Asked on 09 Oct 2019
My mum (60) earns ~$1.2k. My dad (59) is unemployed and consider in good health, tho my dad became quite frail after a fall early this year. Our 4-room flat is fully paid and they have some savings. But they have no other additional insurance or investments etc. Besides topping up their RA, what else can me and my sister (avg salary $4k before CPF, both planning to get married within 2-3 years' time) do to plan for their retirement and possibly medical expenses that come when they get older?
I would advise you and your sister to look at the following:
1) Ensure that they have an integrated shield plan to cover medical expenses. This is one of the biggest financial risks as we get older. A huge hospital bill can wipe out your savings. At least ensure that you have a plan that allows for treatment in a government hospital if the private premiums are too high, along with a rider to mitigate deductible and co-insurance costs.
2) Prepare for long term care costs by ensuring that they have their Eldershield upgraded. Again, this is one of those things that can wipe out an entire lifetime of savings. The cost of long term care, while reduced due to various subsidies and government support, are still extremely high and will weight down on you and your sister.
3) Ensure that they have sufficient liquidity. CPF will only pay out a monthly income from 65 onwards, so till then, a buffer of cash for liquidity and emergencies will come in useful. Put this in a high-interest savings account to maximise it. At the same time, maximize their CPF RA while having some tax relief for yourself as well.
4) You may want to ensure sufficient coverage for you and your sister as well, as we won't want you to to have to turn to your parents for support should any financial difficulty occur.
5) Consider assigning a sum of money to allow for some lower risks investments in their portfolio. If CPF will not pay out enough when they turn 65, we need to consider other income sources to supplement their CPF. Depending on their risk appetite, consider the various asset classes that might suit them. You can speak to an independent financial advisor like myself to understand and consider your options for 1) to 5).
Critical illness cover is not feasible due to the high costs at their age, and so it doesn't make sense financially for you to get that for your parents.
Lastly, help them keep active and spend some time with them! Having them engage in a simple activity may add on to their health and extend their healthy years as well. It could be reading, tai chi lessons, or even playing Pokemon Go (I see many elderly in my estate walking around playing and interacting with each other. It keeps their minds sharp and active, slows the onset of dementia, etc)
Elijah has good advice. Having been through this cycle a few years, I would advise similarly with some differences, as below:
1) get their medical expenses covered with medical / hospital plan insurance. Talk to an advisor to select options within the (household) budget, but it will be unwise to skimp on this. It will come in more handy than you think.
2) in terms of financing the hospital plan insurance, usually some portion is payable via Medisave. I recently learned about how CPF interest works, so... Depending on how your family feels about it... If your parents Medisave are near / exceed their BHS, any interest from Medisave will most likely flow to their CPF OA after their RA is setup. This means the 2.5% interest can be withdrawn as though it is a high yield bank account (can take out, very difficult to put in). If your family feels this is something beneficial, you can consider paying the Medisave premiums with yours / sister's Medisave instead so that they have a low-risk high yield bank account to draw on. When paying the medical insurance/Careshield/Eldershield premiums from yours / sister's Medisave, the drawback is you have less interest / Medisave to draw on for your own needs. But your parents would likely pass away first before either of you, so if there's leftover from their CPF, you get the "cashback" earlier in a sort of way. This is debatable and so up to you n family to think about or consult others on the pros n cons.
3) it would be wise to think about the family budget and discuss. Depending on their savings... How will their day to day expenses and the bills be financed - while you are still part of the household and when you have set up your family? When they no longer have employment income, will their passive returns be able to pay the bills? If they have to pay it from their savings or CPF payouts, is it sustainable? This is something to think about. As one of the sandwich generation, I can tell you I am paying for most of the monthly bills, but it's up to each family to decide how their finances run. This could be an important factor that leads to older folks not stopping employment because they don't have enough to maintain everything.
4) in terms of topping up the RA, personally I feel it's a nice to have. The way CPF life payout works now is that the payouts are calculated assuming the retiree lives until 95. So for every 7000 you put into their RA, the actual increase they may get could be somewhere like 10-15 per month (you have to use the CPF calculators or approach CPF to check this). Back to point 3 above, you have to think how the money benefits them if given in cash vs topping up the RA. Because that 10-15 monthly may not matter enough to pay the bills.
5) I think the CPF life payout is decided when they decide to turn it on. May be beneficial to ask them to check how much that payout is at the moment if they start it at 65, or at 70. CPF should be able to help you with that. Deferring the drawdown age to 70 may mean that the monthly payout increases by as much as 50% (compounding interest and not getting payout between 65-70). The life expectancy for males is about 84, and females about 87, though CPF quotes 1 in 5 live past 95. The RSS is probably not enough in addressing longevity risk, and hence CPF life. But if they don't have much of savings, electing to start drawdown at 70 may not even be an option. This may be a lot of information to absorb, but hope u find it beneficial.
I think you can refer back to Elijah's advice for thereafter.
But this is the order I would have told myself 5 years ago.
Just some simple steps to get you both started:
Please check if your parents already have their MediShield Life plans upgraded with cash rider. This covers the medical expenses that'll come by in the later years. With their age, the premiums can easily go in the thousands with private hospitalisation coverage, so government hospital coverage is a lot more affordable (premiums are generally a third or less compared to private hospital plan).
They have already passed 55 years of age back in 2016/17, so it's kind of already "determined" how much they should have in their retirement funds with CPF. You may like to login to their CPF account and check what they have first before doing any planning. There's a lot of things you can do here so I suggest speaking with a financial consultant to explore options in this area.
Both yourself and your sis are doing the right thing to contribute to your parents' CPF-RA - it also helps you both reduce your tax obligations. Please refer to this link to get a sense of how much you should contribute to your parents' RA.
Lastly, fine-tune the planning with ElderShield supplements that boost the payout to lifetime and triggering with 2 ADLs instead of 5 years and 3 ADLs (sorry for the jargon here you should speak with the consultant to understand more)
These steps will help for a start. As there's no enough information given in the question, and there's also a lot of variables to consider, it's better to engage a trusted consultant to go through the variables and options before doing anything. And the solutions (at times) can be as simple as managing bank savings, not necessarily need to use insurance or any fanciful tools to improve the situation.