MAKE THEIR CPF SAVINGS WORK HARDER
Now that your parents are finally able to enjoy their golden years, here’s what they can do to get more out of their retirement fund.
Help your parents get more out of their retirement fund.
So your parents are about to retire and they’d like to withdraw their hard-earned CPF savings. But how can they do this and maintain a sense of financial security and freedom at the same time?
Fixed monthly payouts
Most Singaporeans will be on the CPF Life scheme, a life insurance plan that uses their CPF Retirement Account savings to give them a lifelong monthly payout from the time they retire.
There are two plans available – the Life Standard Plan and the Life Basic Plan. The former is a default plan and caters to those who prefer a higher monthly payout and lower bequests after their death. It’s suitable for people with few or no children, and who need a higher cash payout each month, be it for medical needs or personal expenses.
The Life Basic Plan, on the other hand, has a lower monthly payout and higher bequest, meaning that after the account holder passes on, there will be a larger trust pool left for his or her beneficiaries. This plan is for those who are self-sufficient and do not need to withdraw a large amount of money every month.
Whichever plan your parents choose, they should be aware that CPF Life is only meant to meet the basic financial needs of retirees, says Andrew Ang, district director at HSBC Insurance. At present, CPF Life can provide for a maximum monthly payout of $1,000.
Will that be enough to cover all their needs? Gregory Fok, director of sales (financial services) at insurance provider Manulife, says it depends on their pre-retirement lifestyle. High earners used to having a disposable income are unlikely to find the payouts sufficient. “Imagine someone who used to earn $100,000 a year,” he says. “If you now ask him to spend only $1,000 a month, that is not going to be possible.”
Making their CPF savings work harder
Should your parents leave their money in the bank? Andrew says that rising inflation may mean that the value of their money could end up being eroded in the long term. Mum and Dad could be better off with lower-risk instruments such as bonds or bond fund investments, he suggests. However, these also have potential pitfalls, he cautions, citing the mini-bond and Ponzi scheme debacles, which caused many retirees to lose their savings.
Gregory adds that with any investment decision, your parents need to address the following question before handing over their money: What is their purpose, time horizon and risk profile? They should also invest in a diversified portfolio to grow their CPF savings. “For people who have not managed such huge amounts of money before, careful planning is required,” he cautions.
In general, high-risk investments are not advisable for your parents, mainly because they have less time to recover their investment if things go wrong. Remember too, that your parents are growing older and an unexpected health issue may wipe out all the savings.
While they may be excited about finally seeing their CPF money, they should not forget what it is ultimately meant for. “Please be prudent with your CPF money as it is meant to fund your retirement needs,” says Andrew. “It is important for everyone to consult a financial adviser to ascertain their retirement needs, as well as explore different alternatives to achieve a comfortable retirement lifestyle. If we cannot find a better way to invest the excess funds, a prudent way is to leave this with CPF to earn a higher interest rate.”