Jonathan Kwok
The Straits Times
Tuesday, Jun 03, 2014
There was quite a reaction from my friends after the Central Provident Fund (CPF) recently raised its Minimum Sum yet again.
We may still be decades away from retirement, but there was still some irritation over the idea that part of our money will be parked in some account that we can access only after various conditions are met.
The latest change announced last month raised the Minimum Sum to $155,000 from July 1, up from $148,000. This is the amount that has to be left in our account at age 55, so it means we can withdraw less.
I was the voice of moderation, as I pointed out the rationale behind the change.
The Minimum Sum has had to go up often in recent years for two reasons, I explained: People are living longer and things are getting more expensive.
No escaping from these realities.
The Minimum Sum is used to buy an annuity, called the CPF Life, which provides monthly payouts from retirement until you die. A higher Minimum Sum means CPF Life payouts can increase to keep pace with inflation.
In fact, my concern is almost opposite from that of some of my peers who worry about money being locked away in the CPF account.
I am less angsty about not being able to use my money whenever I want to. Rather, I tell people that we should be worrying that the payouts from CPF Life will be too low for us to maintain our current lifestyles after we retire.
This system is meant to meet the needs of a lower-middle income retiree. So you will need to save and invest separately if you aspire to live a better life, taking an occasional holiday and eating at restaurants, for example.
I did some back-of-the-envelope calculations to get a quick gauge of how much a couple will need for their retirement. It turns out, you and your partner may need about $500,000 to $800,000 in stocks to provide enough dividends to supplement CPF Life payouts.
Savings and Investment Plan
First and foremost, we need to find out how much an above-average income family spends.
I took data from the Statistics Department's most recent household expenditure survey, which was released in December 2009. The top-earning 20 to 40 per cent of households spent $4,532 per month, the report said.
I'll assume that our hypothetical go-getting couple fall in this range and do not want their living standards to drop after retirement.
But these figures presumably capture households at a time when they are raising children, who would have grown up by the time the couple retire.
So I assumed expenditure could be cut by one-quarter to $3,399.
How much of this can be covered by CPF Life?
A Singaporean man who turns 55 this year and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the standard plan, said the CPF Life Payout estimator.
A woman's monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer. The payouts will start when they turn 65. Taking the lower sums, a husband-and-wife team will get only $2,300 per month from CPF Life, leaving them with a $1,099 deficit from their $3,399 expenditure. That works out to a shortfall of $13,188 per year.
If our hypothetical couple fail to make up the shortfall, they will need to cancel their hotel high teas and forget about travelling further than Johor Baru.
But surely our couple deserve better after slogging for decades in the rat race?
Fear not, a solution is present if they start saving and investing early in life.
I centred my calculations on using shares to meet retirement needs, though you can probably achieve the goal via an investment property. Assuming a dividend yield of 4 per cent, a $329,700 portfolio of stocks will be able to generate dividends of $13,188 per year. This amount will be able to meet our couple's shortfall.
Inflation with no drawdown
This simple calculation discounts inflation, however. As time goes by, things will surely get more expensive and you will need more money to maintain your lifestyle.
A 3 per cent inflation rate over 30 years will lead to annual combined expenditures eventually ballooning to $99,003 for our couple. If CPF Life payouts go up in line with inflation, this would eventually come to $66,992 per year for our couple.
But the shortfall for the couple's desired lifestyle would also have widened, and they would need a combined portfolio of a whopping $800,269 to generate enough dividends for that.
Inflation with drawdown
The previous scenario assumed that the couple would use only dividends from their shares and leave the entire capital to their beneficiaries after they die.
But one way to reduce the required amount is if they are willing to draw down on their stock capital after retirement. So their yearly payouts will consist of both dividends and a drawdown on capital.
After 25 years of retirement, they will have zero shares left but they would have needed a smaller amount to start their retirement with - $520,082.
The lesson from all these calculations is that it makes good financial sense to start preparing for retirement early. Without top-ups from your own investments, CPF Life will be able to provide only a basic lifestyle.
