How I Amassed More Than $120,000 After 4.5 Years of Work

Is it possible to save up $120,000 in just 4.5 years of work? Just a few days ago, I was doing a financial health check for myself using an excel spreadsheet which has since became my best friend for financial planning. I was surprised that after adding up, I had more than $120,000 (Inclusive of CPF). How did it happen?

In this post, I'll show you what happened over the past 4 years plus and try to think back on what I did to accumulate more than $120,000. If you think that I started with a high paying salary, you're wrong. I started with just $1700 per month back in October 2010 as a diploma graduate and to make things worse, I had to pay close to $20,000 for my part time university course fees all within the 4.5 years.

How did the $120,000 came about?

1. 5 figure savings before I started working full time

I saved up about $10,000 before I started working full time. The money was saved up from the allowances given to me by my parents while I was still a student, saved up from the many part time jobs which I worked as a student, and saved up from the NS allowance which I got.

$10,000 is not a huge sum of money bearing in mind that it was saved up over many many years. But, it is the habit of saving up in my younger days which made it easier for me to accumulate $120,000 earlier than later.

2. Monthly and Yearly Savings Goals

Is it that hard to save $120,000 in 4.5 years? If we break it down, to have savings of $120,000 in 4.5 years, we need to save about $30,000 a year which is $2500 a month. Most of us will not be able to save $2500 a month when we just started working.

Thus, besides having monthly savings goals, yearly savings goals would make more sense for most of us. If we factor in our bonuses and other income throughout the year, it may just work out to an average savings of $2500 a month.


3. CPF contributions helps us to accumulate more

I know there are many negative sentiments on the CPF out there. But, the truth is the money in our CPF accounts are part of what we have. We contribute 20% of our salary to our CPF accounts and our employer contributes an additional 17%. This adds up to a saving of 37% of our income which is quite a significant amount. Currently, I have more than $30,000 in my CPF OA account in just 4 years of work. This will come in handy when I need to buy a house in the future.

Moreover, CPF gives interests in the range of 2.5% to 5%. Right now, I can receive about $2000 in interest on a yearly basis.

4. Increase income and savings exponentially

My salary has increased more than 60% over the past 4 years. This is more than 15% increase every year. I've also built up additional income through stocks investing and writing. As I earn more, I can save more which leads to both income and savings increasing exponentially.

Most of the time, we spend more when we earn more. That is perfectly normal but we have to bear in mind to control such that the increase in spending does not exceed the increase in income. If we earn $300 more this month, we may want to increase our expenses by $100 but should not increase by $300 or more.

5. Save more than 50% of income

We can save almost 100% of our gross salary if we save more than 50% of our take home pay. Confused by this statement" Don't worry, let me show you an example:

Let's assume we earn a gross salary of $2500 per month currently. Our take home pay after deducting 20% for CPF would be $2000. If we save 50% of this $2000, it is $1000 in savings in cash. The 20% we contribute to our CPF is $500 so that is additional savings. Our employer contribute another 17% which is $425 as savings in our CPF accounts. Adding up all of this, we get $1000+$500+$425= $1925. When we save 50% of our take home pay, we can easily have a savings of $1925 per month.

Saving 50% of our take home pay:

Gross Income	Net Income	Expenses	Cash Savings	CPF employee	CPF employer	Total Savings
$2,500	$2,000	$1,000	$1,000	$500	$425	$1,925

$1925 is a savings rate of 77% from the gross salary of $2500. If we can save 50% or more of our income, accumulating wealth is not difficult.

I generally save more than 50% of my salary and in certain months, I could even save close to or more than 100% of my income due to the passive income which I've built.

Here's my income and expenditure chart for 2013 and 2014:

Let me summarise on how the $120,000 came about in 4.5 years:

• Save up early in life even when you are still studying. If you're a student, you can save from your allowance and part time jobs. Aim for a 5 figure savings. 
• Set monthly and yearly savings goals. 
• Remember CPF is part of your savings too. It helps us to save for a house so we do not have to worry about it
• Increase income and savings. Save more when you earn more. Create passive income.
• Save more than 50% of income to accumulate wealth faster. A 50% savings on our net salary plus 37% savings of our gross salary in CPF adds up to a total of 77% savings altogether on our gross salary. 

Throughout the past few weeks, I've heard a lot of feedbacks that young people are pessimistic for their future. They are worried that they would not have enough money for their lives. I hope that through this post, young people would feel more optimistic for their future. There is no lack of money when we set our path right.


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Related Posts:

1. Save 75% of your income to retire in 7 years
2. Income and expenditure update for the past one year plus

CPF Advisory Panel's Recommendations - 3 Basic Options You Need To Know

The first round of changes to the CPF system has been announced just a few days ago. From what I see, most of the changes are just renaming of the terms which were used previously with a few other additional flexibility to the system. This was indeed what a lot of people want for the system, to have more flexibility in handling their CPF monies. Let's take a look at the changes recommended.

