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What the CPF Minimum Sum Changes Really Mean for You

CPF minimum sum Singapore

Peter Lin

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In 2016, say goodbye to the “CPF Minimum Sum”. And say hello to “Retirement Sum”. I can just imagine how the CPF Advisory Panel started their discussion. “Okay, ladies and gentlemen, from now on, “Minimum Sum” is a bad word.”

A quick glance at the Executive Summary of the CPF Advisory Panel Report (basically the supposed less cheem version) shows that the phrase “Minimum Sum” appears only 6 times. In comparison, the phrase “Retirement Sum” appears 63 times!

The late, great comedian George Carlin famously said, “I don’t like words that hide the truth. I don’t like words that conceal reality. I don’t like euphemisms, or euphemistic language.” It’s like they’re finally acknowledging what we’ve always known – the “Minimum” Sum is actually becoming quite a significant amount, and now want to remind us that this amount is supposed to be for our “retirement” (and at the rate Singapore is “progressing” now, retirement will probably happen AFTER we die).

If you saw our earlier CPF infographic on the new changes you’ll know that the “Minimum Sum” has now evolved into three “Retirement Sum” amounts. There’s “Basic”, “Full” and “Enhanced”. Or, as I want to call it:

  1. “The Absolute Minimum Minimum Sum”,
  2. “Same Same But Different Minimum Sum” and
  3. “Put In More, Get Back More Minimum Sum”.

If you turn 55 in 2016, you will be given the option to choose one of these three “Retirement Sum” schemes. We’ll discuss who benefits the most from each scheme and which one you should opt for.

 

1. Basic Retirement Sum – The Absolute Minimum Minimum Sum

For years, the CPF Minimum Sum has been increasing, supposedly to combat inflation and rising costs of living. As we’ve said before, this Minimum Sum is supposed to be just enough to help you to live comfortably when you retire. The government was essentially treating us like children, not only by telling us that we cannot manage our own finances, but by not giving us the ability to prove them wrong.

In 2016, change will come. The government is actually giving us what we want. They’re giving us some of our money back. Call me cynical, but that tells me is that the General Elections are near.

We expect most people would be happy with the “Basic Retirement Sum”. It’s half of what today’s CPF Minimum Sum is. It means by age 65, you should be able to withdraw almost all of your CPF, except for $80,500. And guess what? This is practically the amount that was set in 2003.

All you need to do to qualify for the Basic Retirement Sum is to own a property, or at least have used your CPF funds to help pay for it.

Who should opt for the Basic Retirement Sum? Everyone who was worried they’d never see their CPF money again. This is the government’s way of shutting you up and giving you exactly what you want. They’re letting you withdraw a significant amount of your CPF at 65. The government will not have any control over how you use it. How will this affect Singaporeans? Hopefully we won’t have to find out by reading about an increase in casino blacklists and bankruptcy orders.

Seriously, who should opt for the Basic Retirement Sum? This is for those who own their property and want the most flexibility with their retirement options. By taking out most of your CPF, you now probably have a sizable amount of capital which you can invest. If you’ve developed a good investing sense over the years, this may be the best option for you. Just remember that currently, the CPF Interest Rate for the Retirement Account is between 4-5%. If you are convinced you can achieve returns that are better than that, you should definitely consider withdrawing as much of your CPF as possible. Especially since you’ll only get the absolute minimum monthly payout of $650 to $700.

 

2. Full Retirement Sum – The Same Same But Different Minimum Sum

Now, if you don’t own a house, then you don’t have much of a choice. You don’t qualify for the “Basic Retirement Sum” so you have to set aside the “Full Retirement Sum”, set at $161,000 for 2016. Surprise, surprise, this is the same amount as the 2015 “Minimum Sum”.

In other words, if you don’t own a house, or you don’t want to pledge it, technically nothing has changed for you. If you don’t have at least $161,000 to set aside in your CPF Retirement Account, you’re still not going to be able to withdraw any more than $5000 of your CPF funds at 55. The good thing is, you’ll generally end up getting a higher monthly payout.

Who should opt for the Full Retirement Sum? If you really have no urgent use for thousands of dollars suddenly showing up in your bank account when you turn 65, you would be better off leaving it in your CPF Retirement Account and receiving a higher payout each month. This way, you’re not tempted to spend it unnecessarily, and you will be ensured of an income that will allow you to live somewhat comfortably.

 

3. Enhanced Retirement Sum – Put In More, Get Back More Minimum Sum

It’s not immediately obvious why the Enhanced Retirement Sum of $241,500 was recommended by the CPF Advisory Board. After all, the calls for a change to the CPF Minimum Sum scheme have been for the amount to be reduced, not increased further. And the truth of the matter is this option is not really anything special. It’s not like you get any added benefit from choosing this option, like a higher interest rate or a bonus.

Very simply put, it means: You put in more of your own money, you get back more of your own money.

Okay, okay, but if I switch off my cynicism for a moment, there is a way to use the Enhanced Retirement Sum to your benefit, and that’s CPF LIFE. When you top up your Retirement Account to meet the Enhanced Retirement Sum, you stand to get monthly payouts of $1750 to $1900 for life.

For life. That’s not a bad deal.

Life expectancy in a modern city like Singapore is bound to increase, maybe even matching that of Japan, which produced the oldest living man and woman. That being said, life is a gamble, of course, and if you’re unfortunate enough not to live to a ripe old age, your beneficiaries will receive the unused money, if any.

