Making CPF a stronger player
Insight meets six members of the CPF Advisory Panel to find out how it crafted the latest changes to Singapore's retirement scheme
By Rachel Au-Yong, The Sunday Times, 28 Aug 2016
The panel this month announced two key recommendations: a new Lifetime Retirement Investment Scheme giving Singaporeans more options to grow their savings; and an escalating payout option for CPF Life, to help those worried about coping with inflation in their later years. Currently, payouts are fixed monthly amounts.
Giving individuals more flexibility to handle their retirement savings according to their needs certainly seems the name of the game with the changes, which have been accepted by the Government and come a year after the panel made its first set of recommendations.
The 13-person panel was appointed in September 2014. Among its first tranche of changes was the option to withdraw up to 20 per cent of savings at age 65 in a lump sum. This appeased many who had clamoured for the freedom to do what they want with their money in their golden years.
While the changes have been the subject of much discussion, critics may be surprised to learn of the sheer detail that has gone into them.
For one thing, it was a logistical challenge. The panel met more than 20 times over two years, with many meetings crossing the five-hour mark. Each panellist also attended 12 to 15 focus group discussions, to get a sense of the needs and aspirations of the Singaporeans they were working for. That's not counting all the side meetings and endless e-mail exchanges. Insight finds out what led to the changes to this crucial system that will affect all Singaporeans at some point in their lives.
'Singaporeans don't realise what a good deal the CPF is'
By Joanna Seow, The Sunday Times, 28 Aug 2016
The Central Provident Fund (CPF) system has its share of detractors among Singaporeans but, overseas, it attracts a lot of positive attention.
This puzzling fact could be because Singaporeans do not realise they really have a good deal, says finance professor Benedict Koh, a member of the advisory panel that studied ways to improve the scheme. He tells Insight in a recent panel discussion: "I present papers at international conferences. You won't believe what people say: 'Can I invest in your account?'. 'Can foreigners buy it?'."
Many people here are not aware that a 4 to 5 per cent interest rate guaranteed by a government with a triple-A credit rating - the highest rating - is simply unique, says Prof Koh, who is associate dean of the Singapore Management University Lee Kong Chian School of Business.
CPF savings currently accumulate interest of between 2.5 and 6 per cent, including additional interest on lower balances as well as for older members.
There is a legislated minimum interest of 2.5 per cent per year on Ordinary Account savings, but the rate will follow the three-month average of major local banks' interest rates if that is higher. For the July to September CPF interest rates, the latter was calculated from February to April and was only 0.24 per cent.
The interest rates on the Special, Medisave and Retirement accounts are pegged at 1 percentage point above the 12-month average yield of 10-year Singapore Government Securities, or 4 per cent, whichever is higher.
But there is a limit to what people can expect from the system, because it must be a sustainable one, say Prof Koh and panel chairman Tan Chorh Chuan.
For instance, it is not advisable to extend the extra 1 percentage point interest on the first $60,000 of balances to a higher limit because, "eventually, someone would have to pay for that", says Professor Tan.
By Joanna Seow, The Sunday Times, 28 Aug 2016
This puzzling fact could be because Singaporeans do not realise they really have a good deal, says finance professor Benedict Koh, a member of the advisory panel that studied ways to improve the scheme. He tells Insight in a recent panel discussion: "I present papers at international conferences. You won't believe what people say: 'Can I invest in your account?'. 'Can foreigners buy it?'."
Many people here are not aware that a 4 to 5 per cent interest rate guaranteed by a government with a triple-A credit rating - the highest rating - is simply unique, says Prof Koh, who is associate dean of the Singapore Management University Lee Kong Chian School of Business.
CPF savings currently accumulate interest of between 2.5 and 6 per cent, including additional interest on lower balances as well as for older members.
There is a legislated minimum interest of 2.5 per cent per year on Ordinary Account savings, but the rate will follow the three-month average of major local banks' interest rates if that is higher. For the July to September CPF interest rates, the latter was calculated from February to April and was only 0.24 per cent.
The interest rates on the Special, Medisave and Retirement accounts are pegged at 1 percentage point above the 12-month average yield of 10-year Singapore Government Securities, or 4 per cent, whichever is higher.
But there is a limit to what people can expect from the system, because it must be a sustainable one, say Prof Koh and panel chairman Tan Chorh Chuan.
For instance, it is not advisable to extend the extra 1 percentage point interest on the first $60,000 of balances to a higher limit because, "eventually, someone would have to pay for that", says Professor Tan.
Prof Koh adds: "You cannot guarantee paying interest on a risk-free asset that is permanently higher than the market rates. For a country like ours with limited financial resources, it's not a prudent thing to do. I teach finance and my message in the first class is always 'There is no free lunch'. You cannot want high returns and not take risks, you will never find such a financial product."
For those who do have a higher risk appetite, but lack the time and expertise to actively manage investments, the panel recommended introducing a new Lifetime Retirement Investment Scheme to give members more options.
VIEWING IT AS A WHOLE
But if the system is so good, why do some people clamour to take as much money out of it as they can?
VIEWING IT AS A WHOLE
But if the system is so good, why do some people clamour to take as much money out of it as they can?
One reason could be that people tend to view the CPF system in fragments rather than as a whole retirement savings plan, says fellow advisory panel member Christopher Tan, chief executive of financial advisory Providend. Looking at it in parts, people see that they put their money in when they are young, and when they want to take it all out at 55 they are unable to, and at 65 they try again and can withdraw only a portion. In fact, it is similar to what people sign up for with conventional retirement plans offered by insurance companies, he says, where "you don't take the money out early, and when you reach the age of 55 or 60 if you don't take out a lump sum they pay it out as an annuity".
In CPF Life, money that is in the Retirement Account when members choose to start getting monthly payouts is used as the premium for the annuity that provides the payouts.
"So if people see that connection and they see this like a retirement plan, if you look at CPF like another provider and compare all the products between the providers right now, it's the best retirement plan you can find, really," he said.
"So if people see that connection and they see this like a retirement plan, if you look at CPF like another provider and compare all the products between the providers right now, it's the best retirement plan you can find, really," he said.