The changes can be sum up into 3 different options as below:

1. Basic Retirement Sum (BRS)

It was previously not known to many people that they can actually pledge their property to leave just half of the minimum sum and draw out the rest in cash. Many people are still confused by the word minimum sum which has been completely removed in this round of changes. So, if you're still confused by what the term minimum sum means, you don't have to crack your head about it any more. Just forget about it.

The BRS will be set at $80,500 and be increased 3% every year from 2017 to 2020. If you set aside this BRS of $80,500 at age 55, the basic payout you'll be eligible at age 65 is about $650 to $700 for life. Your property will still be pledged in this instance. This BRS sum is half of the Full retirement sum below.


2. Full Retirement Sum (FRS)

Now, this is where the word minimum sum is replaced. The FRS is what we called the Minimum sum previously. This amount will be set at $161,000 for those turning 55 in 2016. If you set aside this amount at age 65, you can expect a full payout of $1200 to $1300 a month for life. If you do not pledge your property, most likely you'll be under this option.


3. Enhanced Retirement Sum (ERS)

This is a new initiative which is being recommended. The amount is set at a maximum of  $241,500 (3x the Basic Retirement Sum). This means anyone who wants to top up extra either from their excess CPF or cash to their CPF Life (Retirement Account) can do so to enjoy higher payouts at the payout eligibility age of 65. If they top up to the maximum of $241,500 by age 65, they can expect to receive $1750 to $1900 per month for life.


There you go, 3 basic options that you need to know for the changes to the CPF system. Besides the 3 basic options, there are also other additional details which you may want to take note of:

1. Flexibility to withdraw your Retirement account savings at age 65

If you turn 55 from 2013 or later, you can withdraw up to 20% of your Retirement Account savings at age 65. This is inclusive of the $5000 that can be withdrawn from age 55.

2. Draw down age is renamed to Payout eligibility age 

The payout eligibility age is at age 65. This is the time where you can start getting monthy payouts from your CPF account depending on the amount you have set before (BRS, FRS or ERS).

3. Start your payouts later, up to age 70

There is an option to start receiving monthly payouts at a later age. The advantage is every year you defer the payouts, monthly payouts permanently increase by 6-7%.

4. Top up your spouse’s CPF so that he/she can also have higher payout

Any amount you have above your Basic Retirement sum can be transferred to your spouse's special or Retirement account if you choose to.


Conclusion

The 3 basic options basically allows us to decide how much we want as payout for retirement when we reach age 65. You can receive about $650-$700 per month under the BRS, $1200-$1300 per month under the FRS and a maximum of $1750-$1900 per month under the ERS.

I suppose more changes will be announced on a later date. With the 3 options and the flexibility to withdraw 20% of our retirement savings at age 65, I think in a sense, it does make the system more flexible. The basic purpose of the CPF to provide for retirement needs still applies. Let's see what other changes will be announced in due course.

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Related Posts:
1. Queries on CPF minimum sum - Pledging your property
2. Changes to the CPF - CPF Focus Group Discussion
3. Return our CPF?

Changes to the CPF - CPF Focus Group Discussion

Few months ago during the national day rally speech by the Prime Minister, it was announced that there may be possible changes to the CPF scheme to allow for more flexibility. A CPF advisory panel was appointed by the Ministry of Manpower in September 2014 to study possible enhancements to some key aspects of the CPF system, to make it more flexible to meet the needs of more Singaporeans and provide additional options in retirement.

I was at the first CPF focus group discussion last Saturday. I got to meet and interact with a few other people and know what were the concerns they had with regards to the CPF system. CPF was not a topic of interest to me until somewhere this year when I started to hear a lot of negative things about it. I had no idea what is the Minimum Sum or what it means. What I only know was that a portion of my salary is deducted every month into the CPF.

Because of the negativity spreading around, I decided to look deeper into what was going on. Writing a financial blog at that time also spur me to produce an article on the CPF system which I wrote here: All about CPF minimum sum and CPF life. My conclusion is, CPF is a social safety net that is for our basic retirement needs. Without it, our society may be in chaos with people having no money for even the basic necessities such as food during retirement.

But, as with every system, there will always be more improvements to be made. Many feedbacks were given and I personally heard from readers who emailed me as well as friends, family and colleagues who discussed about the CPF. As a young person living in Singapore, I see some of my older colleagues regret that they did not plan for retirement earlier in their lives. They had to continue working even when they don't like it. They do not have a choice to do what they like in life rather than just working in something they don't like.

During the focus group discussion, we formed into groups of 6. My group had only 5 person with 2 of the advisory panel members sitting in to listen. We could interact and discuss relatively well with the small group.

The 3 questions that we discussed were:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”
2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”
3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

I shall not elaborate further on what the general answers were during the discussion as you can probably read from news report by the media. They did quite a good job capturing what was being discussed during the focus group discussion.

