Photo Credit: Shakharova from Unsplash
My mum reached a huge milestone in her CPF journey when she turned 65 years old this year. Yes, this is a magical mark yearned for by most CPF members as they will be eligible to start receiving their monthly CPF payouts. As she was the first member in the household to be confronted with this issue, albeit a happy one, we discussed the pros and cons of each decision. Despite her limited knowledge on financial literacy, I am glad that my mum agreed with my recommendation to defer her CPF payouts till a later age. Find out the reasons why I recommended her to delay her CPF LIFE payouts till age 70.
What happens to your CPF account when you turn 65?
Before we even get to the nuts and bolts, it is important to first understand what happens to your CPF account when you turn 65. Just before you turn 65, you will be asked by CPF Board on when you would like to receive your CPF LIFE payouts. Your answer could be anytime from age 65 to age 70, which is also the age that a CPF member will automatically start receiving CPF LIFE payouts.
Just before you are about to receive your CPF LIFE payouts, a 2nd transfer of funds from your Ordinary Account (‘OA’) and Special Account (‘SA’) into the Retirement Account (‘RA’) will be done, up to the cohort’s Full Retirement Sum (‘FRS’). If you have already met the prevailing FRS, this 2nd transfer will not be initiated. Recall that the first transfer would have been conducted at age 55 when the RA is first created which I have explained in this article back in 2016. The concept of how both transfers are performed are shown in Diagram 1.
Diagram 1: Funds transferred from OA and SA into the RA
Do you know that this 2nd transfer (if applicable to the CPF member) is now conducted at the start of payouts (anytime between age 65 to 70) instead of immediately at age 65 which is the CPF withdrawal age? This new flexibility accorded to CPF members is part of the key changes to the CPF system in 2023. This allows CPF members who wish to continue to use their funds in OA and SA for other purposes, such as servicing a housing loan or purchasing an investment instrument, to continue to do so until they start CPF payouts. Moreover, should the need arise, a CPF member can continue to have the option to do a transfer from their OA and SA to the RA via the Retirement Sum Topping Up (‘RSTU’) scheme. Therefore, I welcome this change as it allows CPF members to dictate how and when they would like to utilize their CPF OA and SA funds.
Whatever is the intention, CPF members should not forget that a 2nd transfer is meant to further increase the amount of savings in their RA and provide them with higher payouts since they have not met their cohort’s prevailing FRS yet.
Heartland Boy’s Mum CPF Situation
About 6 years ago, I blogged about the dire straits that my parents found themselves in with regards to their CPF savings. Thanks to the combined efforts of my siblings as well as my mum herself, her retirement outlook looks a tad brighter now. Just look at Diagram 2 which compares her CPF balances in Year 2017 and 2023.
Diagram 2: Funds transferred from OA and SA into the RA
Within 6 years, her CPF balances have grown an absolute $62,000 or a total of 390%. This is largely due to the children giving her allowances and angbaos in the form of CPF funds via the RSTU scheme. Not only does this accelerate my mum’s CPF balances, it also doubles up as an effective tax shield for the cash giver. More and more CPF members have taken notice of this scheme as total amount of retirement sum top-ups rose 60% from 2020 to 2022 as reported in CPF Annual Report 2022.
While the growth of my mum’s CPF balances has been remarkable, it is unfortunately still short of the prevailing Basic Retirement Sum (‘BRS’) of $99,400. That is why I recommended her to defer her CPF payouts for the following reasons:
Employment as main source of income
After several decades of a hard life as a hawker, my mum finally found a physically less taxing job as a retail assistant in a herbal tea shop. The hours are shorter, the work environment is air-conditioned, lesser stress as a salaried employee and there are collegial colleagues to interact with. These were all factors that a hawker life could not afford her previously.
In her own words, “there’s nothing not to like about my current job” and this is really music to the ears of her children. With a full-time job, she continues to receive her take-home pay and CPF contributions from both her employer and her.
Let her CPF savings compound further
As my mum chose to defer the start of her CPF LIFE payouts, she will be allowing her CPF savings to compound for longer. According to CPF Board, every year deferred can see a CPF member’s payouts increase by up to 7%. Short of me doing the actual calculation, I went online to utilize the free CPF LIFE Estimator as shown in Diagram 3.
Diagram 3: Funds transferred from OA and SA into the RA
I told my mum that even without increasing her current CPF balances, she would receive approximately $20 more per month by delaying her CPF LIFE payout to age 70. $20 more per month may not seem a lot but that is based on a status quo position. Let’s not forget that, her health willing, she will continue to receive regular CPF contributions from employment as well as ad-hoc top-ups from her children. These will continue to compound for the next few years to boost her CPF LIFE payouts.
Defer CPF LIFE Payouts
In summary, my mum’s decision is in line with the trend of more CPF members who are choosing to defer payouts at age 65 to increase their payouts. While there is no minimum sum threshold to be enrolled into CPF LIFE, her projected CPF LIFE payouts are so meagre that we are doing every bit to increase them to ensure a better retirement for her.
This article is published on 29 July 2023 and a new update article is found here.
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Hi,
I believe the CPF Estimator is either wrong or outdated – https://www.cpf.gov.sg/eSvc/Web/Schemes/LifeEstimator/GetLifeEstimatorResults
Deferring withdrawals to age 70 means “loss” of payouts from age 65 to 69, totaling $22,200 i.e. $370 x 60 months.
If the additional monthly payout from age 70 is only $20 ($390 – 370) or 5% more, then the additional annual payout is only $20 x 12 = $240.
To breakeven or to recover the “lost” $22,200 would take 91.6 years from age 70 ($22,200 / $240).
Am I missing something or is the CPF Estimator is way underestimating the deferred payout amount from age 70?
Can you clarify what I’ve missed?
TYVM
Hi,
The premiums paid to CPF LIFE that are not withdrawn will be bequeathed to beneficiaries upon death of CPF member. Therefore, you cannot use the entire $22,200 to conduct a break-even analysis.
I do not understand the 2nd transfer up to the cohorts FRS.
Does it mean if,
– I am turning 55 this year
– this years’ FRS is 198,800 and
– my CPF has less than FRS (100K for example)
Then 10 years later (i.e, 2023)
– if there are additional balances in my OA/SA
– 2nd transfer up to *198,800* would be done?
or is the 2nd transfer amount higher than 198800 because the cohort would have earned 4% interest on the FRS account from age 55 to age 65.
This is important because one could opt BRS at 55 (at the cohort’s limit), then at 65 (this BRS amount grows), if the limit is still 198,800, then the top-up difference is much lesser to fulfill and get the pledge out.
Hi Alvin,
I think 2nd transfer is to prevailing FRS. If your 1st transfer has reached FRS already, i think u will automatically reach FRS at 65 too since it is growing at 4% p.a.
When you delay payout from 65 to 70, you will deplete your RA account later, say, by about 5 years.
You start to get ‘free money’ from CPF as soon as your RA is depleted (if you are still alive). So, this free money starts about 5 years late, or you can also take it as you lose about 5 years of free money.
i may be wrong. i am waiting for someone to correct me (if i am wrong)
Hi, you start to get “free money” once your premium + its interest is depleted. So, loosely translated, you are right in that you lose 5 years of free money if you are one of the minority who live say above 90.
Its not exactly 5 years, because you need to weigh against X years of higher payout. eg: 25 years of $1,000 vs 20 years of $1,070 (7% higher).
To add, the 5 years that you delay withdrawals, those interest rate earned on the principal are still yours and not pooled into CPF LIFE