How the team of 13 made its decisions
Panellists discuss some of the hardest decisions they had to make, and the startling lack of financial literacy they encountered in Singaporeans
By Rachel Au-Yong, The Sunday Times, 28 Aug 2016
Not many would think of their retirement savings as a football game. Yet this was the analogy used by some tasked with recommending changes to the entrenched Central Provident Fund (CPF) scheme.
"Think of the investment tools that generate high returns as strikers. You can't have 11 strikers in a team, right? That would be ridiculous," CPF panel adviser Christopher Tan tells The Sunday Times at a recent roundtable, in response to those who clamour to take out their savings and put them in riskier options.
Instead, CPF savings in the Retirement and Special Account, which currently earn guaranteed interest rates of 4 per cent per year, should be regarded as "defenders".
"These are your safe assets, your goalkeepers. That way, even if the market's volatile, it's fine. You can let the strikers go out there and focus on scoring goals," says the chief executive of financial advisory firm Providend.
Mr Tan was one of 13 persons appointed by the Government two years ago to sit on a committee to recommend improvements to the 61-year-old system.
Over the last two years, the panel - chaired by National University of Singapore president Tan Chorh Chuan - has thought hard, with care, about how to make the CPF, a key player in every Singaporean's retirement security, a stronger one.
Six of them met The Sunday Times to talk about the process.
WHAT THE PANEL CAME UP WITH
In all, the panel made two sets of recommendations.
Panellists discuss some of the hardest decisions they had to make, and the startling lack of financial literacy they encountered in Singaporeans
By Rachel Au-Yong, The Sunday Times, 28 Aug 2016
"Think of the investment tools that generate high returns as strikers. You can't have 11 strikers in a team, right? That would be ridiculous," CPF panel adviser Christopher Tan tells The Sunday Times at a recent roundtable, in response to those who clamour to take out their savings and put them in riskier options.
Instead, CPF savings in the Retirement and Special Account, which currently earn guaranteed interest rates of 4 per cent per year, should be regarded as "defenders".
"These are your safe assets, your goalkeepers. That way, even if the market's volatile, it's fine. You can let the strikers go out there and focus on scoring goals," says the chief executive of financial advisory firm Providend.
Mr Tan was one of 13 persons appointed by the Government two years ago to sit on a committee to recommend improvements to the 61-year-old system.
Over the last two years, the panel - chaired by National University of Singapore president Tan Chorh Chuan - has thought hard, with care, about how to make the CPF, a key player in every Singaporean's retirement security, a stronger one.
Six of them met The Sunday Times to talk about the process.
WHAT THE PANEL CAME UP WITH
In all, the panel made two sets of recommendations.
The first came last February and was implemented this year. One of the suggestions was to rename the problem-plagued Minimum Sum - which invoked fears of unmet goals - and call it the Retirement Sum.
There were three types: basic, full and enhanced - essentially recommended levels to meet certain payouts, starting at about $650 a month.
There was also a new option to withdraw up to 20 per cent of one's Retirement Account savings at the age of 65. Previously, members who did not own property and did not meet their Minimum Sum could withdraw only $5,000 upon turning 55.
Another change saw a lower threshold for members to be able to transfer their CPF funds to top up their spouse's CPF account, so that both will benefit from the extra interest paid in the respective accounts and there is peace of mind as the spouse will have his/her own source of retirement payouts.
The second set of recommendations was made earlier this month.
One was the creation of the CPF Lifetime Retirement Investment Scheme (LRIS). It is a low-cost, simplified investment scheme for CPF members who want to take bigger risks to grow their nest egg, but who lack the time or know-how to do so, by offering a smaller number of funds which do not need active management.
The other is a new CPF Life option which sees monthly payouts increase by 2 per cent every year to keep pace with inflation.
Another change saw a lower threshold for members to be able to transfer their CPF funds to top up their spouse's CPF account, so that both will benefit from the extra interest paid in the respective accounts and there is peace of mind as the spouse will have his/her own source of retirement payouts.
The second set of recommendations was made earlier this month.
One was the creation of the CPF Lifetime Retirement Investment Scheme (LRIS). It is a low-cost, simplified investment scheme for CPF members who want to take bigger risks to grow their nest egg, but who lack the time or know-how to do so, by offering a smaller number of funds which do not need active management.
The other is a new CPF Life option which sees monthly payouts increase by 2 per cent every year to keep pace with inflation.
But how did the panel arrive at these suggestions? Were there any moments that drove them up the wall?
By its own account, the panel was a "consensus-seeking one". The team gives credit to Prof Tan, who sought to lay out the pros and cons of each suggestion on the table.
"It was a good process," he says. "It allows everyone to sharpen their thinking. When one person thought something should go this way, we asked, why? What is the evidence? What are the consequences?
"Over time, we came to a consensus and a broader perspective on how the CPF system can benefit everyone."
The flipside of such a process was that it took up time. Lots of it. There were more than 20 meetings, with some going past five hours.
"We always overran, basically," says Mr Tan, as someone interjects: "We learnt to cater food after a while."
There were also numerous "side meetings", as one panellist called it, and "countless e-mail exchanges".
To give the discussions some meat, the panel relied on statistics - such as the expected life expectancy for future generations - which the Manpower Ministry helped to provide.
Each member also attended some 12 to 15 focus-group discussions to get a sense of the ground.
It was at these discussions that they got in touch with the man on the ground, and were confronted with his concerns.
WITHDRAWAL
Perhaps the greatest "conflict" was over whether to allow a lump-sum withdrawal and, if so, how much.
It was at these discussions that they got in touch with the man on the ground, and were confronted with his concerns.
WITHDRAWAL
Perhaps the greatest "conflict" was over whether to allow a lump-sum withdrawal and, if so, how much.
There had been strong calls for greater flexibility in the use of CPF funds, and many lamented that they could not use their money the way they wished in their golden years.
Mr Tan was among those who did not approve of withdrawals of any amount, at first.
He explains: "I felt that if you allowed people to withdraw, then what was the point of the system? If I give you a bank card, there's the tendency to withdraw whenever you have the chance."
