Unless you’re living under a rock, you would have known that some major budget measures were announced by Finance Minister Lawrence Wong on 18 February 2022. For the uninitiated, one of the measures includes raising the Central Provident Fund (CPF) Basic Retirement Sum (BRS).
If you are a Millennial or a Gen Z, you might think that you’re still far from retirement and that this adjustment will not affect you. However, that’s not quite true. Read on to find out more about what the raised BRS means, and how you can save for your retirement.
What has changed about the BRS?
The BRS will be increased by 3.5 per cent every year for the next five batches turning 55, from 2023 to 2027.
According to Finance Minister Lawrence Wong, this change is to allow CPF members to receive higher monthly payouts during retirement. Adjustments to the BRS generally account for improvements in one’s standard of living, rising income levels and long-term inflation. When it is time for us to retire, the estimated monthly payouts will be more on par with the cost of living then.
Wait… What exactly is BRS?
The BRS is the amount you should put aside in your CPF Retirement Account (RA) when you turn 55. This will assure that you can get a monthly payout to cover your basic living expenses during your retirement years, on the assumption that you do not have to pay rent.
What about Full Retirement Sum?
The Full Retirement Sum (FRS) is the maximum amount that would be transferred to your CPF RA when you turn 55, and the maximum you can top up your CPF Special Account (SA) before you turn 55.
CPF members who do not own a property and wish to get the full monthly payout can opt to put aside a FRS that is two times the BRS.
What is the Enhanced Retirement Sum?
The Enhanced Retirement Sum (ERS) is slightly different from the BRS and FRS, as you can only top up your RA to the ERS after the age of 55. The ERS is three times the BRS, and CPF members who wish to get higher monthly payouts can put more savings aside in the ERS.
I’m not turning 55 anytime soon. Why should I pay so much attention to the BRS?
Many Millennials and Gen Zs might have the misconception that retirement planning is only important much later, but that is not quite the case. In this era of a pandemic, impending war and rising cost of living, it is never too early to start planning for your retirement.
This is what you can do:
1. Work out your retirement sum
To work out your own retirement sums, you will first have to calculate the number of years you have before turning 55. Then, calculate the amount you will need with a compound interest calculator.
Stephanie is 25 years old this year, and has 30 years to go before she turns 55. Assuming an initial investment of $10,000, 30 years in length of time in years, and 3% as the estimated interest rate, her estimated retirement sums would be:
● BRS: $242,726.25
● FRS: $242,726.25 (BRS) x 2 = $485,452.50
● ERS: $242,726.25 (BRS) x 3 = $728,178.75
Other than the retirement sum required in your CPF, you may also want to figure out how much of a retirement fund you need, and how much you need to save to work towards that sum. A comfortable retirement does not have to be as expensive as you might expect – use Planner Bee’s retirement calculator to help you with the math!
2. Make use of CPF’s high interest rate
a. Transfer funds from Ordinary Account (OA) to Special Account (SA)
While your Ordinary Account (OA) only gives an annual 2.5% interest, the Special Account (SA) offers 4%, which is a whopping 1.5% more. This makes a world of difference since interest compounds over time.
For instance, this is what your savings will look like after 30 years in either the OA or the SA:
|Account||Sum||Sum after 30 years|
|Ordinary Account (2.5% interest)||$50,000||$104,878.38|
|Special Account (4% interest)||$50,000||$162,169.88|
From this example, we can see that CPF funds will grow by an additional S$57,291.50 if they were kept in SA instead of OA. Additionally, you receive an extra 1% interest per annum on the first S$60,000 on your combined OA and SA CPF balances.
However, it is important to take note that this is a one-way transfer. This means that you can transfer funds from your OA to your SA, but not vice versa. If you are thinking of using your OA funds to purchase a house in the near future, you may want to think carefully before moving any money. If your housing needs are already taken care of, transferring your funds from your OA to your SA could ensure a larger nest egg.
b. Top up your SA
Topping up your Special and Retirement accounts allows you to grow your retirement savings. Other than enjoying the compound interest and working towards higher monthly payouts during your retirement years, you also get to benefit from a tax relief on up to S$8,000 of cash top-ups to your SA each year.
To do so, you can put money into your SA directly. The 4% interest you earn through the account is around twice the rate you earn putting your money into saving accounts under programmes such as UOB One or DBS Multiplier.
Start topping up today, even if you have just started working.
3. Invest your CPF
After putting aside $20,000 in your OA and $40,000 in your SA, you can invest the remaining amount.
You can invest up to 35% of your investable OA savings in funds and stocks, and up to 10% in gold and gold-related products. There is no limit to how much of your investable SA savings you can invest, but you have to keep a minimum balance of S$40,000.
Find out how to get started on investing your CPF here.
What happens if I do not meet the BRS when I’m 55?
If you do not meet the BRS at the age of 55, you are not required to sell your property or top up your CPF with cash. However, you will receive lower CPF Life payouts, since the premium used to purchase the annuity will be smaller.
Even if you do not meet the BRS, you can still withdraw $5,000 of your OA and SA from the age of 55, or all your savings if the account balances add up to less than $5,000.
Take a strategic approach to your retirement planning today
Ensuring that you can have the kind of life you want after retirement is important.
When it comes to investing and saving for retirement, it is always wise to start early. Compound interest and tax reliefs make a huge difference to your money, so you should seriously think about how you can make your CPF savings work better for you.