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 “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”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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How an Average Family Can Retire Within 10 years of Working?

Retirement! It's a word that many people use in their old age. To stop working and not having to worry about money is a dream come true for many. But retirement don't have to happen only when you're old. It can happen when you're young too. When we talk about early retirement, its known as financial independence. This means you don't have to rely on your job for an income to survive any more. Imagine the freedom to do the things you love, the unlimited amount of time you can spend with your kids and see them growing up. Imagine not having to put up with your unreasonable boss and don't have to go through the frustrating mid year and year end appraisals. Then imagine you can pursue what you really like or always wanted to do.

In my previous article, I wrote on how if we saved 75% of our income, we can actually retire in 7 years. Here's the article: Save 75% of your income to retire in 7 years I also wrote that with Singapore's high cost of living, it seems impossible to retire at all with our average household expenses at more than $3600 per month. But, there's still hope for us if we plan it out diligently. With the help of an excel spreadsheet to visualise the numbers and stir up our imaginations, early retirement is certainly within reach. Yes, its early retirement and not late retirement.

So how can an average family in Singapore retire within 10 years of working?

The ideal scenario to retire within 10 years is as follow:

• Household expenses maintain at $2500 per month
• Household income at around $7000 per month
• Invest savings at 5% return after inflation
• During retirement, passive income at 4%

Here's the numbers that shows how your life will unfold each year:

Click image to enlarge

With a household income of about $7000 and expenses at $2500, this household saves about 65% of their income which enables them to retire in 10 years. The age above is only for illustration purposes only so tweak it according to your age currently.


Is $2500 per month expenses enough for a family?

Now, some of you will probably be thinking will $2500 per month for household expenses be enough at all? Am I crazy or something to suggest $2500?

In that case, let's look at higher household expenses of $3000, $3500 and even $4000 with the same level of income at $7000 per month. How long will it take to retire then?

For $3000 expenses, it'll take the household 14 years to retire.

For $3500 expenses, it'll take the household 17 years to retire.

For $4000 expenses, it'll take the household 20 years to retire.

The more expenses you have, the longer time it'll take for you to retire.


Another point we need to take note is that most Singaporeans use their CPF to pay for housing loan instalments. In this case, we can exclude some of the housing cost that we pay monthly using CPF. Since I did not factor in CPF as savings, we should also exclude housing loans paid by CPF as expenses.

$2500 may be enough for household expenses if we take the effort to live a frugal and simple lifestyle.

Is 5% investment return realistic?

For the scenario to work, the investment return must be at a minimum of 5% after inflation on an annualised basis. With inflation at an average of 3%, our investment return needs to be at around 8%. Is this achievable?

If you've invested in the STI ETF in 2002, you would have achieved an annualised return of 9.2% (with dividends) for the year ending December 2013. Here's an article by Shares Investment which reported on it: Instrumental Returns Of The STI Over The Past 10 Years

Just by investing in the STI index fund, one will be able to achieve that kind of return and retire in 10 years. See for yourself whether its achievable?


Is 4% passive income realistic?

For the scenario to work, the passive income must also be reinvested in the first few years before retirement. Thereafter, we assume a 4% withdrawal rate from passive income to sustain our lifestyle. You may be thinking is 4% passive income achievable? Unfortunately, there's no way I can prove that a 4% passive income is achievable. This rate is debatable but I guess if you ask most people who do invest their money in stocks, a 4% dividend yield for passive income is not hard to achieve. The question is will these dividends be sustainable. There needs to be some active managing and rebalancing of investment portfolio involved. When you're retired, I'm sure you'll have lots of time to do that.

Another way is to have an investment property which you can rent out. If you're able to achieve the desired monthly rental to offset your expenses, you also can stop working indefinitely.


Is $7000/month household income possible?

Income is also important for the scenario to work. $7000 household income means $3500 per person for husband and wife. If you don't have this kind of income, not to worry. You can either reduce your household expenses or try to increase your income.

Just remember, to retire in 10 years, you need to save about 65% of your income. If you save 50% of your income, it'll take 17 years to retire. By now, you should be familiar with the formula of how it all works out.


