In our lifespan, we will pass through a lot of milestones. Some milestones that creates a new chapter in our lives are:
- getting married
- buying our first HDB flat
- becoming a parent
- watching our kids cross their own significant milestones
Here I like to point out a uniquely Singaporean milestone that has a great financial impact especially on our retirement plans.
The Critical Age of 55 Years Old
Turning 55 years old in Singapore comes with a few interesting rules that will kick in. Let’s start first with our CPF account.
Upon turning 55 years old, a Retirement Account (RA) will be created for us.
This RA is of course not going to be kept empty. It will be used to form your Retirement Sum.
When you reach 55 years old, your Special and/or Ordinary Accounts savings will be transferred to your Retirement Account to form your Retirement Sum.
From Retirement Account to CPF LIFE
Your retirement sum can be used to join CPF LIFE which provides you with life-long monthly payout or the Retirement Sum Scheme which provides you with a monthly payout of about 20 years.
To join CPF LIFE, you will need to hit the required Retirement Sum.
There are 3 levels of Retirement Sum as of 2016. When you turn 55, you pick which tier of Retirement Sum you wish to go after.
The Enhanced Retirement Sum (ERS) of $241,500 provides the highest amount of payouts for your CPF LIFE.
The Full Retirement Sum (FRS) of $161,000 provides the next highest level of payout.
For those who might not have enough in their Retirement Sum, the Basic Retirement Sum of $80,500 is available. However, this results in a situation where you have to pledge your property to make up the remaining $80,500.
What is a property pledge?
A property pledge is a commitment saying that if you sell your property, you will refund the pledged amount, as well as any CPF money used to buy the property and interest it would have accrued, into your CPF account.
You still own your property after the pledge. But there will be the above restrictions kicking in if you proceed to sell your property after 55 years old.
How about CPF LIFE payouts?
You can check the table below for CPF LIFE payouts.
In 2017, the Full Retirement Sum was increased from $161,000 to $166,000.
The Full Retirement Sum is destined to increase every year – due to inflation.
Imagine how much will the Full Retirement Sum will be by the time YOU turn 55?
Do take note that CPF LIFE monthly payouts will only start when you turn 65.
You CPF funds are essentially in a locked-in period from 55 years to 65 years old.
The Rate of Increase of the Full Retirement Sum
I mentioned this in my previous article on Singapore’s “True” Inflation Rate.
Your CPF Contribution Rate Is Reduced
After you turn 55 years old, the contribution rate from your employer drops from 17% to 13%.
Similarly, your own contribution rate drops to 13%.
As such, retirement planning needs to start earlier rather than later. By failing to plan, you are planning to fail your retirement.
Once you turn 55 years old, the options become very limited.
Consequences when Turning 55 Years Old
Due to the property pledge process, if you intend to sell & downgrade your flat after 55 with the intention of “unlocking” your retirement funds – you need to bear in mind you might not receive a lot of cash proceeds as it would have to be returned back to your CPF to form your Retirement Sum.
Also do bear in mind the potential drop in income when you turn older and you start to approach the retirement age. It also means there will be an impact if you wish to take loans.
The only good thing on your side is actually TIME.
The more TIME you have, the higher your chances of achieving your desired lifestyle during retirement.
It is ALSO not enough to be a compulsive saver – we have the highest savings rate in Asia – we also need to put our money to work that can provide returns of at least 4% – 5% in order to defeat the impact of inflation.
If you are keen to start planning your retirement, you are welcome to contact me for a financial checkup.
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