A common misconception by many Singaporeans is regarding the Retirement Sum set aside in their Retirement Account (RA) versus what they “should be proportionately getting” in their monthly payouts.
There are three levels of Retirement Sum: The Full Retirement Sum (FRS) is two times the Basic Retirement Sum (BRS), and the Enhanced Retirement Sum (ERS) three times the BRS. These are subject to annual revisions to cater for long-term inflation and increase in standard of living.
However, why are CPF LIFE monthly payouts for BRS, FRS and ERS not proportional?
The first $60,000 of your CPF balances earns higher interest of up to 6% p.a. This is due to the
Extra 1% Interest, which is currently paid on the first combined $60,000 balances.
Additional Extra 1% Interest, which is currently paid on top of the Extra Interest on the first combined $30,000 balances for Singaporeans aged 55 and above
Logically speaking, does it not simply mean that the higher the interest rate on your principal amount, the higher the resulting returns?
With the extra interests, this means that the first portion ($30,000 at 6% and $30,000 at 5% interest rates) of your BRS, FRS and ERS will grow faster than the rest of the monies (at 4% interest rate) in the same BRS, FRS and ERS.
Hence when you start CPF LIFE monthly payouts at 65 years old, the first portion (in blue) would give you higher payouts of $790. In comparison, the second (in orange) and third portion (in green) which earns 4% interest rate, would give a lower payout of $660 respectively as it would not have grown as much.
Therefore, even though ERS is tripled of BRS and FRS doubled of BRS, your payouts do not proportionately tripled or doubled.
|Retirement Sum||Monthly Payout|
|Basic Retirement Sum||$790|
|Full Retirement Sum||$1450|
|Enhanced Retirement Sum||$2110|
The above is based on CPF LIFE Standard Plan payouts computed as of 2019 for a male member
What does this mean for Singaporeans?
A progressive interest rate structure allows Singaporeans with lower balances to benefit more with a higher effective interest rate enjoyed as compared to members with higher balances. CPF savings for lower balances would grow faster than those with higher balances, resulting in higher payouts.
In short, Singaporeans should take advantage of the higher interest rates of 6% and 5% respectively by amassing their RA balances to be at least $60,000 as early as possible in life.
I have personally done this by making monthly OA to SA transfers as well as contributing small cash top-ups via Retirement Sum Topping-up scheme. Why not start a little at a time, today?
3 thoughts on “Why are CPF LIFE monthly payouts for BRS, FRS and ERS not proportional?”
Your call to amass $60k as early as possible in life is only good to get the 5th %. The 6th % for the first $30k can only be gotten when one is 55 and above when the RA is formed.
Yup that would be correct. I was careful to indicate that the 6% starts to apply for Singaporeans age 55 and above. I do have readers who are nearing age 55 and above and it is more pertinent to them.
Though, the younger ones should also not let the 5% interest for the $60,000 slip. It is indeed “good money”. You can probably decide to let off a bit of steam after this is fulfilled or continue accumulating the excess on 4%.