For myself, here are my personal views to the 3 questions:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”

I would like CPF to cover all of my basic necessities such as food, utilities bills, transport etc. In today's dollar value, a figure of $1000/mth would be quite comfortable. This is just for basic expenses


2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”

Withdrawing a lump sum at age 65 is not needed if we have adequate money for retirement. I would choose not to withdraw any lump sum unless I really have no savings left. The money in the CPF still earns a 4% risk free interest in the retirement account. Moreover, having $155,000 inside the CPF at age 55 would give us an estimated $1200/mth for the rest of our lives starting from age 65. At 4% interest rates, the $155,000 in your RA account would grow to an estimate of $229,437 when you reach age 65 (assuming there are no further contributions). If we calculate, this would mean a 6.27% annual draw down rate (($14,400 divided by $229,437)*100%). This is not a bad draw down rate at all considering you get payouts for the rest of your life under the CPF life scheme.


3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

This question is tricky. I think starting to draw down at age 65 is already late and if we still get lower payouts at the start, then the amount becomes very little. With a fixed payout, there would be a worry of not having enough in later parts of our lives but I guess who still cares about increase cost of living when they are in their 70s?


I don't really like the idea of only drawing down our CPF at age 65. Since there're considerations to make the CPF more flexible, perhaps there could be an option to draw down earlier but of course with lesser payouts. An example would be to draw down maybe $900-$1000/mth at age 60 instead of $1200/mth at age 65. This is just my suggestion.

I did ask around and I always hear that draw down age at 65 is too late. Perhaps age 60 would be a good age to starting drawing down their CPF. A concern was that those who are above 60 risk losing their jobs more than anyone else.

There will be more focus group discussions organised for the next few months. If you are interested to participate for the subsequent focus group discussions, please refer to this website for more information: www.cpfpanel.sg. You can sign up for the discussions through the website directly. Information on the next available sessions are also listed on the website itself.

You can also send in your views and feedback on the CPF by emailing to cpf_panel@mom.gov.sg

I did talk to some of the advisory panel members and they were sincere in listening to feedbacks so they can make better informed decisions. We can all do our small little part to give our ideas and suggestions.

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Why it is hard for most Singaporeans to retire early?

I was about to publish some of the post on early retirement which I wrote over the weekends until I saw an article by business times today which shows how much Singaporeans are saving? These statistics was from the recent household expenditure survey which was published last week. Most of us would already have read that average monthly household income increased to $10,500. This number was met with many sarcastic remarks on social media. We would think how can this be true when most of us do not have that kind of household income? Is their average really average?

The purpose of my post today is not to debate on whether the income figures were correct or not. Rather, it is all about the report by business times which showed another angle of that report. How much are Singaporeans saving?

Here are the saving figures:

• The 41st-60th percentile, who are essentially the middle class, are saving about 44%. 

This 44% seems to be a good savings rate but if we look closer, this savings include employer and employee CPF contributions. This is essentially not cash savings which we have in our bank. If we deduct away those CPF savings, we're left with about 9% to 15% cash savings since most of our CPF contributions is around 30%-36%. 9% savings is quite a low amount. If you calculate, saving just 10% of your income will probably take you 51 years to retire.

Credit: http://www.aag.com/

Furthermore, the figures do not include non consumption expenditure such as income taxes and house purchases. We know that house purchases make up a big chunk of our expenditure. This makes the figures rather distorted.

It is no wonder Singaporeans find it hard to retire in Singapore. Most still rely on their CPF savings but the problem is most of us also use the CPF for housing purposes. If we continue to do that, we'll always realise that we can't meet the minimum sum and can't retire comfortably.

If we want to retire early at age 55 or even earlier, then we need to have more cash savings. It is no use depending on the CPF for savings and then realise you can't take most of your money out at retirement age. CPF was structured as a social security or safety net. It is not for us to take the money out in lump sum for enjoyment in old age. If we want some enjoyment and not having to worry about not enough money, then we need to plan and save up in cash.

In the next few posts that I'll be publishing, I'll show you how most of us can retire early. Early retirement means in 10 years and possibly within 7 years. I've done up some calculations which will show you how exactly it is done. Watch out for the next posts soon.

Once you reach that stage, you can continue working but you don't have to work for money any more. You can start to work on the stuffs you love, spend more time with your family and kids and even contribute more to society. People who have enough money to retire don't usually sit there idling around. In fact, they become more motivated to produce things which are beneficial to the society as compared to when they are just working for money.

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National Day Rally 2014 - CPF and Retirement Adequacy

The speech by Prime Minister Lee at the national day rally yesterday was quite a good one. He touched on various aspects of Singaporeans lives such as education, retirement and living environment.