Who should opt for the Full Retirement Sum? People who have more than enough money to set aside, so as to receive a substantial monthly payout. This is important as you won’t be able to withdraw the amount after you’ve joined, except under unique circumstances.

 

 

This is all still rather confusing…

Let’s do a quick case study: Peter, Steve and Tony will each turn 55 in 2016. They each have $150,000 in their CPF now.

 

1. Peter, the wannabe photographer

Peter needs money urgently as his retirement plan is to start a photography business. Among other things, it requires him to purchase expensive equipment. He opts to pledge his HDB flat and go for the Basic Retirement Scheme.

In 2016, at 55, he chooses to withdraw $69,500. This leaves $80,500 in his Retirement Account. In 2026, at 65, he starts getting about $700 a month for the rest of his life. He hopes the photography business can sustain him for the rest of his life, because $700 definitely can’t.

 

2. Steve, the strong silent type

Steve has always believed in prudence and doesn’t get caught up in the technology fads of today. You could say he’s a man out of time. He doesn’t see the need for a huge sum of money urgently. He opts to go for the Full Retirement Scheme.

In 2016, at 55, he withdraws only $5000 to travel the world. This leaves $145,000 in his Retirement Account. In 2026, at 65, he starts getting about $1200 for the rest of his life. He’s happy with that – he’s never needed to live too extravagantly.

 

3. Tony, the extravagant technology guru

Tony is a genius, billionaire, playboy and philanthropist. He’s got more than enough money set aside for his retirement. But he likes the decent interest rates that the CPF offers, and the assurance it gives. He opts to go for the Enhanced Retirement Scheme.

In 2016, at 55, he tops up his Retirement Account with another $91,500. This leaves $241,500 in his Retirement Account. In 2026, at 65, he starts getting $1900 for the rest of his life. Not that he really needs it.

 

Got any further questions about the CPF changes? Ask MoneySmart. We’ll try our best to help you.

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Peter Lin

I am the poster boy for reinventing one's self. I've been a broadcast journalist, technical writer, banking customer service officer and a Catholic friar. My life experiences have made me the most cynical idealist you'll ever meet, which is why I'm also the co-founder of a local pop culture website. I believe ignorance is not bliss, and that money is the root of all evil only if you allow it to be.

  • charles

    For Retirement Sum of $80,500 (1X), you get $700 (1Y) monthly from age 65. For $145K (1.8X), you get $1.2K (1.71Y, shouldn’t it be $1,260). For $241,500 (3X), you get $1.9K (2.71Y, shouldn’t it be $2.1K) – law of diminishing returns?

    Also, what happens to our CPF contributions from 55 to 65 years old (assuming still working)? Don’t they count? How & when can we get them back?

    • Shane Tan

      Hi Charles,

      I am no expert in CPF matters but as I have been reading and following up on the Advisory Panel’s recommendations, I shall attempt to answer your questions above. I am open to corrections by other members here or if CPF is reading this and would like to make some clarifications that will be great.

      Firstly, in the Executive Summary submitted by the Advisory Panel (which can be found on http://www.mom.gov.sg/employment-practices/cpf-advisory-panel/Pages/default.aspx), there is an explanation on Page 10 as to why the payouts do not increase in proportion. I quote from the footnote therein “Payouts do not increase proportionately with the retirement sums required because of the greater impact of Extra Interest on lower balances.” Extra Interest here refer to the additional 1% interest on the first 60k balance. This does not take into account the additional 1% interest for the first 30k balance which was announced in the Budget 2015 as this Executive Summary was submitted before the Budget announcement. I have my own model in Excel which calculates the monthly payout, and if my calculations are right, it’s true that the payouts are not in proportion. However, if we remove the additional 1% interest, just based on the assumed 4% interest throughout, the payout will then be proportionate to the starting balance in your RA at 55.

      With regards to your 2nd question, at age 55 the RA is set up for you, and the monies in your SA will first be used to fund the RA. Under the new ruling, if you turn 55 from 2016 onwards, you can choose if you want the BASIC, FULL or EXTENDED Retirement Sum. Depending on your choice and balance in your SA, any shortfall to the Retirement Sum will be funded from your OA if there’s money in there.

      For discussion sake, let’s assume you have 50k in your OA and also 50k in your SA at the time when the RA is opened for you. Let’s also assume you have the Medisave Min Sum set aside, and that you have chosen the Basic Retirement Sum of 80,500, then CPF will first move the 50k in your SA to your RA, then move 30,500 from your OA to your RA. This will leave you with 19,500 in your OA which you can withdraw.

      If you have chosen the Full Retirement Sum of 161k, then all the money in your OA and SA will be moved to your RA to make 95k in your RA, leaving 5k in your OA for you to withdraw if you want to. If you continue to work from 55, your monthly CPF contributions will continue to go to your OA, SA and MA accounts. There will be no contributions to the RA from your monthly salary. The OA, SA and MA balance will continue to build up over the 10 years until you reach 65, whereby CPF will make the second transfer from your SA and OA to try to meet the Retirement Sum of 161k which you chose at 55. If there’s excess, you can withdraw all the excess amount. If say at 65, after transferring all the money in OA and SA to your RA, the total in your RA is 150k, you still can get to withdraw up to 20%, i.e. 30k provided you did not withdraw that 5k at 55. If you did withdraw that 5k, then you can only withdraw 25k at 65. However, do note that if you make that 20% withdrawal, say 25k at 65, then your CPF Life payout will start with 125k instead and your payout will be slightly lower.

      Sorry for the lengthy post but I hope I answered your queries.

      Cheers!

      • charles

        Thank you for the detail explanation