CPF life to pledge or not to pledge your property at age 55.
In Singapore, we have a retirement scheme called CPF life. Every Singaporean citizen has to decide what to do with their CPF at age 55. For example which CPF life scheme we should opt for and whether we should pledge our property, in order to withdraw more money from our CPF.
Disclaimer: This article is not to be used as financial advice. The following information is for education purposes. Anyone wishing to make their financial decisions on their money and investment should seek proper advice from a financial advisor.
I have found an interesting article on CPF life in the local news. Source: Explainer: Why is interest on Retirement Accounts not accrued once CPF Life payouts start, and how much will your family get when you die? — TODAY (todayonline.com)
In the Today’s news article, there is this graphic (see below). A brief explanation on the graphic. At age 55, the CPF that the man has in his OA and SA will be converted to a retirement account (i.e RA account). Assume he managed to have a CPF balance of $200k .
This 200k will be compounded to around $300k when he reached 65 years old. With CPF life standard plan, he can start to withdraw $1,630 per month. If he passes away at age 70, he would have withdrawn $97,800 (i.e $1630 x 5years x 12 months). Using $300,000 — $97,800 = $202,200. This $202k will be passed on to his beneficiaries. Note that the article states from age 65 onwards, there is no interest earned that can be passed on to his beneficiaries. This is because, the interest earned is pooled, so that it will continue to pay out to all CPF life members drawing down their CPF.
This is what many Singaporeans can be assured that their retirement is taken care off, until the day they are no longer around.
But how about those who wishes to pledge their property and put only $100k in their retirement account.
First, let us look into the CPF standard plan without property pledging
In table 1, RA gets compounded to $300k at 4% interest. It is then drawn down monthly by $1630 for life. As we can see by age 80, the $300k is exhausted, resulting a negative balance. The CPF life continues paying $1630 per month till the CPF life member passes away. If he dies at age 75, he will be left with $104k to pass to his beneficiaries. Do note, there is no interest earned on his $300k, once he starts withdrawing his cpf at age 65.
Next, let us look into property pledging. Using the same amount of $200k, we assume he pledge his property resulting in $100k staying in his RA account. Since $100k is half of the amount in table 1, all the numbers here are shown are divided by 2 from table 1. (see table 2 below)
Now he has $100k which sits in his OA account earning 2.5% interest for life and can be withdrawn anytime. Assume he did not invest this amount, but kept in his OA, how long can this amount last while he maintains the full $1630 per month withdrawal in table 1.
Table 3 has a monthly withdrawal of $815. This is added to table 2 withdrawal of $815 from CPF standard plan. This makes up the $1630 which is the same as table 1. The lower interest earned in OA will be compounded, at the same time as the monthly withdrawal $815. As seen in table 3, the OA account will be exhausted after age 80. This means the CPF member will be left with $815 monthly income from his CPF life standard plan in table 2 after age 80.
With property pledging and putting all your money in OA, the amount is not able to generate as good returns as choosing the table 1 option. You will end up with less to spend and it will impact your retirement lifestyle.
Finally, let us check if we have invested the $100k instead of putting it in OA. Assume, that we can get a consistent 5% return per year from age 65.
Table 4, at 65 years old he would have compounded the $100k @ 5% return to $163k. He will withdraw $9780 during that year to $161k to start at age 66yr old. Assume he manage to maintain this 5% return per year and withdraw $815 monthly, he would have $104k at 85year old. As this amount $104k will continue to compound while it is being drawn down, we can project the age from 85 onwards.
Table 5 shows if you have managed to compound your money $104k at 5% and withdraw $815 monthly, it can last even after you reach 100 years old. This means at 5% compounded rate, you can match CPF life under table 1, in terms of monthly drawn down. At the same time, there is flexibility to take out your funds to give your beneficiaries unlike the Table 1 CPF life plan.
In conclusion, when we are at 55 years old, we have to decide what to do with our CPF. It is a life changing decision and this decision impact the rest of our lifetime. Each of us are different and have different needs. While we have the assurance that we can get a fixed sum of money (without pledging our property) to last our lifetime, we should explore alternatives that can provide this assurance as well.
If you below 55 years old today, you can try your hand at investing. If you can consistently make 5% returns year after year, then when you reach 55 years old, the decision to take out your CPF money to invest is clear. However, if you cannot beat the CPF returns provided under CPF life, perhaps you should not pledge your property and just take the CPF life monthly payout instead.
Hitting the 5% returns per year is not easy, but that is a topic for another day. I hope this article will help you decide what to do with your CPF and explore opportunities outside of what you have read about. Do connect with me on linkedin linkedin.com/in/chewlinkiat and share this article, if you find it useful.
