In a country like Singapore, where the population is rapidly ageing, starting early with retirement planning is essential. This is especially important when considering the increasing life expectancy and the rising cost of living.
One way to begin planning for retirement is by leveraging the Central Provident Fund (CPF). All Singapore Citizens and Permanent Residents who are employed in Singapore can access this mandatory social security savings scheme funded by contributions from employers and employees.
Let’s look into what the Central Provident Fund (CPF) is:
What is CPF?
The Central Provident Fund (CPF) is the default retirement scheme for Singapore Citizens and Permanent Residents to save for retirement. It covers healthcare, home ownership, family protection, and asset enhancement.
How do CPF Contributions Work?
Workers have a portion of their salary deposited into their CPF accounts every month. This happens automatically, with the money divided into three accounts.
Employers also contribute a percentage of the employee's pay to their CPF accounts.
The combined contributions from both sides are credited monthly to the employee's CPF accounts, following set percentages based on age, salary limits, and the annual CPF limit.
What are the Different Types of CPF Accounts?
There are three main accounts: the Ordinary Account (OA), Special Account (SA), and MediSave Account (MA).
Each account serves different purposes in helping individuals meet their financial goals through different stages of life.
The Ordinary Account (OA)
This account is primarily used for housing, insurance, investments, and education expenses. It allows you to save for your housing needs, including down payments, mortgage payments, and related fees.
You can also explore investment opportunities through the CPF Investment Scheme (CPFIS). It lets you diversify through financial products like ETFs, unit trusts, and annuities. It even supports education financing for yourself, your children, spouse, siblings, or relatives.
Special Account (SA)
This account was introduced mainly for retirement savings and investments in retirement-related financial products. It offers higher interest rates than the OA which allows your retirement funds to grow faster.
The SA is great for building a solid financial foundation for retirement. It allows you to have sufficient savings to sustain your lifestyle during your golden years. Additionally, the SA provides less volatile financial products like unit trusts and annuities to help you grow your wealth.
MediSave Account (MA)
The MediSave Account (MA) is focused on healthcare expenses and health insurance coverage. It allows you to save on medical costs, including hospitalisation, day surgery, and approved outpatient treatments.
Your MA funds can also be used to pay for health insurance premiums such as Integrated Shield Plans and Medishield Life. It also supports medical expenses for approved dependents.
How to Optimise Your CPF Savings
1. Start Investing Early
The longer your money remains in an interest-earning account, the more opportunities it has to grow through compound interest.
For instance, let's say you begin saving S$100 monthly at 25 years old and achieve an average annual return of 4%. By the time you turn 65, your savings could have accumulated to over S$116,000.
However, if you delay saving until you're 35, you would need to save S$170 each month to reach the same amount by 65.
Similarly, you can also leverage the power of compounding with your CPF savings. Currently, you can enjoy rates of up to 5% per year if you're under 55 and 6% per year if you're over 55.
This gradual but steady growth will help you out for retirement planning. By starting young, your CPF compound interest will have a more significant impact on your savings.
2. Maximise CPF Contributions
The Voluntary Contribution Scheme in Singapore lets people add extra funds to their CPF accounts to speed up the growth of their retirement savings.
The Full Retirement Sum (FRS) is twice the amount of the Basic Retirement Sum (BRS) and can offer higher monthly payouts that encompass rental expenses as well. It’s determined based on your age when you turn 55 and remains unchanged throughout your lifetime.
Even if you've already reached your Full Retirement Sum (below 55) or Enhanced Retirement Sum (over 55), you can still add more funds under the Voluntary Contribution scheme.
You can also spread out any extra contributions among your Ordinary, Special, and MediSave Accounts.
If you have extra savings in your OA, you could consider moving them to your SA to earn a higher interest rate. However, once you transfer the funds, it's a permanent decision. It’s best to evaluate your financial goals and capacity before proceeding.
Additionally, before the age of 55, you can transfer your OA savings to your SA up to the Full Retirement Sum to take advantage of the higher interest rates. Cash top-ups to your SA can also help you reach the Full Retirement Sum and offer tax relief of up to $8,000 yearly.
4.Things to Consider When Using Your CPF to Buy A Home
Owning a property requires careful management of your OA funds. Balancing mortgage payments and retirement savings is crucial since 20% of monthly income goes into CPF accounts.
You may use Ordinary Account (OA) funds for down payments, stamp duties, legal fees, and loan payments. However, if you ever sell the property, you must repay OA funds used, plus 2.5% yearly interest.
The CPF Lifelong Income For The Elderly (CPF LIFE) Scheme is a life annuity program, offering Singapore Citizens and Permanent Residents a continuous monthly payout throughout their lifetime.
You have the flexibility to start receiving your monthly payout at any time, starting from your payout eligibility age up until age 70.
Who Qualifies for CPF LIFE?
You will automatically be eligible for CPF LIFE if you meet the criteria:
You are a Singapore Citizen or Permanent Resident born in 1958 or later.
Your Retirement Account holds at least $60,000 six months before reaching your Payout Eligibility Age (PEA).
If you qualify automatically, the CPF board will notify you before you turn 65 with available options for your payouts.
If you're not included automatically, you will receive monthly payouts until your savings are depleted. You also have the option to enrol voluntarily, anytime between 65 and one month before you reach 80, when you're ready to start receiving your payouts.
Final thoughts
Remember, retirement planning is unique to your personal goals. Each step today shapes your financial future tomorrow.
By optimising your CPF savings, such as taking advantage of compound interest, making voluntary contributions, and considering fund transfers, you can speed up your retirement savings and build a strong financial base for your later years.
We hope this article helped you in your investment journey. Share this with a friend who might need it too.
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