Analysis of CPF Changes 2015 & my very long commentary

Last Updated on 16, January 2017

Recently, it was announced that there will be CPF changes. The CPF Advisory Panel has made a number of recommendations. The recommendations are in 10 separate documents! To help my readers figured out what is happening, I have combined all the 10 reports into a single document. All page number mentioned in this article refers to the PDF page number of the combined document. So when I say page 11 of the combined report, you should insert “11” to the tool bar of the Acrobat Reader as shown in the picture below. The details of where to get the combined report is available at the end of this article. The CPF Changes recommended by the CPF Advisory Panel was accepted (page 21 of the combined report) by the government. This was also evident by one of the advertisement on Straits Times (available HERE) made by the Ministry of Manpower on 11 February 2015 which had a statement stating “You turn 55 in 2016. You will be able to choose from…”. Since the phrase “will be able to choose from” is used, it implies that recommendations have already been cast hard in stones. Some of CPF Changes are as follows (figures are for those turning 55 in 2016):

• Rename “1/2 of Minimum sum with property pledge” to Basic Retirement Sum (BRS) at $80,500.  In the CPF Advisory Panel’s report, it state that the CPF Life Standard Plan will provide approximately $650 - $700 per month starting at 65
• Rename “Minimum Sum” to Full Retirement Sum (FRS) which is now at $161,000. The CPF Life will provide approximately $1,200 to $1,300 per month starting at age 65.
• Introduce a new limit call the Enhanced Retirement Sum (ERS) of $241,500. The CPF Life payout will provide $1,750 to $1,900 per month starting at age 65.

Also, one of the CPF changes is that those turning 55 in 2017 to 2020, the retirement sums will be increased at 3% per annum to adjust for inflation.

CPF Life Payouts in the report not consistent with the actual CPF Life payout

I did a quick calculation and found that none of the payouts cited by the CPF Advisory Panel corresponded with the existing CPF Life Standard payouts. The following are the payouts (starting at 65) from existing CPF Life Standard plan assuming no bonus:

Amount at 55	Male	Female
$80,500	$683 - $754	$616 - $683
$161,000	$1,248 - $1,382	$1,135 - $1,262
$241,500	$1,811 - $2,009	$1,652 - $1,839

Actual CPF Life Standard Payouts using CPF Life Calculator

Initially I thought that the report used male as an example. However, the figures were way off for male when using the Enhanced Retirement Sum. It seems there is some large-sum “penalty” for the Enhanced Retirement Sum. Alternatively, the report was done in a rush to meet a very important dateline that is coming (don’t ask me what this dateline is, you should know!) and hence the figures were not double checked properly.

Why CPF Life payout is not directly proportional to the retirement sum?

I received many queries on why the payouts are not directly proportional to the retirement sum. For instance, the Basic Retirement Sum of $80,500 has a payout between $650 - $700. For Enhanced Retirement Sum (which is exactly thrice that of the Basic Retirement Sum), the payout should be thrice or $1950 - $2100.  However, the Enhanced Retirement Sum payout was quoted as $1,750 to $1,900. After some investigation, I finally found the answer in page 52 footnote number 16(a) of the combined report on why the payout is not linearly proportional to the retirement sum.

Should you pledge your property and opt for Basic Retirement Sum?

I was asked by my clients about the Basic Retirement Sum property pledging.

This ability to pledge one’s property is not new. So what is property pledge? If you pledge your property to CPF, you will be able to withdraw up to half of the CPF Minimum Sum. In fact, under current CPF rules, if you are unable to set aside your full Minimum Sum, your property, bought with your CPF savings, will be automatically pledged. Once the property is pledge, the amount of the pledge will be returned to the member’s CPF account when the property is sold. However, can the money returned back to CPF be used for say housing, medical etc? The answer can be found at the footnote number 9 of page 6 of the combined report).

From financial planning standpoint, pledging your property to CPF does not increase your networth. The amount withdrawn is likely going to be used up quickly such as business, travel, casinos and  “all the things I always wanted to do” such as having multiple mistresses.  In fact, withdrawing part of the CPF would result in a lower payout from CPF Life and opportunity cost of CPF’s high interest rate. Most people felt that they want to consume their CPF as quickly as possible because they do not think they will live that long. But what happen if they do live that long? Can they promise to end their own life to shorten it? Are taxpayers going to pay their bills? As a taxpayer, I am not interested to help them! In fact, by my experience in dealing with clients with all walks of life, those who want to pledge your property to CPF are desperate for cash. They are desperate for cash because of the lack of proper financial planning in their entire working life.  On the other hand, the high networth wants to top-up their CPF to the maximum to earn the high interest and high CPF Life payout as the likelihood of the government playing them out is significantly less likely compared to their private bankers.