What if I'm single? Can I retire in 10 years?

Now, here's the truth. If you're single like me currently, then it's actually easier to retire as most probably your expenses will be lower. The amazing thing about the formula is that it works for a family and it works for a single person too. It's all in percentages. If you're single and can save more than 75% of your income, then it'll take less than 7 years for you to retire.



Retirement is not about doing nothing all day everyday

Contrary to the believe that retirement is filled with images of old people idling around aimlessly, true retirement is actually the ability to find your own passion and pursue it. It is the ability to do what you love without worrying about money. This is called financial freedom. When you don't have to work, you can actually have more time to think about life and create products which will be beneficial to people and our society as a whole. You can do volunteer work, do part time teaching to help others or maybe write a book. Some of these will still generate income for you but the gist is even if it doesn't, you're still happy doing all of it.

Early retirement aka financial independence is possible. Numbers show us how it can be done and it will become a reality as long as we can see it. 10 years to retirement for your family? Watch and see how things can unfold for your life.


Image credit: s.jfch.net

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Related Posts:
1. Save 75% of your income to retire in 7 years
2. The 3 Big Decisions in Life - Marriage, Buying a House and Retirement
3. Will we have enough CPF savings to retire on after using it for housing?

Save 75% of your income to retire in 7 years

"Retirement is hard in Singapore." That's what we've heard before from a friend, a colleague or even your own family members. But, it can be easy if we know how to. How about being able to retire when you're young? That's what we call financial freedom.

I've been reading a couple of financial blogs based in the US and one which particularly stands out was the blog called Mr Money Moustache. Oh yes, I like reading other people's blog too even though I own and write one. The owner of the blog retired in his early 30s and he was also featured in an interview with Yahoo! where he explained how he did what he did. This really captured my attention.

In his blog, there's an article titled: "The Shockingly Simple Math Behind Early Retirement". The maths was if you saved 75% of your income, you'll be able to retire in 7 years. How was this number derived? Being curious, i decided to create my own spreadsheet to visualise how it will all work out. True enough, indeed if we save 75% of our income, we can retire in 7 years.


The scenario to retire in 7 years

Here's the scenario:

Let's say if you earn $30,000 a year which is about $2500 a month. I think this amount should be quite achievable for most of us in Singapore. If we save 75% which is $22,500 or $1875 per month, we'll be left with $625 to spend per month.

Next, we must invest the $22,500 savings and assume a 5% investment return, after inflation, for the next 7 years compounded. By the end of the 7th year, this amount would have grew to $204,301.70

The last part of the equation is this:

If the $204,301.70 invested generates a 4% dividend yield, the dividend income will be $8172. This gives us about $681 to spend per month. That's it, you can now retire and stop working. The dividends will continue to provide income for you for the rest of your life. According to my spreadsheet below, if you start working at the age of 24, you'll be able to retire by age 31. Sounds good?

Click to enlarge

Is it achievable in Singapore with our high cost of living?

Now comes the problem. The problem is in order to retire in 7 years, your expenses have to remain the same after 7 years. That means you can only spend $681 per month. Is this enough in Singapore? It may be enough if you're single but if you got a family, then it would certainly not be enough.


How much do you need to retire in Singapore?

An average household would already be paying about $1200 for their housing loan instalment. The above scenario of only spending $681 is certainly not enough. Adding up other miscellaneous bills and daily expenses, the average household expenditure would most likely be about $2500-$3000 per month.

But wait, some of you may say $3000 is still not enough for a household expenditure. Straits times just reported recently that "the average household spends $1,188 a month on food, $811 on transport, $154 on package tours and holidays, $138 on other recreational and cultural pursuits, and $156 on clothes and footwear." This amount is not even inclusive of the housing loan. So if we add up the $1200 housing loan, this amount would be $3647.

With an expenditure of $3647, how much do you need to earn in order to save 75% of your income and retire in 7 years? The answer is $14,588. Yes, you need to earn $14,588 to save 75% of your income in order to retire in 7 years!


