Tuesday, July 22, 2014

Forum on CPF and retirement adequacy

Those who follow me on my Facebook page would have known that i went for a forum on CPF and retirement adequacy earlier today. I would think in financial and retirement planning, CPF is definitely an important part to know and understand for Singaporeans. There are actually a few pillars on financial planning which i would leave it to another blog post later.

CPF minimum sum

Before i go into the key takeaways for this forum, let's take a look at some CPF members' statistics recently. In 2013, the median cash balances of CPF members' is $126,000. 50% of CPF members met the required minimum sum with 15% members pledging their property. This means in actual fact, those that met the minimum sum without pledging their property is only 35%.

The above figures were a bit worrying for me as the minimum sum of $148,000 in 2013 actually pays a low payout of about $1100. Those who do not meet this amount risk having a lower payout of even below $1000. Suppose they receive $1000 at age 65 currently and live till 85, is this $1000 still sufficient for them 20 years later? Do bear in mind that food prices, healthcare cost and other miscellaneous cost will definitely have increased 20 years from now. For those who receive a lower payout than $1000, it'll be even worse for them.

Do we need CPF at all?

Moving on to some questions that were posted during the forum:

1) More than 40% of women aged 25 and above drop out of the workforce which causes them to not have enough CPF savings for retirement. How do we address that?  That is also why some 50% of the population can't meet the minimum sum because they are not in the scheme at all.

For this question, there wasn't a direct answer to this issue. However, in my opinion, for those who're not working where they do not have any CPF contribution, they should actually plan for their own retirement instead of relying on the scheme itself. CPF allows members to voluntary contribute money into their CPF accounts if they would like to save for retirement. Whether they will do it or whether they trust the government with their money is another issue.

2) With the CPF system, does it mean that people will be less careful with their money and not plan for their own retirement since they think that CPF will take care of their retirement in old age?

For the next question, it was quite related to what Minister of manpower Tan Chuan-Jin's question to the audience. He asked us: "Some may say let them take care of their own money. Do we let individuals save for their own retirement or let the CPF do the job?"

It was said that statistics shows that most people underestimate how much they need for retirement. There is always a tenancy to consume more now than to save for the future. If saving money is a problem, we don't even have to talk about investment as its an even more complicated process than just saving money. However, investing is also an important part of retirement as we need to grow our money to prevent it from depreciating due to inflation. Try asking those who saved money in the past but did not invest and they will tell you that they still don't have enough to retire on.

Retirement planning is a complicated process. Most people do not have the knowledge or the time to manage their own money. That is also where the role of a financial advisor comes in. If everyone wants to manage their own money, then we do not need financial advisers any more. CPF works in a way that it helps to cater for our basic retirement needs. It has the savings portion, the investment portion where it pays a guaranteed interest rate and a medical portion where it helps to take care of our healthcare needs. With the Medishield life, it enhances the healthcare portion to another level.

CPFIS and the interest rates of CPF

"CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government. This assures that the CPF Board will be able to pay its members all their monies when due, and the interest that it commits to pay on CPF accounts.As the Singapore Government is one of the few remaining triple-A credit-rated governments in the world, this is a solid guarantee.The proceeds from SSGS issuance are invested by the Government via MAS and GIC, just as it invests the proceeds from the market-based Singapore Government Securities (SGS)." -Quoted from Ministry of Finance website

The above is how the CPF monies are invested as stated in MOF website. It was said by DPM and Minister for Finance, Mr Tharman Shanmugaratnam that GIC's 15 year annualised return is about 5%. However, we have to note that this return is not the return for investing CPF monies only. GIC manages all government assets and this 5% annualised return is for investing all assets that GIC manages. CPF is just a part of it. In simple terms, the returns for only investing CPF monies may be lesser. To me, CPF already offers an attractive risk free guaranteed interest rate on our CPF monies to the tune of 5% on the first $40,000 of our CPF SA account. It is impossible to find any other risk free rates as high as 5% in the market currently. Of course when interest rates increase in the future, CPF interest rates will increase as well as seen in the 1980s where interest rates were as high as 6.5% even on the OA account.

Of course, those who want to invest their own CPF monies can do so through the CPFIS. However, we have to take into considerations of the risk free rates of minimum 2.5% given to us. Are we able to beat this rate should we invest the money ourselves? It was presented at the forum that 85% of CPFIS earn less than 2.5%. Within it, there are cases of those who lost money. Interestingly, it was also presented by one of the panalist that CPFIS rules are mostly relaxed during the peak of a market. New products are also launched during that time which cause financial institutions to aggressively promote the products under CPFIS during a market cycle peak. This may have indirectly cause the poor performance in the CPFIS. Only 15% manage to beat the 2.5% risk free rate? That is quite low indeed.