Is CPF Life Payout enough for retirement needs?

Another query I got was whether the payout from CPF Life is sufficient for retirement needs.

According to page 46 of the combined report, the Basic Retirement Sum which aims to give a payout of $650 - $700, is targeted at the “lower-middle”. Specifically it was targeted at the 21^st to 40^th of the population (refer to page 56 of combined report). By extension, the Full Retirement Sum is targeted at the 61^st to the 80^th Quintile.  I reproduce the average expenses incurred by retirees in 2012/13 survey (source: HERE):

If you notice, under the “21^st to 40^th” Quintile, the average amount spent on Recreation and Culture is just $23.80 every month! What kind of retirement lifestyle this is? To me this is an obvious poverty level. Surprisingly there are so many retirees in Singapore living in this manner!  I cannot imagine anyone having hardly any recreation for the entire retirement years! Even if you would to look at the 61^th to the 80^th Quintile, the Recreation and Culture is still a miserable $64.90. Can you imagine having a budget of just $778.80 a year for recreation? I cannot imagine. This is not the lifestyle anyone should aim for.

Having done financial planning for many clients, I often will do estimation on the working individual’s likely retirement expenses. This can be easily done by using the current annual expenses and subtract away expenses that are not likely to occur if one is retired such as mortgage installments, taxes, children’s food and tuition fees, support for parents (as they likely would have retired permanently from this world by then).

Current Expenses Less:
.....Mortgage installments
.....Taxes .....Children’s support
.....Parent’s support
Equal: Likely retirement expenses (today’s value):

The figure that I often get is around $2000 to $2500 per month for my typical clients. This will place them at around the 80^th percentile of the retirees’ population!  In fact, I was quite alarm by this figure as it keeps on showing up in recent years. In the past, it was only around $1500 - $2000. This shows the impact of inflation (more on inflation later).

Does that mean that my clients are rich people? Not at all. They are your typical teachers, accountants, engineers, technicians, software programmers, policeman, contractors, etc (see full listing at this link Testimonies).  What this means is that many people will not be able to continue with their existing lifestyle when they retire because they do not have the means to maintain current lifestyle. Theoretical financial planners say that you should aim to get a passive income of 70% of your last drawn pay when planning for your retirement. I say you need to aim to make sure 100% of your expenditure you are incurring currently (with the adjustments mentioned above) today can be met when you retire.  The last thing you want is to try to survive in your retirement years. You want to enjoy your retirement years and certainly spending $$23.80 or $64.90 a month on recreation is as good as no retirement.

Thus, the statistics say the lower-middle average retiree is spending $517.70 is not because they want to but it is likely because they have no choice as their retirement resources are limited. Similarly, the statistic show that the 61st - 80^th Quintile’s average expenditure is $1,055.1 a month could be because they constrained by existing resources as well.

To further show this is likely to be true, I reproduce the expenditure breakdown of a retiree household by dwelling type and its corresponding income sources. Note that the following three tables are the expenditure & income of retiree household whereas the above table is the expenditure per retiree.

One of the observations from the above tables is that the income from ‘Contributions from relatives and friends’  is quite significant. This has to do with the Asian culture of children giving parents some allowances. In fact, 70% of the middle class believe that children should be responsible for financially supporting their parents in old age (Source: 55% worried about their ability to save enough for retirement). This amount is not small. The 1&2 room flat retiree receives 39% of his income from ‘relatives’.  For 3-room, 4-room and 5&Executive flat retiree, the amount of income from ‘relatives’ is 36%, 42% and 37% respectively.  I have a lot of issue with this. This source of income is not sustainable as it means the retiree is using the next generation’s wealth to fund present retirement lifestyle. Moving ahead, this source of income from children is likely to decline due to the children’s difficulty in planning for their own retirement. Moreover, the retiree’s children will be unable to save sufficiently for own retirement when large amount of money is transferred out to parents (73% underestimate the retirement savings needed).

Many of my clients do support their parents financially. However, when I do the needs analysis, majority told me that their parents are not dependents and the needs analysis can exclude them. The financial support they give to their parents is to show filial piety. Most of my clients assume their parents have sufficient money for retirement and this is reflected in my clients’ wills that they do not bequeath anything to their parents. But actually most of my clients does not have any idea how much their parents have.  I believe this is the same problem most faces.

Let’s recalculate to see what is the cash flow of a retiree household by excluding ‘contribution from relatives’:

As it can be seen that many retiree households are already running a negative cash flow.  If children’s support is excluded, almost all retiree household runs into a very large deficit.