Mrs Hauw Soo Hoon, operating partner of venture capital firm iGlobe Partners, was also not in favour. After looking through the numbers, she was convinced that allowing withdrawals would result in inadequate retirement balances for several members.
But she notes: "It's very difficult to explain to the people. You can explain the statistics all you like but, emotionally, they want to see their money back."
On top of this, the panel had heard legitimate reasons for withdrawals: some CPF members were ill and wanted the money to ease the caregiving burden, others were unemployed and needed the cash, while others had religious reasons, like going on the haj.
Various combinations were considered. The panel even weighed some focus-group participants' suggestion of allowing full withdrawals on a case-by-case basis.
"It would greatly increase the complexity of the CPF system," says Prof Tan. "In the end, I feel we struck a good balance between flexibility, adequacy and simplicity, supplemented by giving people timely information, so that they can make well-informed choices for themselves."
It was after several impassioned meetings that the panel members agreed on allowing a one-time withdrawal of up to 20 per cent at age 65. Prof Tan is proud of the fact that his panel has given CPF members one option they did not have before. He says: "Yes, there are risks... But we should provide an option for individuals to judge these risks themselves, and then make a decision based on their specific requirements."
That the withdrawals can take place only at age 65 - when a person is eligible to start payouts - and not earlier, acts as a safeguard.
He adds: "If you are asked to exercise this option when you know better what your finances look like at retirement and how a withdrawal will affect your payouts, you will be able to make a better judgment. If you could take out 20 per cent at 55, you'd think, 'Oh, my retirement is some time in the future'."
LACK OF FINANCIAL LITERACY
But a much bigger problem the panel had to grapple with, beyond satiating people's desire for greater flexibility, was widespread financial illiteracy.
LACK OF FINANCIAL LITERACY
But a much bigger problem the panel had to grapple with, beyond satiating people's desire for greater flexibility, was widespread financial illiteracy.
Members were surprised to find out that many Singaporeans had no idea how much retirement would cost. This, in spite of the fact that Singaporeans regularly top the world's charts in mathematics.
As Professor Benedict Koh, associate dean at the Singapore Management University Lee Kong Chian School of Business, puts it: "There's a difference between being educated and being financially literate."
Mrs Hauw recounted one focus-group discussion where participants were asked what they would do with a basic CPF Life payout of about $600 monthly. One woman, she says, allocated $200 for food.
"I asked her, 'That works out to $6 for a whole day's worth of food - is that enough for you?' So setting a reasonable and realistic budget, even for what seems basic, is still something we have to teach," she says.
It's a sentiment shared by many of her fellow panel advisers.
Prof Tan encountered a "knowledge gap": many he spoke with at the panel's focus-group discussions could not connect the dots that the Minimum Sum was meant for CPF Life annuity payouts.
"People were discussing something without understanding why it was necessary to set aside a sum. Once people realised it was for lifelong payouts for themselves, the whole discussion changed," he says.
Such a rudimentary understanding was also cause for worry for Mr Tan, who wavered over the CPF Lifetime Retirement Investment Scheme (LRIS).
"My fear was that some would think this is a government-managed scheme. If you don't understand investments, when the markets go down, you blame the Government," he says.
This lack of basic understanding was what led the panel to advocate more financial education in both sets of recommendations.
NTUC's International Affairs special duties director Sylvia Choo thinks that training in financial literacy should start as soon as a CPF member starts work.
"Right now most of our financial literacy programmes are for people aged around 50. But at that stage, it may be a bit too late," she says.
MP Saktiandi Supaat, who is also head of the forex research team at Global Markets at Maybank Singapore, thinks that such programmes should take care to give the Singaporean context, like how home ownership and MediShield Life are important for one's retirement security.
WHAT'S NEXT FOR SINGAPORE
One of the guiding principles the panel set out for itself over the last two years was simplicity.
WHAT'S NEXT FOR SINGAPORE
One of the guiding principles the panel set out for itself over the last two years was simplicity.
Prof Tan is aware of how complex the CPF system can get, even for himself as the panel chairman.
But Singaporeans need to understand not just the CPF, but several other policies as well, such as MediShield, and this can be overwhelming.
He says: "There is a whole range of policies and a person who's working or doesn't have time to read up on them, may have difficulty figuring all of them out."
He hopes they have succeeded. That the CPF Board now gives a more colourful, graphical yearly statement to its 3.7 million members is something he considers a win for Singaporeans, even though it was not one of his panel's specific recommendations.
The panel had, in the first part of its report, recommended more public education to improve members' understanding of the CPF system and enable them to make informed decisions best suited to them.
As for Mrs Hauw, it was sitting on the panel long enough to see some changes become law that was rewarding.
"We can see the effect of the changes, see everyone's reactions to them - it's very satisfying," she says.
But it'll be a while before the second set of recommendations is set in stone. The LRIS, for one thing, will need an expert panel to determine the sort of indices and counters that would go into the scheme. It would take a "few years" before the CPF Board finally offers it.
So would any of them be on the LRIS panel? Prof Tan's answer is almost immediate: "As far as we know, our work is finished."
So would any of them be on the LRIS panel? Prof Tan's answer is almost immediate: "As far as we know, our work is finished."
Panellists' strategies
The Sunday Times, 28 Aug 2016
Insight asked the panel if some of its members could give working examples for readers of what they are doing with their CPF savings, bearing in mind their new recommendations. Four share their strategies:
LIFETIME RETIREMENT INVESTMENT SCHEME (LRIS)
I used to trade the majority of my funds in the CPF Investment Scheme but, like many, there weren't much returns. I'm looking forward to the LRIS because I've not much time to spare on investing and I hope it can actually address some of my retirement needs.
- MS SYLVIA CHOO
OPTED FOR ENHANCED RETIREMENT SUM
I have already topped up my CPF account to the current ERS (Enhanced Retirement Sum) because the effect of compounding interest at 4, 5 and 6 per cent on different amounts is significant. I also want to be sure that my retirement monthly payout will be from a reliable and secured source, CPF. In addition, I look forward to the LRIS, even though I'm not the target group.