This year, one of the focus was on retirement. As such, the CPF system was brought up again. PM Lee jokingly said that during last year's national day rally, he was a real estate agent where he talked on issues of housing. This year, the real estate market is not doing well so he became a financial planner. He used a ficticious couple as an example and explained how the CPF system works including explanation on the minimum sum, pledging of property and lease buy back scheme etc. I thought he did a very good job in presenting the CPF in a simple and relatable way which most people can understand. Interestingly, after his speech yesterday, there were more searches on the CPF on Google which increased the number of page views on my various CPF posts i wrote previously. PM Lee manage to get people interested in the CPF.


How much do you need for retirement?

The amount we need for retirement is very subjective as it depends on individual circumstances. PM Lee did a poll during the NDR and most felt $2000 per month is just enough for retirement. In order to receive this $2000 monthly amount from the CPF, one needs to have about $250,000 in their CPF account at the age of 55. This is much more than the current minimum sum of $155,000. As such, PM Lee said that the current minimum sum is actually not that high as one will only be able to have ~$1200 monthly with $155,000. If that person pledges his or her property and draws out half of the MS, then he'll only be able to have $600 monthly which is even lower.

Increase in MS to $161,000 from year 2015

The next increase in MS was announced during the NDR. PM Lee added that he does not see the need for futher major increases to the MS beyond this. This may be good news to many people and young people will not have to worry about the MS increasing to a level far beyond which locks up their money inside the CPF.

However, we have to take note that since the MS will not have further major increases, we could still be only having $1000+ monthly from the CPF 15-30 years from now. Will this amount be enough for our retirement by then?

This should trigger the people of Singapore and especially young people to plan for retirement above and beyond that of the CPF. Previously, people mostly relied on the CPF for retirement and do not have much of their own personal savings because they thought that CPF is already a savings for retirement.


What if you don't have enough for retirement?

There are a few ways to find other sources of income if we do not have enough for retirement. PM Lee said one can continue to work, get support from their children, use their own savings or get money out of their house. Probably that's why the government can be more relax on the CPF since they figured out there are other ways for retirees to get income.


Monetising your house

We know that a house is an asset which can be used to generate income. PM Lee provided a few ways in which we could get money out of our house. We can rent out one room, rent out the whole flat and stay with children, sell the flat and move to a smaller apartment (e.g studio apartment), or take advantage of the lease buy back scheme.

The lease buy back scheme has been extended to 4 room flats where one can sell the remaining lease and get back some money. For a 4 room flat, it is estimated that if you sell 35 years lease to HDB, you'll get $27,500 cash plus $800 per month subsequently.


More changes to the CPF yet to be announced in detailed

Other changes to the CPF include a silver support scheme where low income seniors will receive an annual bonus from the government from age 65.

There will also be flexibility to withdraw CPF monies in lump sum subjected to limits. More to be announced by the Ministry of Manpower on a later date.


Conclusion and my thoughts

Singaporeans have been asking the government to give back their CPF monies. From what I see, the government has indeed heard the feedbacks from the public and is trying to make the CPF system more flexible. As we are given the choice to withdraw more from the CPF, we have to bear in mind to plan for our own retirement. If we withdraw and spend more now, we will have lesser for the future.

Running out of money in your old age will be a sad case. Some have to continue working even in their 70s and 80s, some quarrel with their children and others have to find other means just to put food on the table. These are real cases which I believe is vwry real in our society.

Many want to know how to plan for retirement but few know where to start. Before they know it, it may have already been too late. A national financial education and literacy program in schools and institutions will help instill the right values towards money and inspire young people to be financially prudent at an early stage of life.

What are your views on the national day rally? How do you feel about the changes to the CPF? Feel free to comment and discuss below.

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Related Posts:
1. All about CPF minimum sum and CPF life

CPF as an asset that generates income

By now, those who're frequent readers of my blog would have understood how the CPF system works. For the benefit of those who've not read my previous articles on CPF, i've consolidated a few of it below:

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?
4. Forum on CPF and retirement adequacy

CPF provides income

CPF is not an interesting topic especially for young people. But, it becomes an important thing when we grow older. Because of the lack of public education on these matters, most people do not know what to do with the money in their CPF. Most choose to withdraw everything less the minimum sum from their CPF accounts when they reach 55 years old. Some even pledge their property so that they can withdraw more cash from their CPF accounts. However, this may not be a wise choice. Why do i say that?

The reason is simple. CPF is actually an asset that generates income for your retirement years. It can be liken to you renting out a property you own and collecting rental every month. Your tenants pay you rental every month which is an income for you. CPF provides income for you in your retirement years. Apart from the CPF life which pays about $1200 every month if you meet the minimum sum of $155,000, the rest of your CPF you leave inside the account continues to earn extra interest as well. Let's say if you had $300,000 in your CPF at age 55, $155,000 is transferred to your retirement account and the other $145,000 stays in your CPF OA and SA account respectively. At this point, most people will draw out the entire $145,000 which is left inside the CPF account and put it into their bank account which gives an interest of only 0.05%. How much interest will you get from the bank? The answer is a mere $72.50 for the entire year.

