How to work your CPF savings harder to fight inflation

I TURN 55 soon. Fortunately, 55 is not the retirement age in Singapore. 

Currently, I am happy writing and podcasting, as well as doing ad-hoc projects. I hope to be gainfully employed for many more years.

Still, turning 55 marks a milestone when it comes to one’s Central Provident Fund (CPF) savings. Upon turning 55, you set up your Retirement Account (RA), which is funded by savings from the Special Account (SA) and Ordinary Account (OA). 

Also, you can withdraw your CPF savings after setting aside the Full Retirement Sum (FRS) or, if you own a property, Basic Retirement Sum (BRS). Those who do not meet the BRS can withdraw up to S$5,000 from the OA and SA.

Withdrawing CPF savings to indulge is alluring. Spending on exotic overseas holidays when one is in generally good health sounds great.

Still, many of us should be pragmatic and financially prudent, as we could live to ripe old ages.

The number of Singapore residents aged 80 years and over rose 103 per cent from 69,080 in 2010 to 139,909 in 2023. Those aged 90 years and over jumped by 121 per cent from 10,760 in 2010 to 23,728 in 2023. During this period, the number of Singapore residents grew by about 10 per cent.

For those who turn 55 in 2023, the BRS is S$99,400, FRS is S$198,800 and Enhanced Retirement Sum (ERS) is S$298,200. 

Setting aside the above sums for FRS and ERS at age 55 in your RA allows you to get a monthly payout under CPF Life of S$1,510 to S$1,620, and S$2,210 to S$2,370, respectively from age 65.

CPF Life is a national longevity insurance scheme that provides a member with monthly payouts for life. This is attractive given rising life expectancy.

Inflation

A couple who each sets aside an ERS of S$298,200 in their RA at age 55 in 2023 can receive a combined sum of around S$4,580 a month for life from 2033. 

The above payout works out to about 45 per cent of the median monthly household income from work, including employer CPF contributions, among resident employed households in 2022.

Receiving steady lifelong payouts under CPF Life allows one to age with peace of mind. However, the value of a fixed monthly payout will get eroded by inflation.

The challenge of ensuring financial adequacy when one retires is exacerbated by inflation staying high for a prolonged period. To assume inflation of 4 per cent versus 2 per cent over the long term has profound implications.

Take a household which receives S$4,580 a month and has monthly outgoings of S$3,000. If the amount of cash received remains constant and expenditure rises annually by 2 per cent, the cash inflow cannot cover the outflow after 21 years. Should expenditure rise annually by 4 per cent, the cash inflow will not cover the outflow after 10 years.

The above scenarios will be less drastic after accounting for using savings from earlier years, when cash inflow exceeds outflow, to help cover for later years, when cash outflow exceeds inflow.

With CPF Life, one can opt for the Escalating Plan, where payouts increase by 2 per cent annually for life, instead of the Standard Plan, where payouts are flat.

However, choosing the Escalating Plan over the Standard Plan means starting with a lower payout. In any case, a payout that rises by 2 per cent yearly may not combat annual inflation of 4 per cent.

What makes high inflation scarier for the elderly is that they may rely on labour-intensive services. The inflation rate for such services could rise faster than the overall inflation rate in a tight labour market, where manpower costs escalate faster than general inflation.

Singapore’s CPF system is well-regarded internationally. CPF helps Singapore citizens and permanent residents set aside funds to build a strong foundation for retirement.

While people know they need to save a large part of wages during their working years to cater for retirement needs and emergencies, many may lack the discipline to do so. Hence, being forced to save and not touch some of the savings for years can work its magic. 

Leaving CPF funds in the OA and SA allows a person who has been in employment for many years to build up a very meaningful nest egg through the power of compounding.

Currently, the annual interest rate for OA is 2.5 per cent and for SA, it is 4.04 per cent. Extra interest is earned on the first S$60,000 of combined CPF balances, which is capped at S$20,000 for OA.

Finding alternatives

Generally, I have left funds in my OA and SA untouched, save for having used some CPF savings for housing. Recently, I have started using OA funds to buy Treasury bills (T-bills). 

Should interest rates unexpectedly soften significantly, the interest rates paid to the OA will start looking attractive again. On the other hand, if interest rates stay high for an extended period, might interest rates paid on CPF OA savings rise?

Minister for Manpower Tan See Leng said in a written parliamentary reply in early July that the government is watching CPF interest rate pegs to ensure they “remain relevant in the prevailing operating environment”. 

I sway between setting aside the FRS and ERS to fund my RA. While enjoying a higher annuity is great, maybe I should put less into my RA and have more funds available for investing. 

For safe income-producing instruments, buying T-bills make sense. The cut-off yield on the latest six-month T-bill was 3.75 per cent per annum. Investing in bonds issued by strong issuers or in bond funds can also generate healthy recurrent income.

For some yield, plus potential capital upside without foreign currency exposure, one can buy physical properties in Singapore, local blue-chip equities such as the Singapore banks or Singapore-centric real estate investment trusts with strong sponsors. However, values of equities and properties are subject to market fluctuations.

Meanwhile, younger as well as older workers can hopefully benefit from wage inflation by staying employed. Indeed, staying employed as one ages should greatly help one’s mental and financial well-being.