I don't want to save 75%. I can only save 10%

Some of you may think that saving 75% of income is too much. How about just saving 10%? If you save just 10% of your income, you'll need to wait 51 years before you can retire base on the earlier assumptions. Do you want to wait 51 years before you can actually retire?

If you save 50% of your income, it'll take you 17 years to retire. It's all about the numbers and numbers can tell you the story.

Saving 50% of your income to retire in 32 years

Click to enlarge

How to solve the problem and retire earlier?

As readers of SG Young Investment, most of you would already know that we can increase income or decrease expenses to have more savings. However, in this case, its the savings percentage that is important. If you increase your income and at the same time increase your expenses at the same proportion, then your savings rate would still remain the same. If your savings rate don't increase, you'll never see a difference in your wealth.

If you're able to increase your income but still maintain the same level of expenses as before, then you're in for a great future. If we earn $2000 now and can only save $400, its just 20% savings rate. But if we manage to double our income to $4000 and still maintain the same level of expenses as before, then savings rate get bumped up to 60%. Young people have the potential to make more money in time to come especially in Singapore where opportunities are plenty while older people may already be making quite a substantial amount of income right now. We can start planning for retirement no matter the age we're at. You just need to know the numbers and see your future. The percentage of your savings plays a big role in retirement planning.

In my next post, I'll show you how an average family in Singapore can retire within 10 years of working. Stay tune.

P.S: Here's the video by Yahoo of how a man retired in his early 30s as what I wrote in the beginning of this post. Watch it here: http://finance.yahoo.com/video/retired-30-144216321.html

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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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The 3 Big Decisions in Life - Marriage, Buying a House and Retirement

Our Life Journey

Life is like a journey. When we're born, we were raised up by our parents and take up the role as babies for the first few years. For the next decade, we assume the role as students and go to school, do home work plus sit for exams. After we graduate from school, we start our journey in the corporate world and work for the next 30-40 years before retiring at the end. I'm sure most of you are familiar with the situation i've just described. Some of you may still be students, some of you have just started working while some of you may already be in your retirement years.

Life seems like a cycle. It begins and it will end one day. However, in the midst of it, there are important decisions which we have to make. These decisions are important as they are big decisions which will make or break your life. So what are they?

The 3 biggest decisions that involves money

In schools, we learn all the languages, mathematics, science, history subjects and much more. These knowledge are important for later parts of your life. Learning a language such as English allows us to communicate effectively. Mathematics allow us to solve problems and science gives us the knowledge of how stuff works.

Credit: www.cbc.ca

However, in schools, most of us have never learnt anything about money. How do we budget? How do we use credit wisely? Most of us are at a lost on how to manage our finances or some of us do not see the need to manage our finances. If schools do not teach and your family do not teach you too, then most likely you'll be lost in it.

The good news is now there is a new syllabus in secondary schools to teach about financial literacy as announced previously by Deputy Prime Minister Tharman Shanmugaratnam. The new syllabus is called food and consumer education and it replaces the home economics course which we had in schools last time. This is being offered to secondary 1 and 2 students only. If you would like to know more about the program, just Google Food and consumer education and you'll be able to find the relevant information by Ministry of Education. This is certainly good news to me as students get to learn how to manage money wisely at a young age.

For the rest of us, we may not be so fortunate to learn how to manage money in schools. But, this knowledge is still necessary especially if you're planning to get married.


Planning to get married

As we grow up, we begin to make decisions on our own. Some are big decisions in life. The first big decision which involves money that a lot of us make is to get married. Some of us spend a large sum of money on a wedding. Others spend a minimal amount of money for their wedding.

I wrote about the cost of a typical wedding in Singapore before. Read: How much money is needed to get married and start a family in Singapore?

So how much was the cost?

