Weigh trade-off between cashing out money and leaving funds to grow for retirement needs
Invest Editor/Senior Correspondent
Published Sep 23, 2018
Stay in or cash out? That is the question for many people as they near 55 and the enticing pot of CPF money awaits. Some Singaporeans resist the temptation to grab their Central Provident Fund (CPF) savings, and leave the funds untouched so they can keep capitalising on the attractive interest rates before they eventually retire.
But 51 per cent of those who withdrew their cash on reaching 55 parked the funds in savings accounts at banks and finance firms, according to a recent survey.
Yet fixed deposit rates remain low, so these members may find inflation eating away the value of their savings over the long term.
Let's assume all your funds are in a savings account with an annual interest rate of 0.5 per cent. With inflation here at 2 per cent, your money will lose about 26 per cent of its value in 20 years, from $100,000 to $74,008, says Mr Brandon Lam, Singapore head of financial planning group at DBS Bank.
While withdrawal is an option once you turn 55, leaving cash in the CPF earns higher interest rates. The first $30,000 in the Special, Medisave and Retirement Accounts, for instance, earns 6 per cent. The next $30,000 earns 5 per cent, and amounts above $60,000 will earn 4 per cent.
So how to decide? The first thing CPF members should do is consider the trade-off between withdrawing CPF money to meet whatever immediate needs they have, such as home renovations, or leaving it in their accounts to grow for retirement needs.
SingCapital chief executive Alfred Chia says you should consider withdrawing only if you need to use retirement savings to repay loans, for children's education, for investment opportunities that can generate a minimum of 2.5 per cent returns, or to achieve important financial goals. If not, you would be better off leaving the funds in your CPF accounts to enjoy the attractive interest rates of up to 6 per cent.
A Central Provident Fund Retirement Account (RA) will be created when a CPF member turns 55.
Savings from his CPF Special and Ordinary Accounts, up to the Full Retirement Sum, will be transferred to the RA to form his retirement sum, to provide a monthly income in old age.
The remaining savings in his CPF Special and Ordinary Accounts can be withdrawn any time after he turns 55, subject to the applicable withdrawal rules.
The CPF member may also apply to withdraw his RA savings (excluding top-up monies, any government grants received and interest earned) above the Basic Retirement Sum if he owns a property with sufficient CPF property charge or pledge.
"As CPF members can withdraw any amount (subject to CPF rules) at any time after age 55, it works like a private personal ATM with much higher interest than a bank savings account," he adds.
The good news for those who want liquidity is that there is more flexibility now when it comes to withdrawals. At one time, you could make only one a year but that has changed.
"Members can access the withdrawable monies in their CPF accounts when the need arises, and those who withdraw their CPF savings via PayNow can receive payments within a day," says the CPF Board.
The Sunday Times looks at the CPF Trends study and offers tips on what members can do with their retirement savings.
Leaving CPF savings untouched
The recent CPF Board study found that 40 per cent of members who turned 55 and had withdrawable CPF funds did not pull any cash out.
The study drew data from a survey of around 7,200 Singapore residents aged 55 to 70.
They were asked about their retirement and healthcare needs and how these have changed over time. Face-to-face interviews with these people are held every two years.
Withdrawing CPF savings
The study found that people who made withdrawals mostly deposited the funds in a bank or used them to pay for near-term expenditure needs or big-ticket items.
About 60 per cent of members aged 55 to 70 said they had made cash withdrawals since turning 55. The median amount taken out was $9,000 while the average amount was $33,000.
The median amount deposited for those who withdrew cash and put it in a bank account was $8,000.
This group did not report any specific purpose for making withdrawals, which suggests they were not prompted by immediate needs, says the CPF Board.
Broadly, there were three main uses of the withdrawn cash:
•Leaving it in a bank savings account without having any specific use for the cash;
•Paying for immediate needs, such as household expenses or to pay off loans; and
•Spending on big-ticket items, such as holidays, overseas trips or home renovations.
Around 27 per cent of those who made withdrawals used the funds for household expenses, while 12 per cent used them for holidays or overseas trips, and 4.4 per cent used them for home renovation.
The CPF Board noted that people in this "withdrawal" group had more children on average than other groups. Some of them also used the money to pay for their children's education.
A relatively higher proportion of members in this group also reported poorer health and some indicated that the withdrawn funds were for medical expenses.
The CPF said members with higher healthcare needs should look to schemes such as MediShield Life and Medisave, where increased withdrawal limits would help to support their medical expenditures and provide greater peace of mind.
Five things to consider when you turn 55
1. DON'T WITHDRAW YOUR CPF SAVINGS
The CPF survey indicated that 40 per cent of CPF members did not make cash withdrawals after turning 55. This allowed them to keep earning attractive, risk-free interest. If they later decide to withdraw their savings, they can receive them within a day with PayNow.
