Understanding CPF
Things You Should Know About CPF Retirement Account (RA)
This article might only be interesting to those who already have a CPF Retirement Account, specifically those ages 55 and above. Nevertheless, this article will also be helpful to anyone who is already contributing to their CPF as eventually everyone will age and hit that age 55. Hence being informed will certainly help in planning for your future.
1. Formation of CPF Retirement Account
The CPF Retirement account is the combination all of your monies in your Ordinary account and Special account that you have contributed throughout the years. This will happen when you reach your age of 55.
The amount of money that can be withdrawn will depend on the amount of money that has to be kept aside in your Retirement Account first prior to been given out to you. The specific amount that you have to place in your Retirement Account is the Retirement Sum that you have to fulfill.
There are 3 kinds of Retirement Sum:
- Basic Retirement Sum
- Full Retirement Sum
- Enhanced Retirement Sum
By default, everyone has to achieve the Full Retirement Sum (FRS). But if you choose to pledge your property, you only have to fulfill the Basic Retirement Sum (BRS).
Full Retirement Sum is twice the amount of Basic Retirement Sum. And Enhanced Retirement Sum is 3 times the amount of Basic Retirement Sum. As of now, 2018, the Basic Retirement Sum is $85,500, Full Retirement Sum is $171,000 and Enhanced Retirement Sum is $256,500.
To illustrate the Retirement Sum, here is a table for you;
Take note that the retirement sum will gradually increase approximately by 3% every year. Hence if you are still in your 20s, do not expect the same retirement sum when you reach 55.
2. The interest earned
4%, that is how much interest earned per annum on your CPF Retirement Account. That is only the base interest rate.
But its not actually 4% as the CPF board does allocate an extra 1% on the first $60,000 of the RA and an additional 1% on the first $30,000. Sounds complicated, indeed it does require you to read a few times to understand it.
Here’s an example;
A person who just reached 55 in 2019 and has a combined balance of $176,000 with the assumption that he has to fulfill the FRS. After 10 years, how much will he accumulate?
- First $30,000 will earn an interest rate of:
4% (Base interest rate) + 1% (Extra interest rate on first $60,000) + 1% (Additional interest rate on the first $30,000)
= 6%
After 10 years: $53,725
- Subsequent $30,000 will earn an interest rate of:
4% (Base interest rate) + 1% (Extra interest rate on first $60,000)
= 5%
After 10 years: $48,867
- The remaining $116,000 will earn an interest rate of:
= 4%
After 10 years: $171,708
That will total up to $274,300
*This example is for illustration purposes only.
Looking at the figure, it’s quite a good return. Hence if you are not able to reach any of the retirement sums, do not panic and wonder if you need to top in cash. With the interest rate, it is possible to do so, that does depend on how much initially have when you reach 55.
You are still able to contribute to your CPF accounts even after 55. Monies contributed will follow the allocation rate at that age. Monies will not be directed to your RA but to your Ordinary, Special and Medisave accounts respectively. Both your Ordinary and Special account will be combined once again when you reach 65. Resulting in a bigger amount in your RA and consequently a bigger payout for your CPF Life.
3. Choice of CPF LIFE Plans
CPF LIFE (Lifelong Income For the Elderly) is a lifelong annuity scheme. It will provide you with monthly income for life. It is a useful instrument as it will you give you an income until the day you pass on. That is important so that you don’t outlive your income.
Prior to reaching the age of 55, the CPF board will have sent you a letter stating that you are able to choose the CPF LIFE plan of your choice. You don’t have to select which plan you would want as soon as possible. But do take note you only have till the age of 70 to choose. So do make a decision once you know where do you and your family stand financially.
There are 3 types of CPF LIFE plans.
- Standard Plan
- Basic Plan
- Escalating Plan
The choice of which plan has to be suitable for your current financial condition and the needs of your beneficiaries. There are several things that you should do prior to selecting the plan of your choice.
- Check on all your annuity or retirement plans that you have. To check your overall income during retirement.
- Check on all your life insurance policies to see the total of the death benefit that you have. This is to calculate how much your beneficiaries will have when you pass on.
- Foresee what future expenses that you might incur as you age. E.g. Medical expenses, health insurance premiums.
- Plan what you want to do during retirement. With the free time that you will have after years of working; you might even pick up a hobby or activity which most likely needs funding.
After doing all of the above, you will have a much easier time on choosing which CPF LIFE plan that will suit you. Some might say that the payouts from their CPF monies might not be a lot but nevertheless, it is another source of income to supply you when you are no longer working anymore. Hence financial planning is vital in getting ready for your retirement years.
That comes to the end of this article. Hope that this is beneficial for you and do share it with your family friends. Till next time.
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.
