SINGAPOREANS are waking up to a grim reality - they have to work longer and retire later. And it's not hard to find the reason: Most are in danger of outliving their savings.
The Government has proposed a multi-pronged plan to meet the challenge of ensuring that retirees have enough cash for old age.
It includes several adjustments to the Central Provident Fund (CPF) scheme, such as higher returns on a portion of CPF savings, delaying the draw down on the Minimum Sum and a compulsory annuity scheme.
The plan, announced by Prime Minister Lee Hsien Loong in his National Day Rally speech last Sunday, also proposed a new law that would require employers to offer jobs to workers who have reached the retirement age of 62 but want to keep working.
This is aimed at ensuring that there will be a continuous income stream to support these workers as the drawdown age for the CPF Minimum Sum is delayed to 65.
Financial experts say the proposals reinforce the need for Singaporeans to be more self-sufficient and to start planning for their retirement. Relying solely on government initiatives to fund their golden years is not enough.
Here are the proposed CPF-related changes and their possible impact on retirement planning.
Higher interest rate
THE CPF interest rate will go up by 1 percentage point for the first $60,000 in combined CPF accounts, with not more than $20,000 from the Ordinary Account.
Account holders can still use this first $60,000 for housing and medical needs but they may not withdraw any of it to make their own investments.
It means that more than half the people making regular contributions will receive higher returns on their entire balances.
But the timing required to accumulate the $60,000 will differ for each individual. It depends on the salary and the age when the person starts working.
Alpha Financial Advisers chief executive Arthur Lim said: 'For younger Singaporeans entering the workforce, they will have the advantages of compounding interest rates and time to increase their CPF account balances.'
However, the manager of wealth management firm New Independent, Mr Chong Kok Peng, noted that it is unlikely that those in their 20s will accumulate enough CPF money to maximise the additional 1 per cent interest rate as they will likely use their Ordinary Account to purchase a home.
Mr Chong calculated that for a 35-year-old male with $120,000 in his CPF account, the additional 1 per cent on the first $60,000 yields $33,651 when he reaches 65. Assuming a 2 per cent inflation rate, the additional 1 per cent works out to $18,578 at today's value at age 65.
'Individuals should treat this as a bonus from the Government instead of relying heavily on it. In today's value, the purchasing power of $18,500 can only last a few years of expenses,' he said.
On Tuesday, the Government said it will look at pegging the CPF interest rates on Special, Medisave and Retirement Accounts to appropriate long-term bond yields.
For the initial years, the rates may be below the current 4 per cent Special Account guaranteed rate but over time, it should be more than 4 per cent.
Delay in draw down
THE age that CPF members can start drawing down from their Minimum Sum will rise progressively from 2012, from 62 now until it hits 65 in 2018.
Both the draw-down age and the re-employment age will first be raised to 65, and later to 67.
By 2012, people who want to retire at 62 will no longer be able to draw down their Minimum Sum. They must wait until they hit 65.
'They will need to save more money to make up the difference,' said Mr Chong.
Mr Leong Sze Hian, president of the Society of Financial Service Professionals, said this difference worked out to be $32,411.
Saving this sum will allow for a monthly payout of $954. This would have been the payout for a 62-year-old based on the Minimum Sum of $120,000 in 2013.
The earlier a person starts saving, the less he needs to save.
Based on a return of 4 per cent a year, Mr Leong calculated that for a 30-year-old male, the monthly savings would be $42, or an annual figure of $504, until he reaches 62.
For a 40-year-old man, $77 needs to be put away a month and $158 for a 49-year-old.
The savings will allow members to build a lump sum of $32,411 and so be able to withdraw $954 a month for the three years between 62 and 65. They can then draw down the Minimum Sum over the next 20 years.
Compulsory annuity
THE Government wants to make it compulsory for CPF members to buy a deferred annuity to ensure that they will get a monthly payout from age 85 until their death.
An annuity is an insurance cover purchased by paying a lump sum to an insurer. The cash is invested and used to provide a monthly income.
Current CPF rules already give members the choice of buying a life annuity from one of eight insurers with their Minimum Sum when they reach 55. But only 4 per cent of CPF members who turned 55 last year did so.
Some of those who opt to leave the money with the CPF Board say it is a 'no-brainer' as they can draw a higher monthly payout of $790 for 20 years.
By comparison, the life annuity products on the market now pay about $470 to over $500 a month for an initial investment of $99,600 - the current CPF Minimum Sum - although the payments last for life.
Delaying the draw down of the Minimum Sum to age 65 means that members who opt to leave their Minimum Sum with the CPF will start to draw their monthly payouts for 20 years, until age 85.
To ensure that members' savings last their lifetimes, the proposed compulsory annuity scheme will entail deducting a portion of the Minimum Sum to pay for monthly annuity payouts after the age of 85.
As it works on the principle of risk pooling, CPF members who die early may not live to see the benefits of the compulsory annuity scheme as the premiums may go towards paying the annuity payouts of other members.
Based on the assumption that an annuity monthly payout of $300 should last members until the age 100, Mr Leong calculated that the lump sum annuity premium at age 55 works out to $8,527.
If this sum is deducted at age 55, and compounded at 5 per cent for 30 years, it will provide a monthly payout of $300 starting at age 85 and go on for 15 years.
In reality, the actual premium for the compulsory deferred annuity may be lower as the current estimation is that only half of those at age 62 will still be alive at 85.
This means the amount to be deducted need only be at most half of $8,527 or $4,263.50, Mr Leong added.
For those who have the full Minimum Sum of $120,000 in 2013, $4,263.50 accounts for just 3.55 per cent.
For those with less than $120,000 at age 65, the estimated annuity premium of $4,263.50 will be a higher percentage of their Minimum Sum. Hence, it may have a greater impact on the monthly amounts they can draw down from age 65.
These people could consider buying a three-room HDB flat to qualify for the proposed 30-year leaseback scheme from the Government.
Based on the current $150,000 value of these flats, someone who buys one at 30 and enters the leaseback scheme may receive an estimated $30,000 in 35 years' time, said Mr Leong.
Another option is to rent out a room while still occupying the flat.
Retirement tips
NOW is a good time to start planning for your retirement, whether it is years away or just around the corner.
It starts with knowing what you want to do when you stop work and taking stock of what is required.
To get an idea of the estimated retirement amount, the Life Insurance Association has said that based on a life expectancy of 82, a person needs savings of at least $250,000 to maintain a 'reasonable' living standard.
This figure was based on the median earnings of Singaporeans of about $2,500 a month. So if a person needs 60 per cent of pre-retirement earnings when he retires, this would work out to $18,000 a year or $1,500 monthly.
With a longer life expectancy of beyond 82, one needs more savings. Here are some retirement tips from Alpha Financial Advisers.
-Live within your means.
-Start saving early and make time work for you.
-Get out of debt as early as possible.
-Realise that expenses are earnings minus savings.
-Plan and save for long-term objectives like retirement and buying a home.
-A protection strategy is just as important as an investment strategy.
'They will have the advantages of compounding interest rates and time to increase their CPF account balances.'
MR LIM,
On younger Singaporean workers. 'They will need to save more money to make up the difference.'
MR CHONG,
On those planning to retire at 62 from 2012 onwards, who now have to wait longer to draw down their Minimum Sum
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