- MRS HAUW SOO HOON
TOPPING UP WIFE'S ACCOUNT
I will top up my wife's account to provide retirement security for her should I pass on. If she has her own CPF Life plan, she would have her own annuity payouts throughout her life. She will also earn extra interest on the first $30,000 in her Retirement Account. I will also defer drawing down my own CPF savings. I won't take a single cent out for as long as I can because deferring easily compounds your interest.
- PROFESSOR BENEDICT KOH
ESCALATING PAYOUTS OPTION
I'm more risk-averse, so I will choose the less risky option of leaving my money in the CPF accounts to earn the 4 to 6 per cent interest instead of investing it. I'll choose the escalating payouts option to mitigate inflation. So I will top up to the ERS amount - if I'm able to - when I'm 55, so that the starting payout is not too low.
- MR SAKTIANDI SUPAAT
The Sunday Times, 28 Aug 2016
Insight asked the panel if some of its members could give working examples for readers of what they are doing with their CPF savings, bearing in mind their new recommendations. Four share their strategies:
LIFETIME RETIREMENT INVESTMENT SCHEME (LRIS)
I used to trade the majority of my funds in the CPF Investment Scheme but, like many, there weren't much returns. I'm looking forward to the LRIS because I've not much time to spare on investing and I hope it can actually address some of my retirement needs.
- MS SYLVIA CHOO
OPTED FOR ENHANCED RETIREMENT SUM
I have already topped up my CPF account to the current ERS (Enhanced Retirement Sum) because the effect of compounding interest at 4, 5 and 6 per cent on different amounts is significant. I also want to be sure that my retirement monthly payout will be from a reliable and secured source, CPF. In addition, I look forward to the LRIS, even though I'm not the target group.
- MRS HAUW SOO HOON
TOPPING UP WIFE'S ACCOUNT
I will top up my wife's account to provide retirement security for her should I pass on. If she has her own CPF Life plan, she would have her own annuity payouts throughout her life. She will also earn extra interest on the first $30,000 in her Retirement Account. I will also defer drawing down my own CPF savings. I won't take a single cent out for as long as I can because deferring easily compounds your interest.
- PROFESSOR BENEDICT KOH
ESCALATING PAYOUTS OPTION
I'm more risk-averse, so I will choose the less risky option of leaving my money in the CPF accounts to earn the 4 to 6 per cent interest instead of investing it. I'll choose the escalating payouts option to mitigate inflation. So I will top up to the ERS amount - if I'm able to - when I'm 55, so that the starting payout is not too low.
- MR SAKTIANDI SUPAAT
WHO'S WHO ON THE PANEL
The Sunday Times, 28 Aug 2016
PROFESSOR TAN CHORH CHUAN (Chairman) 57, president of the National University of Singapore (NUS)
PROFESSOR JOSEPH CHERIAN 53, practice professor of finance and director of the Centre for Asset Management Research and Investments at NUS Business School
MS SYLVIA CHOO 49, special duties director of National Trades Union Congress International Affairs
MS MALATHI DAS 47, immediate past president of the Singapore Council of Women's Organisations
MRS HAUW SOO HOON 63, operating partner at venture capital firm iGlobe Partners
PROFESSOR BENEDICT KOH 58, finance professor and associate dean at the Singapore Management University Lee Kong Chian School of Business
MR TERRY LEE 63, president of the Singapore Insurance Employees' Union
MR MUHAMMAD FAIZAL OTHMAN 45, vice-chairman of Taman Jurong Citizens' Consultative Committee
MR NG CHER YAN 57, immediate past chairman of the Braddell Heights Citizens' Consultative Committee
MR COLIN PAKSHONG 56, independent actuarial consultant
MR SAKTIANDI SUPAAT 43, head of forex research for global markets at Maybank, and Member of Parliament for Bishan-Toa Payoh GRC
DR TAN BEE WAN 61, executive chairman of learning consultancy Integrative Learning Corporation and social enterprise ACE (Active, Contributive and Engaged) Seniors
MR CHRISTOPHER TAN 46, chief executive of financial advisory firm Providend
The Sunday Times, 28 Aug 2016
PROFESSOR TAN CHORH CHUAN (Chairman) 57, president of the National University of Singapore (NUS)
PROFESSOR JOSEPH CHERIAN 53, practice professor of finance and director of the Centre for Asset Management Research and Investments at NUS Business School
MS SYLVIA CHOO 49, special duties director of National Trades Union Congress International Affairs
MS MALATHI DAS 47, immediate past president of the Singapore Council of Women's Organisations
MRS HAUW SOO HOON 63, operating partner at venture capital firm iGlobe Partners
PROFESSOR BENEDICT KOH 58, finance professor and associate dean at the Singapore Management University Lee Kong Chian School of Business
MR TERRY LEE 63, president of the Singapore Insurance Employees' Union
MR MUHAMMAD FAIZAL OTHMAN 45, vice-chairman of Taman Jurong Citizens' Consultative Committee
MR NG CHER YAN 57, immediate past chairman of the Braddell Heights Citizens' Consultative Committee
MR COLIN PAKSHONG 56, independent actuarial consultant
MR SAKTIANDI SUPAAT 43, head of forex research for global markets at Maybank, and Member of Parliament for Bishan-Toa Payoh GRC
DR TAN BEE WAN 61, executive chairman of learning consultancy Integrative Learning Corporation and social enterprise ACE (Active, Contributive and Engaged) Seniors
MR CHRISTOPHER TAN 46, chief executive of financial advisory firm Providend
Turning 55 - the best is yet to be
There is still time to catch up if you missed out on saving money in CPF
By Goh Eng Yeow, Senior Correspondent, The Sunday Times, 28 Aug 2016
Turning 55 is supposed to be a momentous event in our lives.
When my dad reached that milestone 33 years ago, he stopped working. He also got a big windfall from withdrawing all his Central Provident Fund (CPF) savings. Those were the days when a person did not have to set aside any money in his CPF for retirement needs or medical expenses.
Time flies. I could scarcely believe that it was my turn to hit 55 earlier this month. I still look and feel pretty much the same as always, but my friends made a big fuss about it and hosted me to dinner at the Tanglin Club to celebrate the occasion.
For me, the greatest significance of this milestone is the need to take decisions on our CPF savings, which can turn out to be quite a sizeable sum for some of us.