The cost of wedding was as high as $56,000 

The cost of $56,000 shocked many people. There are couples who spend $100,000 on a wedding while some others spend only $900. Wedding cost can be subjective and it depends on individual couples on how much they want to spend on it. What we need to take note is to have a proper budget before your wedding. Borrowing and spending money you do not have for a wedding may be the worse decision you'll make as the debt comes back to haunt you after your marriage. So, budget the cost, prepare and save up that amount before getting married may be a better choice. If not, settle for a cheaper alternative wedding if you really can't afford it.

I had many good comments from readers sharing their views on getting married. One particular comment that i thought was good to share was this:

"20 years down the road, the same old money issues will surface again and again. It all boils down to living within your means, and forget about ‘face-value’. A standard wedding hotel dinner packages in 1990 starts at $800 to $2,000 per table. Instead of the usual wedding, my wife and I booked a small corner at a café in a hotel for buffet dinner, 30 pax at $23.95 per pax. That’s our wedding banquet. No fancy outfits. No fancy decorations. But we had joy. The monetary gifts covered the entire wedding dinner. Our first home was a 5-years-old re-sale 3 room flat costing $67,000 at Bukit Batok. The only renovation cost were the few cans of paint and labour provided by friends with beers as payment. For the first 10 years of our marriage our focus was on raising our beautiful children, career advancements, savings and savings. The holidays were simple, Malaysian beaches and towns.

 My cousin spent $65,000 on a lavish wedding in 1992. Fancy restaurants, overseas photography packages, skilled professional hairstylists, Hong Kong air-flown make-up artists etc. She divorced her husband in 1995. Re-married in late 90s, this time spending $85,000 on wedding banquet. Renovation and furnishing for her new home came close to $200,000. She yet to have any kids as they’re planning to split.

 Today, my wife and I are in our late 40s. Happily married. Our daughter is 20 and son is 15. We’ve no less than 8 properties spreading over Singapore, Australia and Malaysia. No less than 3 fancy cars and annual European holidays. I’m not writing to show-off. The point that I’m trying to make is marriage has nothing to do with the amount of money one spent on the wedding banquet or renovating/buying a new home. It has to do with love. If a couple loves each other they will sacrifice and compromise …….. to achieve their dreams. The dreams of building a sustainable family. The dreams of bringing up children in a warm lovely home. The dreams of building assets with no whatsoever issues of insufficient money. To do this, the first step is avoid debt. Forget about excessive big wedding banquet with exorbitant photography/video packages. Just make it simple, dinner with family and close friends with less than 5 tables. Be yourself. Be merry. Marriage is about love not the amount one spend on his or her wedding. Also, the family you’re going to build is not judge by the renovation." 

A simple wedding can also lasts a lifetime of happiness. It's not about the wedding. It's about the life after that.


Planning to buy a house 

The second biggest decision we have to make is buying a house. This is a cost that most of us have to pay for the next 25 years. I wrote before that for a $300,000 HDB flat, the monthly instalment will be $1225 per month for 25 years. Not forgetting that we need to pay a 10% down payment of $30,000 first. This seem like a scary thing for young couples who have just started working or worked only for a few years.

I also stated the cost for a house:

Total upfront cost for house: $53,000-$65,000

This includes the down payment and also the renovation and furniture cost.

Nevertheless, i said before that it is possible to save up for a house as well as for a wedding. It takes around 2-3 years for a couple to save up in order to start a family. So, plan early to avoid hiccups.

Again, it is important to budget. If you realise you can't afford a 4 room flat, then there's always an option to get a smaller one.

I came up with the estimated cost and wrote on which income bracket is suitable for which type of house:

1) A family income of less than $2000 (2 Room flat)
2) A family income of more than $2000 but less than $4000 (3 Room flat)
3) A family income of more than $4000 but less than $5000 (4 Room flat)
5) A family income of more than $5800 (5 Room flat)

This was important because of the limit to the amount of debt you can take also known as the Mortgage Servicing Ratio(MSR) for HDB flats. It is capped at 30% of your gross monthly income which means you cannot take on debt more than that.

I also wrote on the various housing grants available which will help us lessen the burden of owning a house.