However, if you choose to leave the remaining $145,000 in your CPF OA and SA account, it earns about 2.5%-4% interest annually. The interest you'll get is a good $3625-$5800. It is extra income for you every year. Why is this important? You see, most people withdraw their CPF money at age 55 and feel rich. They will buy something they like such as an expensive watch or maybe go for a holiday in Europe for a few thousand dollars. But many do not know that if they leave the money in the CPF just for another year, they could actually get the same items they bought for free. They can spend the interest given which does not affect their base capital at all. They can get the same $2000 watch for free and go on that $3000 holiday for free.

How to make CPF an asset that generates income?

To make CPF as an asset that generates income, we have to actively manage it and not just leave it on its own. We have to start making sure we can meet the minimum sum. It was reported in Channel New Asia that just one fifth of Singaporeans are confident that CPF will meet their retirement needs. Only 32% of the surveyed respondents said they actively manage their CPF. Actively managing their CPF means that they review, rebalance their CPF portfolio if needed. Something surprising is a total of 59% felt there should be more education on retirement. This does show that people want to learn more but do not know where to learn it from. Hopefully there will be more public education on retirement planning.


Contribute voluntary cash top up into CPF account to meet minimum sum

This topic of CPF has become a taboo to speak off. Most just want to withdraw everything out fearing that they can never see their money again. However, on the other side, there are people who contribute voluntary to their CPF account year in and year out. They contribute their own cash.

These few people who did that will realise that they are able to meet the minimum sum easily. When they already have more than the MS in their CPF SA account before the age of 55, the interest is actually enough to cover the increase in MS every month. With about $180,000 in the SA account, the interest is about $7000+ which is enough to cover the increase in MS. This person does not even have to worry about not being able to meet the MS any more. A person can contribute a maximum of $30,600 annually less the mandatory contribution which he/she and the employer has already contributed. From 2015, the annual limit will be increased to $31,450.


Transfer from OA to SA to meet minimum sum

There are also people who transfer monies from their CPF Ordinary account (OA) to their CPF Special account (SA). Why they do that is for a simple reason. To earn higher interest. CPF OA earns 2.5% while CPF SA earns 4%. The first $20,000 in OA earns 3.5% and the first $40,000 in SA earns 5%. With the higher interest, the money in the CPF compound faster over the years which makes it easier to meet the MS.


Meet the MS to have better retirement years

Meeting the minimum sum will ensure you have sufficient for your retirement years. Currently, CPF provides about $1200 per month for the rest of your lives starting from the age of 65. At the age of 55, if you've met the minimum sum and do not withdraw the rest of your CPF out, you can actually have extra income for yourself every year with the interest given. I would say if you do not need your CPF money at age 55, consider leaving it inside to earn more interest. You can still withdraw it out any time you want when you need it. People withdraw it out to buy something they like with their hard earned money. You can leave it inside and use the interest to buy something you like without having to touch your initial savings. Which is a better choice? Of course, you can choose not buy anything and let the money continue to grow. It's your choice.

CPF changes coming your way

There will be some CPF changes which will be announced soon. As our Prime Minister has said during his national day speech, one of the focus of the national day rally will be on the CPF. More will be announced in this week's national day rally on Sunday. Watch the national day rally on TV this Sunday evening and we'll see what will be announced. 

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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?
4. Forum on CPF and retirement adequacy

Creativity to reach out to the public

Recently, i've seen increased efforts by the Singapore government to reach out to the public with regards to CPF, Medishield life and even the pioneer generation package. The last video is the most surprising.

Firstly, there were various infographics done up by the Ministry of Manpower to let people understand more on the CPF system. One example seen below:

Secondly, there're advertisements by Ministry of Health on the new Medishield life:

The last one is a song on the pioneer generation package. This is what i just saw on TV awhile ago. Quite interesting i must say. It's in mandarin:

There's also a malay version to share on the Pioneer generation package:

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Treat CPF money as real money

There's a lot of perception out there that the CPF money is not real money. People generally are less careful with their CPF money as compared to the money in their bank account. Why do I say that? Let me give you some examples.

These are the common sayings about the CPF

1. I want to use my CPF to pay for all my housing loan. Using CPF money to pay for a house is better than using cash to pay for a house
2. I want to use the Medisave to pay for my hospital bills. Using Medisave to pay for hospital bills is less taxing to my current financial health
3. I don't have to bother about the investments i make using my CPF money. When people ask me to invest in this fund using my CPF, i'm less worried about losing money. 

It is as though people believe that they would never see their CPF monies again and the government just wants to keep it all for themselves. Haven't you heard of your friends or relatives saying just use as much CPF as you can to buy a house? Better not leave your money inside the CPF? 

