Wednesday 11 March 2015

The power of compounding CPF interest rates: Tan Chuan-Jin

'Younger workers can save enough to retire'
They must keep working, buy HDB flat within their means, says minister
By Toh Yong Chuan, Manpower Correspondent, The Straits Times, 10 Mar 2015

YOUNGER workers do not have to worry about not saving enough for their retirement, as long as they keep working and buy Housing Board flats within their means, said Manpower Minister Tan Chuan-Jin yesterday.

To illustrate the point, the minister used a hypothetical case of a polytechnic graduate with a monthly starting pay of $2,200.

He would save enough in his Central Provident Fund (CPF) accounts to receive a monthly payout of about 60 per cent to 70 per cent of his last drawn pay from age 65 for the rest of his life, according to projections by the Manpower Ministry (MOM) to dispel worries young people have about retirement savings.

This is even assuming that his monthly salary never rises from $2,200 and that he works only 32 instead of 40 years between age 25 and 65. In MOM's projection, the $2,200 monthly pay is also lower than the median monthly starting pay of $2,400 for polytechnic graduates. The calculations assume that the person buys a four-room HDB Build-to-Order flat with a spouse and they have paid off the mortgage by age 50 with CPF savings.

At age 25, he will start saving about $130 each month in his CPF Special Account (SA). The monthly SA contribution gradually rises to $250 for the 50-to-55 age band, and falls to $50 for age 60 to 65.

Despite the fluctuations, the 25-year-old would still accumulate about $165,000 in his SA by age 65 because CPF interest rates are compounded, said Mr Tan.

Without the compounding interest, he would save only about $55,000 if he stashed away the cash in a biscuit tin. "This is not magic, it is just basic mathematics," said Mr Tan. He noted that the projection was conservative and did not factor in wage growth and CPF Ordinary Account balances. "And if you add those, clearly, he would have even more."

"The retirement picture for younger Singaporeans is relatively healthy," he said. "Most Singaporeans who work regularly, and make prudent housing options, should have no worries building up a comfortable retirement nest egg within the CPF system."

The polytechnic graduate scenario was one of two examples he cited in Parliament yesterday.

The other concerned a hypothetical example of a breadwinner who earns $3,500 each month and turns 55 next year. This was to illustrate the decisions he has to make at 55 on how much to set aside for retirement, and then at age 65 on whether to make a lump sum withdrawal or defer it to get higher permanent payouts later.

The minister acknowledged that having more options could make the CPF system more complex. "We can't run away from that," said Mr Tan.

But he pledged that the MOM and CPF Board would ramp up their public education drive: "We will scale up and intensify our efforts to first raise awareness and understanding of the CPF system and the new changes."

More assurance needed on future retirement sums

AS A young Singaporean who has just entered the workforce, I am at a critical juncture where I need to make important life decisions - getting married, buying my first home, and starting a family, all the while being mindful that the more I spend today, the less I may have for my retirement.

Hence, I was pleased to read Manpower Minister Tan Chuan-Jin's illustration of a 25-year-old polytechnic graduate, Ben, who can save $165,000 in his Central Provident Fund (CPF) by the age of 65 - enough to meet the prevailing Full Retirement Sum of $161,000 ("Singapore Budget 2015: CPF Board to roll out one-on-one retirement planning services this year"; ST Online, Monday).

However, upon deeper analysis, I found that the CPF Minimum Sum has increased a whopping 437 per cent since its inception in 1987.

It has grown from $30,000 to $161,000 in 28 years.

If this trend continues, a 65-year-old Ben may need to set aside more than $800,000 for his retirement in 2055.

This is worrying for younger Singaporeans.

Will the Basic, Full and Enhanced Retirement Sums experience the same exponential increase of its predecessor, the CPF Minimum Sum scheme?

Muhammad Rasyid Abdullah
ST Forum, 12 Mar 2015

Retirement adequacy: MOM replies

IN HIS letter ("More assurance needed on future retirement sums"; last Thursday), Mr Muhammad Rasyid Abdullah asked if a younger member would have enough in retirement savings if one were to project what the Retirement Sums would be, going forward.

Simply projecting the Retirement Sums based on past increases to the Minimum Sum will likely lead to an overestimate. The Minimum Sum underwent significant structural adjustments over the last decade to raise it to a level that would provide for basic needs in retirement.

A Central Provident Fund (CPF) advisory panel set up in September last year has recommended replacing the Minimum Sum with a range of Retirement Sums (Basic, Full and Enhanced) that CPF members can choose from, depending on their desired payout level in retirement. The panel has also recommended raising the Retirement Sums by 3 per cent for each successive cohort of members turning 55, to cater for long-term inflation and some increase in standard of living.

This is in contrast to the average 6 per cent increase per year in the Minimum Sum since 2003. The Government has accepted the panel's recommendations.

Mr Muhammad Rasyid also referred to an illustration given by Manpower Minister Tan Chuan-Jin in his recent speech in Parliament and was concerned that the projection of $165,000 in savings in the CPF Special Account used in the illustration would be insufficient to meet the needs of a younger CPF member when he enters retirement.

In the example, Mr Tan had said that an individual with a constant salary of $2,200 would have contributed a total of about $55,000 to his CPF Special Account alone, assuming that he worked 80 per cent of the time (or about 32 out of 40 years) from age 25 to 65.

However, because of the interest earned on his CPF savings, he would have about $165,000 in his Special Account at age 65 - three times what he put in.

The focus of the example was on the impact of compounding interest. The example did not factor in wage increases and any savings accumulated in the Ordinary Account after paying for a home. A member's overall retirement savings would, therefore, be higher once we factor those in.

We thank Mr Muhammad Rasyid for his letter, and encourage more young Singaporeans to start thinking and planning for their retirement early.

Musa Fazal
Divisional Director
Income Security Policy Division
Ministry of Manpower
ST Forum, 17 Mar 2015

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