CPF Board has announced that CPF Minimum Sum will be increased to $155,000 from $148,000 for 2014. This news has caused pretty bad publicity and it is definitely not well received. There is so much attention on the $155,000 number that they have left out the details surrounding the minimum sum.
Instead of focusing on the number and how it has increased over the years, this article explores the mechanics of the Minimum Sum scheme and how applicable it is to retirement.
How to Calculate Your CPF Minimum Sum
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1. The Minimum Sum Can Be Reduced By Half If You Own a Property
While many are still being fixated on the $155,000 number, they forget that if they own a property the Minimum Sum can be reduced by half potentially. Assuming the value of the property is worth more than the pledge amount which is half of the minimum sum, then the minimum sum required is only $77,500. The reason for this is that if you own a home and live in it, you do not have to pay rental which decreases your monthly expenses dramatically.
2. You Are Able to Get Full or Partial Exemptions If You Have An Existing Annuity Policy
The sole purpose of the CPF Minimum Sum is to ensure that people have sufficient monthly income for retirement through the CPF Life Annuity. So if you already have an existing annuity policy, you can actually apply for exemption if the amount you get from the annuity is higher than the monthly payment by CPF. If your annuity payment is lower, you can still apply for partial exemption.
3. Retirement Account Earns 4% Return Per Annum
When one reaches retirement age, the Minimum Sum goes into the Retirement Account. The money in the Retirement Account is used to pay for a CPF Life annuity scheme. Currently, the Retirement Account earns 4% return per year which is actually pretty decent return for a low risk fixed income instrument.
4. Is the Minimum Sum Even Enough?
Using the CPF Life Calculator, a full $155,000 Minimum Sum provides approximately $1,200 monthly income via the CPF Life Annuity. Is $1,200 even enough for living expenses? There is still the issue of inflation during the 20 to 30 years of retirement which can further raise living expenses. If the Minimum Sum is reduced by half to $77,500, the monthly payout is only $600 to $700, which is generally insufficient for living expenses.
So the Minimum Sum is really the bare minimum required for retirement. In fact, it is generally not enough for most people so you need to start planning for retirement much earlier. The CPF Life payout can only be a supplement to your retirement, majority will still have to come from your own investments. To begin planning for retirement, use the Dr Wealth retirement calculator to calculate your retirement number and start saving!
About the Author
Calvin Yeo, CFA, CFP is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform aiming to provide free effective and quality financial planning for the mass public.
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