This is the sentiments that was seen and felt during the CPF protest at Hong Lim Park. Look at some of the placards which people wrote:

I can tell you truthfully that it is not just these people who are believing that CPF money should be released to them earlier. Even my friends and relatives around me have this believe as well. 

Behaviour perspectives on the CPF

During the IPS CPF forum yesterday, one of the panellist, Mr Donald low, made a presentation on behaviour perspectives on the CPF.  Mr Donald Low is a Associate Dean (Research and Executive Education) and senior fellow at the Lee Kuan Yew school of public policy. He said that: "People tend to focus much more on current consumption and discount their future interest heavily". This is why when you have a pay raise, there is always a tendency to spend more now than to save more now. 

He continued to say that "There is a two-selves problem. People often find it hard to imagine their future selves as themselves. Policies that involved delayed gratification, no matter how reasonable and rationally presented, tend not to be too well received." 

If you're at the age of 25 now, can you imagine yourself to be in your 70s? The below photo was shown on the slides being presented:

I bet none of us will think of how we'll be like when we're old. It is probably also why few of us will really think about retirement when we're in our 20s or 30s and some even up till 40s. More often than not, when you realise you need to plan for retirement, it may have been too late. Fortunately for these people who totally forgot that they need money for retirement, they have the CPF to fall back on. But, as i've said before, even with the CPF, most of them will have just the minimum to survive on. A few hundred dollars a month perhaps? Say good bye to the dream retirement of travelling around the world. 

Asset rich and cash poor?

This problem of asset rich and cash poor was discussed in the forum yesterday too. This reminds me of an article on straits times of an old man who lives in a bungalow but he has to eat bread everyday because he has no money to buy proper food for himself. There is an option to downgrade and live in a smaller flat so he can have some cash but it is easier said than done. It is an emotional decision to sell and downgrade and move to a totally new environment. 

The asset rich and cash poor is a result of over using the CPF for housing which leaves them little for retirement. This problem will continue to happen for future generations with our high housing prices now. 

Be prudent when handling your CPF money too. Treat it as your real money. If you want to have adequate funds for your retirement, start with the CPF. Understand how it works and make good use of the system such as taking advantage of the risk free interest rates which is given.

There has been a few useful info graphics that MOM has made the effort to come out with. One of it on CPF interest rates is as below:

Credits: http://www.mom.gov.sg/IMG/employment-practices/cpf-and-you-08.jpg

For more info graphics from MOM on CPF, go here: http://www.mom.gov.sg/employment-practices/employment-rights-conditions/cpf-and-you/Pages/cpf-and-you.aspx

Arm yourself with a little knowledge and it could go a long way for your life. Start retirement planning today!

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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?

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.

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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?

Will we have enough CPF savings to retire on after using it for housing?

We all know that housing prices are much more expensive than it was 20 years ago. When my parents bought our 4 room flat, it only cost $70,000. Now, the price is as high as $350,000. A young couple who buys a new HDB flat will most likely be paying about $280,000(after subsidies) for it. If they take a loan from HDB, the monthly instalment works out to be about $1100 per month. This have to be paid for the next 25 years. Assuming this couple buys the house at 27 years old, by the time they finish paying, they will be 52 years old which is very near the age where they will be allowed to draw out any amount of their CPF above the minimum sum.

Not sure about how the CPF works and what is the CPF minimum sum? Read my earlier post here: All about CPF minimum sum and CPF life

There were some concerns from the public out there which i've gathered:

1. Will we have enough CPF savings to retire on after using a substantial amount for housing?
2. Will we be able to meet the minimum sum by the time we reach 55? How much will the minimum sum be then?

High housing price leads to depleted CPF savings?

The CPF savings from the ordinary account can be used to pay for housing. I was curious whether youngsters my age will still have enough CPF savings to retire on after paying for housing for the next 25 years? How much CPF savings will we have by that time? So, i decided to do some calculations using a formulated excel spreadsheet i designed myself. 

Young person earning $3000 starting salary

Before i show the results of the calculations, there are some assumptions for the calculations:

• Each person earns $3000 starting pay and starts working at age 25
• 4% salary increment every year
• Housing loan of $550 per person every month paid from CPF OA account (assuming cost of house is $280,000 and taking a loan of $252,000 for 25 years)
• Husband and wife shares 50-50 of the cost

Let's say this person buys their house at age 27, this is what his CPF account would look like for the first 3 years:

On the third year, his CPF OA account is totally wiped out to pay for the first instalment of his house. 

The next few years are shown below:

The various different contribution rates of the CPF and interest rates have been taken into considerations. The first $20,000 of the OA earns 3.5% interest and thereafter 2,5% interest. The first $40,000 of the SA account earns 5% and thereafter 4%. The OA contributions rates are 23%, 21%, 19% and 13.5% for different age brackets and the SA contribution rates are 6%, 7%, 8% and 9.5% respectively. Also, CPF contribution is up till $5000 monthly salary. Any salary after that is not subjected to CPF contributions. For more info on CPF contribution rates, click here.  

