examples. It will be better if you do a comprehensive calculation of your current retirement fund or seek advice from a professional.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