The Straits Times
Tuesday, Jun 03, 2014
There was quite a reaction from my friends after the Central Provident Fund (CPF) recently raised its Minimum Sum yet again.
We may still be decades away from retirement, but there was still some irritation over the idea that part of our money will be parked in some account that we can access only after various conditions are met.
The latest change announced last month raised the Minimum Sum to $155,000 from July 1, up from $148,000. This is the amount that has to be left in our account at age 55, so it means we can withdraw less.
I was the voice of moderation, as I pointed out the rationale behind the change.
The Minimum Sum has had to go up often in recent years for two reasons, I explained: People are living longer and things are getting more expensive.
No escaping from these realities.
The Minimum Sum is used to buy an annuity, called the CPF Life, which provides monthly payouts from retirement until you die. A higher Minimum Sum means CPF Life payouts can increase to keep pace with inflation.
In fact, my concern is almost opposite from that of some of my peers who worry about money being locked away in the CPF account.
I am less angsty about not being able to use my money whenever I want to. Rather, I tell people that we should be worrying that the payouts from CPF Life will be too low for us to maintain our current lifestyles after we retire.
This system is meant to meet the needs of a lower-middle income retiree. So you will need to save and invest separately if you aspire to live a better life, taking an occasional holiday and eating at restaurants, for example.
I did some back-of-the-envelope calculations to get a quick gauge of how much a couple will need for their retirement. It turns out, you and your partner may need about $500,000 to $800,000 in stocks to provide enough dividends to supplement CPF Life payouts.
Savings and Investment Plan
First and foremost, we need to find out how much an above-average income family spends.
I took data from the Statistics Department's most recent household expenditure survey, which was released in December 2009. The top-earning 20 to 40 per cent of households spent $4,532 per month, the report said.
I'll assume that our hypothetical go-getting couple fall in this range and do not want their living standards to drop after retirement.
But these figures presumably capture households at a time when they are raising children, who would have grown up by the time the couple retire.
So I assumed expenditure could be cut by one-quarter to $3,399.
How much of this can be covered by CPF Life?
A Singaporean man who turns 55 this year and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the standard plan, said the CPF Life Payout estimator.
A woman's monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer. The payouts will start when they turn 65. Taking the lower sums, a husband-and-wife team will get only $2,300 per month from CPF Life, leaving them with a $1,099 deficit from their $3,399 expenditure. That works out to a shortfall of $13,188 per year.
If our hypothetical couple fail to make up the shortfall, they will need to cancel their hotel high teas and forget about travelling further than Johor Baru.
But surely our couple deserve better after slogging for decades in the rat race?
Fear not, a solution is present if they start saving and investing early in life.
I centred my calculations on using shares to meet retirement needs, though you can probably achieve the goal via an investment property. Assuming a dividend yield of 4 per cent, a $329,700 portfolio of stocks will be able to generate dividends of $13,188 per year. This amount will be able to meet our couple's shortfall.
Inflation with no drawdown
This simple calculation discounts inflation, however. As time goes by, things will surely get more expensive and you will need more money to maintain your lifestyle.
A 3 per cent inflation rate over 30 years will lead to annual combined expenditures eventually ballooning to $99,003 for our couple. If CPF Life payouts go up in line with inflation, this would eventually come to $66,992 per year for our couple.
But the shortfall for the couple's desired lifestyle would also have widened, and they would need a combined portfolio of a whopping $800,269 to generate enough dividends for that.
Inflation with drawdown
The previous scenario assumed that the couple would use only dividends from their shares and leave the entire capital to their beneficiaries after they die.
But one way to reduce the required amount is if they are willing to draw down on their stock capital after retirement. So their yearly payouts will consist of both dividends and a drawdown on capital.
After 25 years of retirement, they will have zero shares left but they would have needed a smaller amount to start their retirement with - $520,082.
The lesson from all these calculations is that it makes good financial sense to start preparing for retirement early. Without top-ups from your own investments, CPF Life will be able to provide only a basic lifestyle.