In my case, the choice is simple. After setting aside $161,000 in the newly created CPF Retirement Account, I still have some funds left in both my CPF Ordinary and Special accounts.
I could have withdrawn the monies like my dad did all those years ago, but I decided against doing that because the CPF pays a much higher interest rate vis-a-vis what I can get from bank deposits.
I also did something which my dad would not have dreamt of doing - I wrote a cheque to put another $80,500 into the CPF Retirement Account to top it up to the so-called Enhanced Retirement Sum limit of $241,500.
I also reckoned that if I pour another $7,500 each year into the Retirement Account for the next 10 years, the sum in it would escalate to about $470,000 by the time I turn 65. That is not including the additional savings that I would have accumulated from the contributions made to the CPF Ordinary and Special accounts so long as I keep on working.
Those who want their CPF money back as soon as they can get their hands on it will think that I must be crazy to be putting more money into my CPF Retirement Account.
However, to me, the ugly possibility of my CPF money going up in smoke or not getting the money back is practically nil. The CPF is probably the safest place in the world to park our retirement nest egg and get an attractive, risk-free return to boot.
This is because Singapore is one of the few remaining triple-A rated countries and the Singapore dollar is one of the world's strongest currencies.
There is still time to catch up if you missed out on saving money in CPF
By Goh Eng Yeow, Senior Correspondent, The Sunday Times, 28 Aug 2016
When my dad reached that milestone 33 years ago, he stopped working. He also got a big windfall from withdrawing all his Central Provident Fund (CPF) savings. Those were the days when a person did not have to set aside any money in his CPF for retirement needs or medical expenses.
Time flies. I could scarcely believe that it was my turn to hit 55 earlier this month. I still look and feel pretty much the same as always, but my friends made a big fuss about it and hosted me to dinner at the Tanglin Club to celebrate the occasion.
For me, the greatest significance of this milestone is the need to take decisions on our CPF savings, which can turn out to be quite a sizeable sum for some of us.
In my case, the choice is simple. After setting aside $161,000 in the newly created CPF Retirement Account, I still have some funds left in both my CPF Ordinary and Special accounts.
I could have withdrawn the monies like my dad did all those years ago, but I decided against doing that because the CPF pays a much higher interest rate vis-a-vis what I can get from bank deposits.
I also did something which my dad would not have dreamt of doing - I wrote a cheque to put another $80,500 into the CPF Retirement Account to top it up to the so-called Enhanced Retirement Sum limit of $241,500.
I also reckoned that if I pour another $7,500 each year into the Retirement Account for the next 10 years, the sum in it would escalate to about $470,000 by the time I turn 65. That is not including the additional savings that I would have accumulated from the contributions made to the CPF Ordinary and Special accounts so long as I keep on working.
Those who want their CPF money back as soon as they can get their hands on it will think that I must be crazy to be putting more money into my CPF Retirement Account.
However, to me, the ugly possibility of my CPF money going up in smoke or not getting the money back is practically nil. The CPF is probably the safest place in the world to park our retirement nest egg and get an attractive, risk-free return to boot.
This is because Singapore is one of the few remaining triple-A rated countries and the Singapore dollar is one of the world's strongest currencies.
In doing what I did to achieve the best returns I can get out of the CPF, I am simply relying on the power of compounding - once described by the great scientist Albert Einstein as the eighth wonder of the world.
I am also assuming that the CPF will continue to keep payouts at the current attractive levels while inflation stays low for a long time - a scenario that seems conceivable since much of the global economy is stuck in a rut of low growth which dampens consumer spending.
To try to achieve the same returns elsewhere, I would have to take on risks which may cause me to lose part of my nest egg if I am not careful. Given the availability of the CPF mechanism to accumulate returns risk-free, this is one issue which I would rather not lose sleep over.
I also find that I am not the only person who adopted such a strategy. At a recent class reunion, a classmate friend said that he had taken a similar approach.
What we are doing reminds one of the snowball analogy about accumulating wealth that was once articulated by Mr Charlie Munger, the billionaire business partner of investment guru Warren Buffett.
Mr Munger likens the process to rolling a snowball. It helps to start on top of a long hill, start rolling early, and try to roll that snowball for a very long time. It pays to start saving when one is young and to live a long life.
WHAT IF YOU HAVEN'T SAVED?
Now, this is well and good for people who have the foresight to consistently save more than they spend. We can afford to leave our monies in the CPF to enjoy a further snowballing effect on our retirement savings because we have other sources of finance to fall back on if we are suddenly confronted with an emergency.
WHAT IF YOU HAVEN'T SAVED?
Now, this is well and good for people who have the foresight to consistently save more than they spend. We can afford to leave our monies in the CPF to enjoy a further snowballing effect on our retirement savings because we have other sources of finance to fall back on if we are suddenly confronted with an emergency.
This may, however, not sound like music to the ears of those in their 50s who may have missed out on the opportunity to squirrel away more savings when they were younger and who may be eyeing the CPF money, now locked out of their reach, to help defray their expenses.
This is the group which most keenly feel the threat of being pushed out of their jobs because their companies may want to replace them with younger and cheaper staff - but which want to carry on working, not because they want to, but because they have little savings to fall back on.
For them, turning 55 can be a scary turning point in life - the beginning of the end, as one friend despondently puts it. But this is surely no reason for despair if they are worried about their finances. There is still time to catch up.
I believe that the expertise they acquired from their many years of working will enable them to build up their wealth in a significant way if they put their heart and soul into it.
One of the most heartwarming stories I have ever read is that of a remarkable woman, Ms Anne Scheiber, who turned the US$5,000 which she had saved up when she retired at 50 into a mind-boggling US$22 million by the time she died at the ripe old age of 101 in 1995.
During her long career at the US Internal Revenue Service until she retired in 1944, Ms Scheiber never earned more than US$4,000 a year, and despite being an exemplary worker, she never got a promotion. She also suffered financial losses in the 1930s after getting bad advice from stockbrokers.
In short, hers is a familiar hard-luck story that those of us who may be stuck in a career rut and got burned in our investments when we looked for alternative ways to make money, can relate to.