Hence, a retiree whose income consists more than 30% from children’s ‘filial piety’ is going to have a very sad ending. The conclusion of this section is that many retirees’ expenditure level is determined not because they lead a lifestyle that they want but because they are constrained by their lack of resources. As a financial planner, I would say that this group of retiree are supposed to be working because they have yet to achieve financial freedom. Having negative cash flow is NOT financial freedom especially a large part of the income comes from borrowing money from the next generation.

If you cannot remember anything in this section, I suggest you remember this: target a retirement monthly income of at least $2500 (today’s value) as this income will be able to provide a comfortable retirement for a retiree.  You should never aim for a retirement that only meet basic needs.

Inflation Assumptions

The CPF Advisory Panel wrote that the expenditure level of the lower-middle retiree household has risen by about 5% per annum based on the Household Expenditure Survey 2002/2003 and 2012/2013. The panel admits that this was above inflation (page 31 of the combined report).

I did my own calculation. The CPI in 2003 was 88.5 while in 2013 it was 115.8. This means the official inflation was (115.8/88.5)^(1/10)-1 = 2.7% per annum.

So does this means that the official CPI is a lie? Or does it means that the lower-middle class is facing a higher cost of living?

In my opinion, there are two primary reasons why a household would have a higher expenditure over the years:

1. One reason is due to the higher cost of goods and services. This is known as inflation.
2. Another reason is due to the desire to have a better lifestyle. 10 years ago, nobody owned any smart phone because none existed. These days, it is common for people to enter into expensive contracts in order to get these ‘free’ smartphones. Actually these expensive contracts are economically equivalent to entering into hire purchase agreements. The increase in lifestyle is not necessary a bad thing. It is a reflection of the progress of society.

The CPF Advisory Panel recommends that the Basic Retirement Sum should be increased by 3% every year for those turning 55 in 2017 to 2020. I disagree with this. It should be 5% per annum!

It also means that those who are trying to plan for their retirement should assume an ‘inflation’ of 5% per annum. At the same time, any retirement income should increase at least 5% per annum!

The impact of assuming 5% as the ‘inflation’ assumption is a significant one. Let’s work out some numbers on how much you need for retirement:

Current age = 55 Monthly Retirement Income = $2500 or $30,000 (today’s value) Retirement years = 30 Return on investments = 2% pa. If you assume average inflation rate = 3% pa, at 62 the amount of retirement funding required is $$1,279,640 (equivalent to $1,040,464 in today’s dollars). If you assume average inflation rate = 5% pa, at 62 the amount of retirement funding required is a whopping $1,989,273 (equivalent to $1,413,739 in today’s dollars).

How much you need for retirement?

As it can be seen that the actual amount for retirement is a huge one. Having $1.9 million sounds like a millionaire but in reality it just gives you an average lifestyle . Retirees who have less than this are living a life that is far lesser than what they used to when they were working. Why should a retiree be living a lifestyle that is less than average? Retirement is not the time for misery. Retirement means financial freedom and financial freedom implies having a comfortable life.

The Enhanced Retirement Sum is $241,500 for those turning 55 in 2016. This is just a very small amount of the retirement pie. Obviously the Enhanced Retirement Sum is not sufficient for any retirees. Hence, it is important that an individual still work towards planning for his or her own retirement planning.

As a financial planner, I can use the Enhanced Retirement Sum as a fixed income portion of a retiree investment portfolio. I am aware that there are many who do not trust the government because of never ending shifting of goal posts (page 42 of the combined report). Well, you can take it as part of the investment risk in investing in the CPF Life. The chances of your financial adviser cheating you by selling you unsuitable product are probably infinitely higher than your government. In fact, the mystery shopper survey showed that up to 70% of the recommendations by financial advisers were NOT suitable! If you so happen to be accredited investor, you probably have already been cheated a million times by your private banker (see Why accredited investors are in for a raw deal).

Other interesting questions answered in the report

In the report, there are some interesting questions answered such as:

• Under existing rules, do you need to top-up your CPF in cash or sell your property if you do not meet the Minimum Sum? (See bullet point (d) on page 42 of the combined report.)
• What is the proposed way to increase the CPF Life Payout without further increase in using own CPF? (See point 28 of page 51 of the combined report.)
• It was recommended that 20% of CPF can be withdrawn at 65. But what if you really need some money before that or has already stopped work? (See point 5 of page 58 of combined report).
• What are the existing rules in allowing earlier access to CPF savings for medical reasons? (See page 63 of combined report.)
• What is the relationship between the Silver Housing Bonus and CPF Life? (See page 64 of the combined report.)
• What is the relationship between the Lease Buyback Scheme and CPF Life? (See page 66 of the combined report.)

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