2. TOP UP TO ENHANCED RETIREMENT SUM (ERS)
People who want to have higher retirement payouts can top up to the prevailing ERS of $256,500 at 55. This will allow them to receive monthly lifelong payouts of $1,910 to $2,060 from age 65. And if you have surplus savings, you can continue to top up to each year's prevailing ERS after 55 to get higher monthly payouts from 65.
3. BUILD UP HEALTHCARE SAVINGS
Members who reach 55 and have not met their Basic Healthcare Sum (BHS) can transfer funds from their CPF Special and Ordinary accounts to their Medisave Account, up to their BHS. They must first have the Full Retirement Sum (FRS), or Basic Retirement Sum (BRS) with sufficient property charge/pledge, in their Retirement Account.
Members can also apply to transfer their Special and Ordinary account savings to their loved ones' Medisave Account if the recipients are over 55, up to their BHS. For members who turn 65 this year, their BHS will be fixed at $54,500, which will not change for the rest of their lives.
A loved one can be a spouse, sibling, parent, grandparent, parent-in-law or grandparent-in-law.
Medisave Account savings can be used to pay for your own and your immediate family members' medical expenses, as well as the premiums of approved medical insurance schemes, like MediShield Life.
4. TOP UP OR TRANSFER TO YOUR LOVED ONES
In addition to enhancing your own retirement, you can also consider transferring some of your savings to the CPF accounts of your spouse and other loved ones.
The Government made it easier to do this in 2016. Members can now transfer their CPF savings above the Basic Retirement Sum, rather than the Full Retirement Sum (FRS), to their spouses.
From Oct 1, there will be a lower threshold for members to make CPF transfers to their parents and grandparents. You will be able to transfer CPF savings above your BRS to your parents and grandparents if you have sufficient CPF savings, inclusive of property pledge or charge, to meet your FRS.
Right now, you can transfer only CPF savings above your FRS to your parents and grandparents.
There were 15,789 top-ups and 4,345 CPF transfers to spouses above the FRS last year.
5. PAY OFF YOUR HOME LOANS
Around 13 per cent of members had used their CPF withdrawals at 55 to pay off loans. But if you use your CPF Ordinary Account savings to service a mortgage, note that CPF contribution rates drop over time.
Furthermore, a smaller proportion of our contributions goes into our Ordinary Account as we get older, so it's important to pay off the mortgage as soon as you can, says the CPF Board.
Four things to do with your withdrawable CPF savings
1. INVEST IN EQUITIES
Mr Lam advises customers to assess their financial position and establish their retirement needs before allocating their funds to optimise returns.
Keep in mind that the average Singaporean's life expectancy is increasing - it's 85.2 years for women and 80.7 years for men.
Mr Lam notes: "Should you choose to withdraw your CPF funds, taking into account the increase in life expectancy, you should note that your investment horizon is also extended.
"If so, you might consider allocating a portion of your funds in assets which may yield higher returns over a long horizon (but are in turn higher risk) such as equities or exchange-traded funds."
Ms Chung Shaw Bee, head of wealth management at United Overseas Bank, says one income-generating option you could consider is multi-asset funds that have a focus on generating regular payouts. "You could also consider investing in a globally diversified portfolio of bonds as holding different asset classes enables you to hedge against risks across market cycles."
2. RETIREMENT-RELATED INSURANCE
To supplement the CPF Life payout, you can consider putting aside some money in retirement insurance plans, such as annuities that can provide an additional source of stable income.
Besides annuities, life insurers have been rolling out retirement insurance plans that come with flexible premium payment terms and different payout periods to cater to your financial needs.
3. ENDOWMENT INSURANCE PLANS
Ms Chung says that you could diversify your retirement investment portfolio by investing in short- to medium-term insurance endowment policies.
Such policies can offer lump sum proceeds at different maturity periods, so you get a staggered payout, or monthly cash benefits if you prefer higher liquidity. The yield from endowment policies can also hedge against the effects of inflation.
4. SINGAPORE SAVINGS BONDS (SSBs)
As interest rates inch upwards, the SSB is gaining popularity among retail investors.
SSBs, which are fully backed by the Government, are a principal-guaranteed, risk-free, affordable and low-cost investment option.
The SSB rate steps up over time, so over a 10-year period, the average interest is generally higher than that for fixed deposits.
To invest, you will need at least $500, lower than conventional Singapore Government Securities (SGS), which require $1,000. Corporate bonds usually require $250,000.
If you hold your SSB for the full 10 years, your return will match the average 10-year SGS yield the month before your investment. In the past 10 years, the 10-year SGS yield has been between 2 per cent and 3 per cent most of the time. The average interest rate a year for the October issue of SSB is 2.42 per cent.
SSBs may be a viable option for your withdrawable CPF funds, particularly when the average returns go beyond 2.5 per cent.