Yet, after she retired, Ms Scheiber was able to turn adversity into advantage by putting to good use the analytical skills she picked up on her job by looking for worthwhile investments. Her investments included shares of companies such as healthcare products maker Johnson & Johnson and consumer products maker Colgate-Palmolive.
The best part of it all is that until her death, she operated from a tiny apartment in New York and nobody knew how incredibly wealthy she was.
There was even an upbeat end to her story: Towards the end of her life, she quietly arranged for her fortune, which had blossomed through both boom and bust, and every sociological change imaginable, to be donated to a university to set up a scholarship to help support women's education.
Ms Scheiber is a shining example that, in our 50s, the best in life is yet to be.
Plan for retirement with 'pay' and 'play' cheques
Around 200 people attending a CPF Retirement Planning roadshow get tips on how to save and invest for their golden years
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 4 Sep 2016
Central Provident Fund (CPF) members are encouraged to treat their nest egg as a cheque book that never stops paying. About 220 people heard this message when they attended a CPF Retirement Planning roadshow at Suntec City on Aug 27.
They were told that it is prudent to plan their golden years with part of their retirement income treated as the "die die must have" portion and the rest as the "good to have" portion. The "die die must have" portion is the so-called "pay cheque" which pays for life, and the "good to have" portion is the "play cheque".
Panel speaker Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, highlighted the way the CPF plays an integral role in one's retirement "pay cheques". "The more you accumulate and the less you withdraw (from your CPF savings), the more you have and correspondingly the pay cheque is bigger," he said.
He posed the following question to the audience: "How much do you want your pay cheque to be?"
Mr Soh said he had transferred money from his Ordinary Account to his Special Account to earn the higher interest rate of 4 per cent. However, he cautioned that such transfers are one-way only.
Other ways of boosting your nest egg include CPF top-ups with cash or CPF savings, and delaying your first CPF Life payout up to age 70.
For example, CPF members aged below 55 can top up their Special Account to the prevailing Full Retirement Sum of $161,000. Those above 55 can top up their Retirement Account to the prevailing Enhanced Retirement Sum of $241,500, which will generate monthly CPF Life payouts of about $1,900 when they reach 65.
A CPF Life plan with an escalating payout option to protect retirement savings against inflation will be available in the coming years.
Mr Soh considers the CPF Ordinary and Special Account savings the "best emergency fund" for members above 55 since they can get the monies within a few working days after application and also enjoy interest rates much higher than bank interest rates.
Another panel speaker, Providend chief executive Christopher Tan, reiterated that the CPF Special Account is a "very good" risk-free investment instrument with returns that many insurance plans and bonds cannot beat.
He added that for basic retirement, one needs to have three things - a fully paid-for house, medical expenses insurance to pay hospital bills, and a monthly income.
Mr Tan showed how to make use of different instruments such as annuities and investments, together with CPF Life, to plan for both the retirement pay and play cheques.
His investment tips include the importance of diversification, knowing one's risk appetite, and staying invested for the long term in order to gain from the power of compounding and to ride out market volatility.
He said as investment returns will be muted in the coming years, the cost of investment is extremely important, so be on the lookout for low-cost instruments such as index funds and the upcoming CPF Lifetime Retirement Investment Scheme.
After the talk, participants took the chance to ask about CPF top-ups, withdrawals and the CPF Life scheme.
A teacher, Mr Tony Lai, 42, said he considers himself financially literate but attended the session to find out more.
The next CPF roadshow event will be held at the Toa Payoh HDB Hub on Sept 17 and 18. Visit cpf.gov.sg/bigRchat for more information.
6 little-known facts about the CPF
More members are looking at putting more into CPF accounts with better rates amid low yields elsewhere
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 4 Sep 2016
With the Central Provident Fund (CPF) enhancements making headlines in recent months, more CPF members are waking up to the fact that there is a viable investment tool in their backyard.
The low-yield environment makes even the Ordinary Account rate of 2.5 per cent appear attractive, not to mention the Retirement Account (for those above 55), which attracts up to 6 per cent interest.
The chatter these days seem to be skewed towards how people can put more into CPF to grow their nest egg, rather than withdrawing.
To recap, the first slew of recommendations by the CPF Advisory Panel was announced early last year. They involve different payout options and the flexibility of deferring payouts up to age 70 so as to receive more cash later. Last month, the last few recommendations, which include a CPF Life escalating payout option, were announced.
Despite the CPF Board's publicity campaign and articles written about the changes, some still find the CPF schemes complex and difficult to understand, judging from queries to The Sunday Times, as well as those posed during the question-and-answer session at the CPF Retirement Planning roadshow on Aug 27.
Here are six little-known facts about the CPF:
1. TOPPING UP YOUR CHILDREN'S CPF ACCOUNTS
Every Singaporean newborn today has a CPF account set up for him or her by the Government for the purpose of receiving the $4,000 Medisave grant.
For children who are Singapore citizens or permanent residents, a CPF account will be automatically created when a first top-up or CPF contribution is received.
Some wealthier CPF members or those with excess cash have opted to use the CPF as a legacy for their children or grandchildren by topping up their Special Accounts the moment they are born.
In fact, you can contribute up to the prevailing Full Retirement Sum (FRS) of $161,000 into the newborn's Special Account in one go, under the Retirement Sum Topping-Up Scheme.
Some members have already done so.
Imagine the power of compounding over 55 years.
Assuming the Special Account's floor interest rate remains at 4 per cent, your initial contributions would compound to some $1.5 million over the next 55 years.
Another way of topping up your children's CPF accounts is to use the Voluntary Contribution Scheme, currently capped at $37,740 a year.
Contributions can be made to the Medisave Account only (up to the Basic Healthcare Sum) or can be split among the Ordinary, Special and Medisave accounts.
However, bear in mind that unlike cash top-ups to other loved ones like spouses, parents and siblings, you do not receive any tax benefit for topping up your child or grandchild's CPF accounts.
Of course, not everyone will be comfortable with locking up funds for 55 years.
Some financial experts recommend that it would be better to invest the same amount in equities and low-cost index funds - given the very long investment horizon that a young child has - which should reap potentially higher returns.
