There was quite a bit of hu-has on my Facebook’s news feed with lots of unhappiness that the CPF’s Minimum Sum has increased from $123,000 to $131,000 and that many more people will not be able to take their hard-earned money out from their CPF accounts and these money will eventually be “taken away” from them…
Be assured that the “taken away” part will not be the case as I have seen many of my clients who have reached their draw-down age, did not reach the Minimum Sum and are still able to take out their money.
I will not be dedicating this post to how you will be drawing your CPF money when you reach the draw-down age or explain what you need to do if you are unable to reach the Minimum Sum. But rather, I will explain the rationale behind the annual increment of the Minimum Sum from the Financial Planning Point of View.
Proper Planning For Retirement – The Concept Behind The Minimum Sum
If you are truly concerned about planning for your Retirement, a Financial Advisor would usually sit down with you and work out the numbers. For instance, to plan for your Retirement, you would need to know a few numbers like
- How much you would like to have and to spend each month and in today’s dollar
- How long you would like to have these sum of money
- What is your feel for the average rate of inflation
An Example To Illustrate The Above
Mr. X is currently 30 and would like to retire at the age of 65. He would like to have $3000 (in today’s dollar) each month during his retirement and would like to enjoy this form of income for 20 years. His feel of the rate of inflation is around 4%.
In total, he would need to have $3000 x 12 x 20years = $720,000. But because of the presence of inflation which means things will get more and more expensive and your same amount of money, e.g. $10 will not buy the same amount of thing in the future as compared to today.
Therefore if Mr X’s Retirement Planning is to factor in the rate of inflation, the actual amount that he really need to have when he is 65 years old is around $2.8 million. For those who know how to use a Financial Calculator, I have used n = 35, i = 4%, PV = 720,000 and solving for FV.
Mr X would really need to work hard and save hard in order to reach that $2.8 million to enjoy a comfortable retirement. And Mr X would need to do so, starting from today or else the amount that he needs to save up will get more and more.
This Is What The CPF Minimum Sum Is Trying To Do
A monthly sum has been computed to ensure that every Singaporeans will have enough to last through their retirement. But because of inflation, the computed monthly amount will increase with each year. These increments will add onto the Final Sum (the total of the monthly amounts) that’s quite equivalent to the Minimum Sum amount.
But why was the Minimum Sum set to be at the age of 55 and not the statutory Retirement Age? In my personal opinion (sorry I did not do any research on this area) is that there’s minimum Interest which will help to compound the Minimum Sum set aside at age 55 and this will help to give that member the amount that he/she will need to retire properly.
Proper Financial Planning Is Never Easy
As you can see, doing a proper financial planning for yourself is never easy. Just as you thought that what you need at your Retirement Age is supposed to be X amount but after taking into accounts – factor like Inflation, the amount needed is even higher and the amount that you start saving is higher as well.
This is why you need to pay attention to each area of your Financial Planning and get things sorted out and proper planning to start as soon as possible.
With lots of information available online you can always get started on your own but if you are having problems or issues, do consult a qualified and professional Financial Advisor.
So start planning today!