With a 4% yearly salary increment, this person would have hit $5000 monthly salary at age 39. At the end of age 55, this person would have $198,408.63 in his OA account and $231,939.04 in his SA account. There is an additional medisave contribution which when exceeded the medisave minimum sum of $43,500 will be transferred to the SA account. This works out to be an additional $197,006.55. Total in OA and SA combined is $627,354.22. This seems like a decent amount at age 55. However, this is based on current conditions where the CPF minimum sum is at $155,000. How much will the CPF minimum sum increase to 20 years from now will be unknown. But even if the minimum sum increases to $500,000, this graduate would have no problem meeting it at age 55.

The above illustrations is for a young graduate who is assumed to have earned $3000 starting salary at the age of 25 and 4% salary increment every year. It does not reflect any bonus payments, retrenchment scenarios or whatsoever. Will $627k be enough to retire on 30 years from now? It may not be so. 

Young person earning $2000 starting salary

Let's bring it a step further by calculating for a person who earns a lower salary say $2000 and only 3% increment every year.

There is an interesting finding for a person who only earns a starting salary of $2000. This person will not have enough CPF savings to pay for the first 10% down payment of the $280,000 HDB flat until the age of 28. The down payment cost will be shared in a 50-50 ratio between husband and wife. 

At the age of 28, we can see the CPF OA account again goes to zero and remains at zero for the next 3 years till age 31. This is because, this person's CPF contribution to his OA is below $550. Thus after paying for the housing instalment, he's left with zero. In fact, he'll have to fork out some cash for that 3 years to pay for housing loan instalment.

The rest of his CPF savings until age 55 is shown below:

The verdict? This person who starts out with a salary of $2000 and 3% yearly salary increment will have $52,736.75 in his CPF OA and $167,429.75 in his CPF SA at age 55. There is an additional medisave contribution which when exceeded the medisave minimum sum of $43,500 will be transferred to the SA account. This works out to be an additional $123,535.19 in his SA account. Total available for retirement for him would be $343,338.04. 

. 

Will CPF minimum sum increase to $500,000?

We know that CPF minimum sum has been increasing yearly from 2003. During the CPF protest last week, it was said that the CPF minimum sum will increase to $500,000 and most young people would never get to see their money again. Is this possible?

The current CPF minimum sum is $155,000. Based on this, one can expect to receive about $1200 per month under the CPF life scheme. If the minimum sum increases to $500,000, all else remaining equal, one can expect to receive at least >$3600 monthly. This is quite a decent sum of money. However, we will not be able to predict the standard of living at that time. Prices of food may have doubled or tripled with your normal chicken rice at $8-$9 instead of the $3 we have now. The CPF minimum sum is increased for the same purpose of catering for a higher standard of living.


Singaporeans can't meet minimum sum?

If Singaporeans can't meet minimum sum, it's not because the minimum sum is too high. Rather, we should look at whether these people have enough to retire on? They may only be getting a few hundred dollars per month if their CPF savings is low. If they only depend on CPF savings to retire, then it'll surely not be enough. The sad truth is they may have to continue to work to an old age in order to just survive unless they have their children to take care of them. Many people suggest to let those people who don't meet the minimum sum to draw out more at age 55 instead of the current $5000 only. But however, if they are allowed to draw out more now, they will have lesser in the future. They may be able to retire now, enjoy for a few years then be forced to go back to work in their 60s again.


$2000 salary can retire comfortably?

The person in the above example with $2000 starting salary and 3% yearly salary increment can afford to retire with $340,000+. This doesn't seem like a lot of money especially when its 30 years from now. If this person knows that the CPF may not be adequate for him to retire on, he can start to have an alternative retirement plan for himself through his own private savings or even voluntary contributing cash into his CPF account. He can also consider transferring some amount from his CPF OA to SA to earn the higher interest rate of 4%. If he has investment knowledge, he can also invest his CPF money prudently under the CPF investment scheme(CPFIS).


CPF is a first line safety net. However, it may not be enough for some to retire on

Even with the CPF system, some people may still not be able to retire as seen in some of the cases in Singapore currently. The problem is people may rely too heavily on a system and leave retirement entirely to the CPF. They continue to spend all the money they earn without having any personal savings. If the government wants everyone to retire comfortably, they can raise the CPF contribution rates but they will not be able to do it easily. Even with the current low contribution rates, people are already making noise and protesting on it. I would think even the minimum sum is on the low side as with $1200 a month, it's not a lot of money.


Create your own CPF system

It is always prudent for us to plan for our own retirement aside from the CPF. If you want to retire earlier than 55 or 65, then plan it yourself. Create your own CPF system: "Personal Savings, Personal investment portfolio and personal passive income". This is the financial freedom system. A system we can all strive to achieve.