2. CPF AS A FIXED DEPOSIT OR FIXED INCOME ALTERNATIVE
Some CPF members have taken to actively transferring their Ordinary Account savings to the Special Account to earn the higher interest rates.
But if your Special Account balance - including savings withdrawn under the CPF Investment Scheme - has reached the prevailing FRS, you would be unable to do further top-ups.
In the chase for yields, even the Ordinary Account interest rate of 2.5 per cent a year is not to be sniffed at, particularly if you are comparing it with fixed deposit rates which have fallen to paltry levels. Even the average annual returns of some bonds, such as the Singapore Savings Bonds, have dipped below 2 per cent.
Some insurance policies with guaranteed returns and a fixed tenure - usually three to five years - also pale in comparison with the Ordinary Account interest rate.
If you are below 55 and are confident of setting aside the requisite retirement sums at 55, you can consider the Ordinary Account as an alternative fixed deposit instrument but with less liquidity. Because of the lack of liquidity, this works better for those who are close to 55 and/or are confident they have no need for the cash.
For example, if you are 53 years old, you can park your spare cash savings in the Ordinary Account and consider it as a two-year fixed deposit. This is because if you are able to set aside sufficient savings in your Retirement Account, you can withdraw the rest at age 55 or later, whenever the need arises.
And you can still use the Ordinary Account savings for other investments under the CPF Investment Scheme and to purchase properties, after setting aside $20,000 in your Ordinary Account.
3. CASH REFUNDS FOR CPF SAVINGS USED FOR PROPERTY PURCHASES
One way of putting cash into your Ordinary Account is to do so via a full or partial refund of the CPF savings that you had previously withdrawn for property purchases plus the interest accrued on them.
Some members wrongly believed that they could refund the CPF savings used for their properties only upon the sale of these properties.
Even if the properties are unsold, you can make cash refunds by filling out a CPF form and indicating which property you are making the refund for. However, you should note that such cash refunds are irrevocable.
4. ZERO ORDINARY ACCOUNT BALANCE
Some members wanted to know if it is possible to deplete the Ordinary Account to zero when transferring CPF savings from that account to the Special Account, and still earn the higher interest rates.
This question was raised during the CPF Retirement Planning roadshow. Mr Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, responded that it is possible.
For members below 55, when the Ordinary Account has zero balance, the first $60,000 in the Special Account savings will attract 5 per cent while the remaining balance will enjoy 4 per cent interest.
5. CPF WITHDRAWALS
For members who are 55 and older, have the requisite retirement sums in their Retirement Account, and still have balances in both the Ordinary and Special Accounts, withdrawals will be made from the Special Account first before the Ordinary Account.
CPF said that this is because CPF members may still have commitments such as housing, education and investment after turning 55.
The board says: "As Ordinary Account savings can be used for continued participation in schemes after 55, the withdrawal sequence is catered to the needs of the majority of Singaporeans. Nonetheless, members who wish to benefit from CPF attractive interest rates have the option to top up their Retirement Account under the Retirement Sum Topping-Up Scheme."
6. FREQUENCY OF CPF WITHDRAWALS CPF
Members are not restricted to only one withdrawal a year. Members who have withdrawable balances in their CPF accounts may submit an application any time and the Board will assess the application.
The amount of money that the member may withdraw will still be based on the applicable withdrawal rules and it does not change the amount of savings that can be withdrawn by the member.
Ms Scheiber is a shining example that, in our 50s, the best in life is yet to be.
Plan for retirement with 'pay' and 'play' cheques
Around 200 people attending a CPF Retirement Planning roadshow get tips on how to save and invest for their golden years
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 4 Sep 2016
They were told that it is prudent to plan their golden years with part of their retirement income treated as the "die die must have" portion and the rest as the "good to have" portion. The "die die must have" portion is the so-called "pay cheque" which pays for life, and the "good to have" portion is the "play cheque".
Panel speaker Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, highlighted the way the CPF plays an integral role in one's retirement "pay cheques". "The more you accumulate and the less you withdraw (from your CPF savings), the more you have and correspondingly the pay cheque is bigger," he said.
He posed the following question to the audience: "How much do you want your pay cheque to be?"
Mr Soh said he had transferred money from his Ordinary Account to his Special Account to earn the higher interest rate of 4 per cent. However, he cautioned that such transfers are one-way only.
Other ways of boosting your nest egg include CPF top-ups with cash or CPF savings, and delaying your first CPF Life payout up to age 70.
For example, CPF members aged below 55 can top up their Special Account to the prevailing Full Retirement Sum of $161,000. Those above 55 can top up their Retirement Account to the prevailing Enhanced Retirement Sum of $241,500, which will generate monthly CPF Life payouts of about $1,900 when they reach 65.
A CPF Life plan with an escalating payout option to protect retirement savings against inflation will be available in the coming years.
Mr Soh considers the CPF Ordinary and Special Account savings the "best emergency fund" for members above 55 since they can get the monies within a few working days after application and also enjoy interest rates much higher than bank interest rates.
Another panel speaker, Providend chief executive Christopher Tan, reiterated that the CPF Special Account is a "very good" risk-free investment instrument with returns that many insurance plans and bonds cannot beat.
He added that for basic retirement, one needs to have three things - a fully paid-for house, medical expenses insurance to pay hospital bills, and a monthly income.
Mr Tan showed how to make use of different instruments such as annuities and investments, together with CPF Life, to plan for both the retirement pay and play cheques.
His investment tips include the importance of diversification, knowing one's risk appetite, and staying invested for the long term in order to gain from the power of compounding and to ride out market volatility.
He said as investment returns will be muted in the coming years, the cost of investment is extremely important, so be on the lookout for low-cost instruments such as index funds and the upcoming CPF Lifetime Retirement Investment Scheme.
After the talk, participants took the chance to ask about CPF top-ups, withdrawals and the CPF Life scheme.
A teacher, Mr Tony Lai, 42, said he considers himself financially literate but attended the session to find out more.
The next CPF roadshow event will be held at the Toa Payoh HDB Hub on Sept 17 and 18. Visit cpf.gov.sg/bigRchat for more information.
