Budget 2024 CPF changes: How much do you need to commit to your CPF Retirement Account?

Budget 2024 announced significant changes for the CPF program to streamline the program and remove loopholes within the system. The CPF Special Account (CPF-SA) is a liquid store of value that provides a riskless 4.08% return with the latest changes, it will close for all members above the age of 55. CPF members would now have to struggle with choosing whether to commit funds to the CPF Ordinary Account (CPF-OA), which would provide a greatly diminished 2.5% return or the CPF Retirement Account (CPF-RA), which preserves the 4.08% returns but can only allow a 20% withdrawal at age 65.

The cognitive burden on CPF members is much more significant than before. This article discusses what would be a reasonable amount to keep in CPF-RA. In a future article, I will discuss the most practical way to replace the CPF-SA with an investment portfolio of Singapore stocks.

CPF-RA’s purpose is for Singaporeans to hedge longevity risk

Funds committed into CPF-RA have a fundamental purpose of hedging against longevity risk. At age 65, CPF-Life will begin to generate a monthly income for the CPF member until their last day. This will prevent older people from becoming a burden to their children and other taxpayers.

There are three schemes within CPF Life, each with its features :

• The Basic Plan commits the least resources into annuities and leaves the most significant assets to your spouse or children when you pass away. Payouts are low and even decline after you reach age 95.
• The Standard Plan commits the most significant resources into an annuity but leaves the most minor assets to your spouse or children when you pass away. As such, monthly payouts are the highest and can be maintained for life.
• The Escalating plan produces the lowest payout, but payouts increase by 2% yearly. This plan is designed to partially mitigate the effects of inflation.

If you believe you will not live as long as you have short-lived ancestors, you may wish to go with the Basic Plan to minimise the annuities you buy. The Standard Plan can provide the highest possible payout if you are single. If you are concerned about inflation and believe you will live for a very long time, the Escalating plan will increase payouts yearly until your last day.

For savvy investors, it is possible to channel excess payouts from the Standard plan into an investment portfolio and then provide that portfolio as a gift to your will beneficiaries after you die.

How much is enough?

To determine how much is enough, you need to know how much you will spend every month at age 65. This is very hard. Imagine if you need to buy medication in old age. If you are mobile and can buy your medicines from JB, your medical expenses will be significantly lower than if you can only purchase medication from local pharmacies. 

The most essential variable to determine how much you need at age 65 is to look at academic research on how much a 65-year-old Singaporean would need to live a basic lifestyle. Based on research from the Lee Kuan Yew School of Public Policy, this number is $1,421. If we adjust this by 3% inflation every year, the expenses will be about $1,552 every month in 2024.

The minimum amount you’ll need per month should vary from 80% to 100% of this $1,552, so amounts should range from $1,242 to $1,553 in today’s dollars.

You can then refer to the table below, which I derived from using the CPF Life estimator for a 65-year-old person today, to determine how much savings you need to achieve this target. Cells in yellow are adequate for 80% of the basic standard of living. The cells in green are sufficient to meet the basic standard of living.

The tables contain multiples of the Basic Retirement Sum (BRS), which is currently $102,900 in 2024. As the CPF Life Estimator was used in 2024, it is more accurate to treat the new ERS as $411,600 and not $426,000 which is the ERS when it officially kicks in on 2025. 

Male – 65 Years Old Today

Female – 65 Years Old Today

If you observe the table, the first thing that pops up is that Full Retirement Sum or FRS, having $205,800 in your CPF-RA, cannot fund even 80% of your basic retirement needs at age 65. At the bare minimum, the older ERS or OERS, which is 3 x BRS on the Standard Plan or $308,700, is the bare minimum for retirement adequacy, and that’s only for men who live shorter lives ( women may need just about 1% more ).

Learning to invest may be inevitable.

It is already very challenging to accumulate the Full Retirement sum. It is even harder to reach OERS at $308,700, given that CPF-OA to CPF-SA transfers stop after reaching FRS. It means that in practice, most Singaporeans can only expect to cover part of a basic standard of living after age 65. This means continuing to find some paid employment or relying on children after age 65 for economic support.

For those who do meet OERS, going under the standard plan can risk significant dissipation of wealth if you die prematurely. Retirement experts like Wade Pfau do not recommend putting more than 20-40% of net worth into annuities. If your net worth is not exceptionally high, you may not wish to have too much locked into annuities, as it is magnifies your mortality risk.

Because of this, there are limits to what CPF-RA and CPF-Life can offer to you. This means possibly picking up investing skills to capture the market upside and fight inflation as part of your retirement planning. This will be discussed in the following article.

Conclusion

With the CPF-SA gone, CPF members now need to be able to determine how much they would need in today’s dollars in the CPF-RA to achieve a basic standard of living when reaching age 65. To reach this number at the barest minimum, the older ERS or three times or $308,700, the BRS remains a valid target for all CPF members to reach.

My wish list for policymakers would be to continue to promote OERS or 3xBRS as a standard threshold for CPF-RA adequacy, maybe rename it as ARS or Adequate Retirement Sum, and policy interventions should exist to allow all CPF members special incentives to attain this target rapidly in the future.

And join me at my live webinar to discover: How I Build Early Retirement Portfolio that allowed me to retire at 39. p.s. the portfolio currently yields ~6.75%

For more articles on how the CPF SA Closure affects you, read:

• Budget 2024 CPF changes: A best-effort attempt to replace the 4% return of the CPF Special Account
• CPF Changes: ERS Now 4x BRS But Kiss CPF SA Shielding Goodbye
• The return for RA is 4.08%, but the return for CPF LIFE is not!
• 4 alternative to CPF SA Shielding

For an in-depth video explanation on annuities and how you can use a Dividend Portfolio to enhance your CPF Life strategy, watch my breakdown here: