This is the 6th installment of our retirement series. In my previous writings, I shared how I used our proprietary tool “RetireWell” to give our client David (aged 59), a reliable income stream throughout his retiring years. (you can read the unedited version of the earlier articles at www.providend.com/articles/
I have written quite a bit on how bucket 2-6 are invested to get the returns necessary for withdrawals. In this article, I will now turn our attention to the income bucket.
Needs of a retiree in retirement
Some of the needs that a retiree has in retirement are:
- The need to hedge against living too long so that the money will not run out before they do.
- The need to have a minimum monthly amount of money to meet expenses regardless of financial markets volatility
- The need to mitigate the risk of overspending in the earlier years of retirement leaving insufficient money towards the end of retirement.
The “income bucket” in our RetireWell methodology is meant to take care of these needs.
RetireWell Income Bucket
The monies in the income bucket is designed to provide a lifetime of controlled and consistent income stream, regardless of the performance of the market. It is what we called “safe retirement income floor” (SRIF). Instruments that are suitable for this bucket would be bonds, private annuities, rental income from properties and for Singaporeans and Singapore Permanent Residents – CPF LIFE.
CPF LIFE (which stands for Lifelong Income for the Elderly) is the national annuity scheme run by CPF Board. Currently, this annuity is giving a guaranteed interest of at least 4% p.a.
Our CPF is invested into special issues of the Singapore Government Securities (SGS) (otherwise known as Singapore Government Bonds) as they are rated AAA and deemed very safe. These bonds are issued specifically to the Board to meet its interest and other obligations. They do not have quoted market values and the Board cannot trade them in the market. The CPF Board currently guarantees that we will get a minimum return of 2.5% p.a. for Ordinary Account (OA) and 4% p.a. for Special Account (SA), Medisave Account (MA) and Retirement Account (RA) as well as CPF LIFE. By investing it in Special SGS, we are effectively lending our monies to the Singapore government for a guaranteed 2.5% p.a. to 4% p.a. with very low risk.
At aged 65 years old, depending on the plans you choose (there are currently 2 plans and will be increased to 3 next year) and depending on the amount you have in your RA then, you will get different amount of monthly payouts. (See table 1 and 2)
Table 1: Different payouts per month for different amount in RA at aged 55. Data source: CPF Board
Table 2: Different payouts and bequest for different plans assuming the Full Retirement Sum of $166,000 currently in your RA at aged 55. Data source: CPF Board
So, which plan should you choose? If you look at table 2, the Standard Plan pays a higher payout during your lifetime but a lower bequest upon demise. Conversely, the Basic Plan pays a lower payout but a higher bequest upon demise. But the difference is monthly payout is just slightly above $100. However, the difference in bequest is relatively huge. The question you should ask yourself is whether the slightly above $100 payout per month is going to make a material difference to your retirement lifestyle. If the answer is no, then it does seem from a financial standpoint, the Basic Plan is more suitable, especially so, when the bequest amount is a lot more if death occurs in the later years.
CPF LIFE Plans with Escalating Payouts
This third CPF LIFE plan will only be available in 2018 and more details. The key feature of this plan is that the payouts will increase by 2% p.a. and it is targeted at retirees who want your payouts to hedge against the increase cost of living. However, retirees who want to choose this plan at aged 65 must be prepared to accept the starting payouts to be about 20% lower than that of the Standard Plan (see table 1). If you want the same starting payouts as the Standard Plan and yet receive escalating payouts, you can either:
a. Top up their CPF LIFE premiums further (see table 4) or
b. Delay their payout start age (see table 5)
Table 3: Different payouts for CPF LIFE Standard Plan and CPF LIFE Plan with Escalating Payouts
Table 4: Topping up CPF LIFE premiums further
Table 5: Delaying payout start age
The income bucket is an important component in our planning for retiree clients. It is the bucket that gives our clients the safe retirement income floor throughout their lives, regardless of financial markets performance. It also mitigates overspending risk as the payouts are controlled on a monthly basis. CPF LIFE is an excellent scheme to use because of its high guaranteed return relative to its low risk feature, although there is a maximum you can buy (currently you are only allowed to top up a maximum of $249,000 into your RA at aged 55). Where suitable, I certainly encourage you to make full use of this scheme as it is a low-cost annuity scheme with good returns and low risk. You cannot find another better annuity of such kind in Singapore.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Retirement Financial Adviser. The edited version has been published in The Business Times on 27 May 2017.