6 little-known facts about the CPF
More members are looking at putting more into CPF accounts with better rates amid low yields elsewhere
By Lorna Tan, Invest Editor/Senior Correspondent, The Sunday Times, 4 Sep 2016
With the Central Provident Fund (CPF) enhancements making headlines in recent months, more CPF members are waking up to the fact that there is a viable investment tool in their backyard.
The low-yield environment makes even the Ordinary Account rate of 2.5 per cent appear attractive, not to mention the Retirement Account (for those above 55), which attracts up to 6 per cent interest.
The chatter these days seem to be skewed towards how people can put more into CPF to grow their nest egg, rather than withdrawing.
To recap, the first slew of recommendations by the CPF Advisory Panel was announced early last year. They involve different payout options and the flexibility of deferring payouts up to age 70 so as to receive more cash later. Last month, the last few recommendations, which include a CPF Life escalating payout option, were announced.
Despite the CPF Board's publicity campaign and articles written about the changes, some still find the CPF schemes complex and difficult to understand, judging from queries to The Sunday Times, as well as those posed during the question-and-answer session at the CPF Retirement Planning roadshow on Aug 27.
Here are six little-known facts about the CPF:
1. TOPPING UP YOUR CHILDREN'S CPF ACCOUNTS
Every Singaporean newborn today has a CPF account set up for him or her by the Government for the purpose of receiving the $4,000 Medisave grant.
For children who are Singapore citizens or permanent residents, a CPF account will be automatically created when a first top-up or CPF contribution is received.
Some wealthier CPF members or those with excess cash have opted to use the CPF as a legacy for their children or grandchildren by topping up their Special Accounts the moment they are born.
In fact, you can contribute up to the prevailing Full Retirement Sum (FRS) of $161,000 into the newborn's Special Account in one go, under the Retirement Sum Topping-Up Scheme.
Some members have already done so.
Imagine the power of compounding over 55 years.
Assuming the Special Account's floor interest rate remains at 4 per cent, your initial contributions would compound to some $1.5 million over the next 55 years.
Another way of topping up your children's CPF accounts is to use the Voluntary Contribution Scheme, currently capped at $37,740 a year.
Contributions can be made to the Medisave Account only (up to the Basic Healthcare Sum) or can be split among the Ordinary, Special and Medisave accounts.
However, bear in mind that unlike cash top-ups to other loved ones like spouses, parents and siblings, you do not receive any tax benefit for topping up your child or grandchild's CPF accounts.
Of course, not everyone will be comfortable with locking up funds for 55 years.
Some financial experts recommend that it would be better to invest the same amount in equities and low-cost index funds - given the very long investment horizon that a young child has - which should reap potentially higher returns.
2. CPF AS A FIXED DEPOSIT OR FIXED INCOME ALTERNATIVE
Some CPF members have taken to actively transferring their Ordinary Account savings to the Special Account to earn the higher interest rates.
But if your Special Account balance - including savings withdrawn under the CPF Investment Scheme - has reached the prevailing FRS, you would be unable to do further top-ups.
In the chase for yields, even the Ordinary Account interest rate of 2.5 per cent a year is not to be sniffed at, particularly if you are comparing it with fixed deposit rates which have fallen to paltry levels. Even the average annual returns of some bonds, such as the Singapore Savings Bonds, have dipped below 2 per cent.
Some insurance policies with guaranteed returns and a fixed tenure - usually three to five years - also pale in comparison with the Ordinary Account interest rate.
If you are below 55 and are confident of setting aside the requisite retirement sums at 55, you can consider the Ordinary Account as an alternative fixed deposit instrument but with less liquidity. Because of the lack of liquidity, this works better for those who are close to 55 and/or are confident they have no need for the cash.
For example, if you are 53 years old, you can park your spare cash savings in the Ordinary Account and consider it as a two-year fixed deposit. This is because if you are able to set aside sufficient savings in your Retirement Account, you can withdraw the rest at age 55 or later, whenever the need arises.
And you can still use the Ordinary Account savings for other investments under the CPF Investment Scheme and to purchase properties, after setting aside $20,000 in your Ordinary Account.
3. CASH REFUNDS FOR CPF SAVINGS USED FOR PROPERTY PURCHASES
One way of putting cash into your Ordinary Account is to do so via a full or partial refund of the CPF savings that you had previously withdrawn for property purchases plus the interest accrued on them.
Some members wrongly believed that they could refund the CPF savings used for their properties only upon the sale of these properties.
Even if the properties are unsold, you can make cash refunds by filling out a CPF form and indicating which property you are making the refund for. However, you should note that such cash refunds are irrevocable.
4. ZERO ORDINARY ACCOUNT BALANCE
Some members wanted to know if it is possible to deplete the Ordinary Account to zero when transferring CPF savings from that account to the Special Account, and still earn the higher interest rates.
This question was raised during the CPF Retirement Planning roadshow. Mr Soh Chin Heng, deputy chief executive officer (services) of the CPF Board, responded that it is possible.
For members below 55, when the Ordinary Account has zero balance, the first $60,000 in the Special Account savings will attract 5 per cent while the remaining balance will enjoy 4 per cent interest.
5. CPF WITHDRAWALS
For members who are 55 and older, have the requisite retirement sums in their Retirement Account, and still have balances in both the Ordinary and Special Accounts, withdrawals will be made from the Special Account first before the Ordinary Account.
CPF said that this is because CPF members may still have commitments such as housing, education and investment after turning 55.
The board says: "As Ordinary Account savings can be used for continued participation in schemes after 55, the withdrawal sequence is catered to the needs of the majority of Singaporeans. Nonetheless, members who wish to benefit from CPF attractive interest rates have the option to top up their Retirement Account under the Retirement Sum Topping-Up Scheme."
6. FREQUENCY OF CPF WITHDRAWALS CPF
Members are not restricted to only one withdrawal a year. Members who have withdrawable balances in their CPF accounts may submit an application any time and the Board will assess the application.
The amount of money that the member may withdraw will still be based on the applicable withdrawal rules and it does not change the amount of savings that can be withdrawn by the member.
CPF review: New CPF LIFE plan with Escalating Payouts and Lifetime Retirement Investment Scheme recommended
CPF Advisory Panel's Recommendations, Part One
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