Wednesday, July 29, 2009

CPF Minimum Sum. What's it all about?

CPF Minimum Sum. What's it all about?

by Christopher Pua 29 July 2009

I have always been asked this question whenever I conduct a retirement planning workshop:
"What is this minimum sum? How much must I have in the CPF? What is this CPF minimum
sum all about?"

What is the Minimum Sum?
So, I thought it would be good if I could share my thoughts and views on this matter. The
CPF minimum sum was initiated by the CPF board in 2003. Under this scheme, all CPF
members turning 55 would have to set aside a Minimum Sum of CPF money from their
Special Account(SA)and their Ordinary Account(OA) into a new Retirement Account(RA),
before they could withdraw the balance from their OA.

The reasons for the implementation of this scheme are many. In my opinion, I would say
that this is a fantastic system to help CPF members managed their hard earned CPF savings,
and to help them to drawdown the cash from the RA for their retirement years.

Before this system was in place, we have heard many stories of how retirees CPF money was
completely spent in a blink of an eye soon after they withdrew their CPF money at age 55.
You may have heard this saying, that Singapore knows how to make money, but most are
quite bad when it comes to managing their hard earned cash.

How much must I have in the Minimum Sum?
So, since 2003, CPF members who turned 55 have to set aside this minimum sum to the RA.
When it first started, the minimum sum was $80,000. And as you may have already known,
this figure will increase on a yearly basis and would also be subject to an additional
adjustment to inflation. As of today, the minimum sum, for those turning 55 between 1 July
2009 to 30 June 2010, would be $117,000. for a table of projected minimum sum till Jun
2014 please visit this CPF site

So, if you have the minimum sum, all is well and good, you set aside the $117,000 or more
depending on when you turn 55, then you are free to withdraw out the remaining OA
balances, (btw, all you SA balances will be used to set aside for the minimum sum first, if it
is insufficient, they will take the balance from the OA).

But what if you do not have enough? Does it mean that you will not be able to withdraw a
single cent after you turned 55? No, there is a formula for you to work out how much money
will be set aside from your SA and OA for the minimum sum.

Take for example you turn 55 this year, the new minimum sum is 117,000. However, you only
have 50,000 in your OA and 40,000 in your SA. When the time comes for CPF to set aside the
minimum sum, they will first calculate the total OA and SA balance, which in this case is
$90,000. Then, they will apportion 60% of this total amount to the RA (90,000 x 60% =
54,000). Remember, I said earlier that they will deduct from SA first, so in this case they will
move the $40,000 from your SA to RA, and another $14,000 from your OA to RA(total $40k
+ $14k = $54k). Then the remaining $36,000 ($50k - $14k) from your OA can be withdrawn
by you.

Any subsequent contribution into you CPF account in the future will be channelled as follows:
60% to RA, and 40% to OA. I hope I have managed to explain it clearly.

What's it all about? What's the use of it?
So, now that you have set aside the minimum sum to the RA, what are you doing to do with
this money? Good question! CPF gives you 4 alternatives to make use of this cash in your RA.

1. Leave it inside CPF, earn the yearly interest(currently 4%) from CPF and drawdown the
money for your retirement.

2. Put this sum into a bank and drawdown the money for your retirement.

3. Buy a Private annuity take pays you a monthly income till you kick the bucket. Current
annuity payout is between 3.5% to 4.2%

4. Buy into CPF life annuity that pays out a monthly coupon till you kick the bucket. Current
CPF annuity payout is between 8% to 11%.

So, needless to say, you should know which is the best way to go. CPF life of course. and if
you still have excess, buy another private annuity.

Why do you need so many annuity during your retirement years? That's because, by now you
should have re-allocated your portfolio and ensure that in your different class of asset
allocations, annuity should now occupy the centre stage, not investment, not insurance, gold
or other assets classes, they will now form your satellite assets in your portfolio. Because
annuity will ensure that you will have a constant stream of income until you pass on, it's a
way of protecting you against depleting your resources before you die.

Hope this is helpful for all.

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