Decumulation And Your CPF

May 17, 2022

You may have heard of the importance of Wealth Accumulation – but do you know that Wealth Decumulation is just as crucial to your retirement happiness? Too many people place emphasis only on the accumulative phase and overlook the importance of decumulation.

Accumulation is the acquisition or gradual gathering of something; in this case we are talking about your source of retirement income.

Decumulation is the disposal of something accumulated; here we mean planning strategically to use the assets you have set aside for retirement to ensure that everything you have accumulated lasts for as long as you need it to.

How does the concept of decumulation apply to your CPF?

When we think about retirement in Singapore, the keywords that pops into the mind will be Central Provident Fund (CPF), which consists of your Ordinary Account (OA), Special Account (SA) and MediSave Account (MA).

As you work, 20% of your income and an additional 17% will be contributed by your employer into your CPF. This will allow you to accumulate your CPF savings, which is meant to be used for your housing, education and medical needs.

At age 55, your OA and SA will be directed to your Retirement Account (RA) to form the Full Retirement Sum (FRS), which currently stands at S$192,000.1

If you already are/or have opted in to be a member of CPF Life, you will be able to receive monthly payouts till your death. When you get your payout, it is essentially the process of decumulation at work.

Sounds like a solid enough retirement plan right? Hold on – have you actually stopped to think about how the numbers add up?

Let’s use this example:

Meet Terry, age 40. He intends to retire at age 65, which means he has 25 years more to grow his retirement funds. Assuming he has a lifespan of 90 years, he will need to ensure he has 25 years of retirement income to live on.

Terry’s current monthly expenses amount to S$5,000 and he would like to maintain this standard of living even after he retires. After accommodating for inflation, Terry is going to need at least S$3.152 million to sustain him through his retirement and old age.

Now let’s look at how much CPF Life is going to give Terry.

Assuming that at age 55, Terry has S$321,667 in his Full Retirement Sum, which will give him an estimated monthly payout of S$2,513 at age 65.2 Even so, that still means a glaring shortfall to meet his monthly desired retirement income after he retires at 65.

Where are the rest of the funds going to come from to make up for the shortfall? Well, here’s where we come in with customised solutions that help people like Terry (and you) maximise their wealth potential.