Lastly, curious to know how my excel spreadsheet looks like after all the calculations? Here's a sneak peek:

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Related Posts:
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2. Return our CPF?

Return our CPF?

There was a protest called "Return our CPF" at Hong Lim park on Saturday. The turn out was about 6000 people which filled up the whole field. The whole protest was centred on the frustrations that Singaporeans cannot withdraw much of their CPF savings for retirement and many Singaporeans can't afford to retire. In fact, it was reported that about 55% of Singaporeans do not meet the minimum sum and thus they can only withdraw $5000 out at age 55. The rest will be paid out monthly to each individual once they reach ages 62-65.

The retirement problem in Singapore

There are indeed people who can't retire in Singapore. Prices have been rising rapidly especially from the 90s till recently and Singaporeans would realise that their savings have somewhat diminished. $10,000 today is not worth as much as $10,000 30 years ago. $1 may be able to buy you a bowl of noodles in the past but $1 today can only barely buy you a cup of coffee. This is how inflation affects ordinary people like us. If Singaporeans themselves have no personal savings and rely on the CPF for retirement, i would say they would be in deep trouble.

Why is the CPF savings not enough for retirement?

The CPF contribution rates for employees like us are 20% currently and for your employers, it's 16%. That is a total of 36% currently. But did you know that CPF contribution rates was only 10% for employers and 20% for employees in 1999? It gradually rose to 16% in 2001 and 2002 but dropped back to 13% from 2003 to 2006. However, in the mid 1980s, CPF contribution rates was a total of 50%. On average, suppose the CPF savings a person has will be around 30% of his monthly income. Why is it still not enough for retirement when its already a savings of 30%?

Some argue its because of the low interest rates which the CPF pays. Currently, the CPF ordinary account (OA) pays 2.5% and the special (SA) and medisave account pays 4%. There is also an extra 1% for the first $20,000 of OA and the first $40,000 of SA. Is this low in our current low interest rates environment?

Another main reason is that most of us use CPF to pay for our housing loans. When we do that, we would definitely have lesser in our CPF for retirement.


The history of CPF interest rates

CPF interest rates were 6.5% for both OA and SA from 1977 to 1986. Why was it higher in the 1980s and only 2.5% and 4% currently? The reason is simple, Singapore follows the global interest rates. We have to anyway because if we do not, our country will suffer as a whole. Back then, interest rates on savings deposits were high. POSB once had interest rates on its savings account as high as 9.5%. But, don't forget that if you borrowed money to buy a house back then, the interest rates were high too. The two interest rates goes hand in hand.

Similarly, now we have low interest rates which our banks pay only 0.15% on your savings account. When you buy a house, interest rates are low too at 1.5% if you borrow from a bank. CPF legislated its interest rates to pay a minimum of 2.5% if not we would be getting even lower than this. However, if you realise, the loan interest rates for borrowing from HDB to buy a house is 2.6%. This is higher than the bank's lending rate. So now people are protesting that CPF interest rates are low and the government should raise interest rates but how many realise that the loan interest rates will rise as well? If it rises to 4%, can people still afford to buy a house? There are impacts to every action which is taken.


How to get higher interest rates?

No matter how much people protest, the CPF interest rates will not change at the current situation. If it were to change drastically higher, i would be worried as this would certainly crash our economy and create even more problems such as unemployment. To ensure that we can retire, we need to plan ahead. At least we should find ways to grow our money above the inflation rate so it does not depreciate overtime.

The average inflation rate has been 3-4% over the past 10 years. The OA pays only 2.5-3.5% so it is unable to keep up with inflation. That is why the money inside this account does not grow fast enough to keep up with rising prices. On the other hand, the SA account pays 4-5% interest which is keeping up with the inflation rate. The safest way we can do is to transfer the money from our OA to our SA to earn the guaranteed higher interest rate and let it compound over the years. However, do note that once you transfer to your SA, you cannot transfer back. If you need the money in your OA to pay for housing loans, do consider carefully before doing the transfer.  

Another way is to invest your CPF OA money under the CPFIS scheme. However, do take note there is always risks associated with investing so do equip yourself with the knowledge before embarking on any investments.


The importance of personal savings

I cannot emphasise enough the importance of personal savings. The CPF will not be enough for most people to retire on as most of us use it for housing purposes. Most people use 30% of their monthly salary to pay for housing which leaves only 6% of their salary saved into CPF. This small amount will never be enough for you to meet the minimum sum and much less retired. With housing prices at a high, every young person's CPF will be left with very little. I would think that young people like me will have an even tougher time to retire in the future if we do not start to have our own savings. We need to plan ahead so that we do not face the same problems as what older people are facing today.


So, is it still viable for return our CPF? You be the judge.

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