That's all for my short post on the key takeaways of the forum. Thank you Institute of policy studies (IPS) for organising this and for inviting me to this fruitful session. There were many other questions and issues raised which I will not write today. Maybe some other day perhaps.

Enjoyed my articles? 
You can Subscribe to SG Young Investment by Email 
or follow me on my Facebook page and get notified about new posts.

Related Posts:
1. All about CPF minimum sum and CPF life
2. Queries on CPF minimum sum - Pledging your property
3. Will we have enough CPF savings to retire on after using it for housing?


  1. When you reach 55 yrs old, you may begin to appreciate CPF OA and CPF Investment Account.

    Ask those who have closed their CPF investment account upon reaching 55.

    1. Hi Uncle CW,

      CPFIS is definitely a good thing if we know how to invest prudently. However, many do not know how to invest as statistics shows 85% of CPFIS earn less than 2.5%. Some even lose money.

      Anyway, for those who want to invest their CPF monies even more, there will be announcements made on it soon.

    2. For those who doesn't know how to invest well and not putting enough time and effort to improve their investment skills; whatever other investment schemes introduced are not going to be effective for them.

      In the free market, there is no such thing as low risk high return and Govt cannot force people to learn investment skills.

    3. Hi Uncle CW,

      Agreed. For those who have no investment skills, its better not to invest their cpf monies at all. But then again, most of the time these people invest not on their own but on the advise of a financial advisor.

    4. Then we will need to reach out to increase everyone FQ first .

      Sense of urgency now.

      You got raise this in forum?


    5. Hi Uncle CW,

      It was raised by one of the panelist. He said education to cpf members on investment planning is the key to raise financial literacy. He also suggest that financial planners be re-trained in this aspect on cpf investment.

  2. SGYI, thanks for the recap, there is no mentioned of healthcare related aspect i.e. the Medishield Life in the forum at all?

    1. Hi Richard,

      Healthcare was mentioned but they did not go into details about the Medishield life. There were comments on whether to relax the criteria for medisave or does medisave cause healthcare cost to go up because people will consume healthcare even if they do not need it. Minister Tan's reply was that checks have already been put in place for the proper use of medisave to prevent unnecessary usage. Whether to relax the measures is another issue.

      The forum was more on the financial aspect of retirement. Social issues were brought up as well but it was not really answered during the forum.


  3. Hi SGYI, is there any discussion about the CPF Draw Down Age (DDA)? I find it interesting that so many people are talking about raising Minimum Sum but not many people are talking about the Draw Down Age. For a 35 yo, the Minimum Sum could be $300-400k when they reach 55. However, there will be people who are able to meet this amount and even have a surplus of 30k, 50k or even 100k. But looking at the rate the Draw Down Age is raised, it will be 75 before you can start drawing your CPF Life for a 35 yo now.

    1. Hi Chin Wei,

      Yes there were discussions on the DDA as well. There were comments that the DDA is too far from the 55 years old MS age. The MS age may eventually be raised too to be above 55. The reason is more people are living to at least age 85. In fact, 1 in 2 singaporeans are living to age 85. If we were to retire at age 55, then we have 30 years living in retirement which is equal to the amount of years we spent working assuming one starts work at age 25. This does not make sense and we should change our mindset to retire later.

      I suppose there will be efforts by the government to convince Singaporeans that working above age 55 is ok. Then the MS age will be raised.

  4. I think they should let people withdraw their SRS over 20 years

    1. Hi financialray,

      SRS is voluntary. If its withdrawn over 20 years then people may not put money into the scheme anymore. Hope I understood your comment correctly?

    2. Hi SGYI, I think financialray meant that we should be allowed to withdraw our SRS over a longer period of time so that we can accumulate more money in our SRS without it being taxed when we withdraw at age 62 (if i rem correctly) and beyond.

      Currently, we have 10 years to withdraw our SRS money after which the government will just withdraw the remaining money left in a lump sum which is not good for us. This means that it is best to have a maximum amount of 400k in our SRS, any amount above that will be taxed. So if we have a longer period to withdraw our money, we can put more money in our SRS thus having more money for retirement.

    3. Hi,

      Yes it can be withdrawn over 10 years. I understood him wrongly at first. If it can be withdrawn over 20 years then we can put in more money without being taxed.

  5. As people live longer, allowing one to withdraw the SRS over 20 years would mean less tax as 50% of the amount will be taxed on withdrawal. I think most who save to SRS are financially savvy and if they can grow their SRS accounts to huge sums, they should be allowed to withdraw over 20 or more years so that their tax is lower.

    1. Hi financialray,

      SRS can be withdrawn over 10 years. I suppose if we plan correctly and withdraw the funds in 10 equal portions, we should be able to have a much lower tax rate when we withdraw at the retirement age.