Read more on the housing grants here: The affordability of housing in Singapore and the various housing grants available


Planning for Retirement

The last big decision we have to make is planning for retirement. Many of us find out how to book the wedding package from the hotel, how to apply for a BTO HDB flat but most of us do not plan for retirement or do not know how to plan for it. But, it is actually the most important aspect of our lives after working hard for the past 30 years or so. Imagine if you start working at the age of 25, retire when you're 55, you would have worked 30 years. If you live till 85 years old, that would be another 30 years in retirement. Your retirement years is actually equal to your working years. 30 years in retirement is a long time and if you do not plan for it, how are you going to have enough money to live through it?

But of course, some would say i can work till 65. So retirement years are shorten to 20 years. That is still a long time. Then, there will be people who say they won't live that long so don't have to plan for retirement. But the problem is, none of us can know how long we can live. What if you really live to a ripe old age? The truth is, life expectancy is getting longer.

Credit: propertywealthunlimited.com

Cost of Retirement: $1 Million Dollars?

I first heard of this 1 Million amount about 8 years back when i was studying for a diploma in one of the local polytechnics. I was listening to a financial advisor who told me that i would need $1 Million dollars by the time i retire 40 years from now. I was confused at this idea because i thought who can really save up a Million dollars? Does that mean everyone has to be a millionaire just to survive in Singapore?

To find out if this is true, we just have to do a simple illustration.

Total Savings: $1 Million
Retirement age: 55 years old
Expected life expectancy: 85 years old
Years in retirement: 30 years
Amount available for spending per month: $2777.77 (($1,000,000/30years)/12 months)

According to the simple illustration above, with $1 Million dollars you can spend about $2777 per month for the next 30 years. Is this enough for retirement? I think this amount should be quite enough to live by bearing in mind that inflation will happen through the years and things will get more expensive in the future. If we have $500,000 only, then the amount available for spending during retirement will be halved at $1388.

Now, $1388 seems like too little to live by especially if its 30 years from now. A $3 chicken rice may have become $5 or $6 by then. So perhaps, $500,000 is not enough for retirement?


CPF for retirement

By now, all of us should know what is the CPF after all the discussions and attention that it had gained through social media in recent months. PM Lee also gave a detailed explanation on the CPF during his National day rally speech. In essence, if you've met the minimum sum of $155,000 currently, you would expect to get an estimate of $1200-$1300 per month from age 65 to the day you pass away. As the minimum sum increases, the monthly payouts will increase as well. It was announced that the minimum sum will increase to $161,000 next year.

Still, $1200 per month may be too little for retirement. Some may also think they don't want to retire at age 65. If you want to retire earlier, then planning early is important. We just have to take into consideration that the CPF will supplement our income from age 65. To me, it is only an additional bonus and not a necessity where we depend on it fully for retirement.


How do you plan for your retirement?

There is no exact way to plan for retirement and that's what makes it confusing for many people. We always want to find the model answer to problems but some how, some things never have a model answer. One way i can think of to plan for retirement is to set a target amount you want to achieve and work towards it. If you want $500,000 at age 55, then set that long term target and also set a few short term targets. For example, $100,000 at age 30, $200,000 at age 40, $400,000 at age 50.

The figures may seem hard to achieve at first but if you break it down further, it'll seem easier. For $200,000 at age 40, let's say you start work at age 25, from age 25 to age 40 it'll be 15 years. So, to achieve $200,000 by age 40, you need to save $1111 per month for the next 15 years. Seems achievable now?

The above is the traditional way to retirement where you save up so that you can draw on it for future spending. You will draw on your savings for retirement. There is another better way where you still save up but this time round, you do not have to draw on that savings. This is done through creating passive income where you will have income for the rest of your life even without working.

Are you prepared for the 3 big decision of your life journey?

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Related Posts:
1. How much money is needed to get married and start a family in Singapore?
2. A couple should buy a 3 room HDB flat if combined gross income is less than $4000
3. How much money does a couple need to earn in order to afford a $300,000 HDB flat?
4. All about CPF minimum sum and CPF life

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:
1. All about CPF minimum sum and CPF life
2. Return our CPF?