What If Your CPF Is Returned To You?

By Timothy Ho

Just a week ago, the hot topic of CPF was brought back to our attention as Han Hui Hui, Roy Ngerng, and their supporters rallied for their CPF monies to be returned to them. However, should the Government accede to their request, what would they actually do with the money?

22-year old Han Hui Hui is probably too young to have made much contribution to her account, and therefore need not consider matters such as how to manage more than $100,000.

How much money does the average Singaporean actually have in their CPF?

According to CPF, the average cash balance for active CPF members at age 55 is $126,000 (2013). If a Singaporean wants to retire at that age, he will have $126,000 to survive on for the rest of his life. Assuming that the person lives till the age of 85, he will have about $350 a month. That is clearly an insufficient amount for living expenses.

Why CPF Life works better than a lump-sum repayment

Let’s compare apples for apples. Assuming an individual is able to set aside the minimum sum of $155,000 by the age of 67 before having his CPF “returned”, he will receive a monthly payout of about $760. Here, we are assuming death at 85, and that he actually budgeted his finances properly.

This is far lesser than the $1200 that CPF Life would have disbursed. While not a large sum, the further 57% paid by CPF Life is still significantly better in comparison. The reason why CPF Life is able to pay that extra sum is because it takes into consideration that even as you draw down your retirement savings, the remaining principal sum in your account stays eligible for risk-free interest earning.

To top it off, CPF Life payment is for life. It does not stop when your account has drawn down the last dollar.

Singaporeans are not saving enough

According to a survey done by EnjoyCompare.com, 4 out of 5 respondents between the ages of 20 – 35 have no savings at all. This means that Singaporeans are not saving enough, and this is bad news. We can blame it on our high cost of living, stagnating wages and whatever else we can think of, but the fact remains that we are not saving enough.

Even if the survey was not a good representation of the general population in Singapore, we are certain that most of us know of people who fall into the trap of not saving enough.

Essentially, Singaporeans are better spenders than savers.

CPF is effective because it forces everyone to save, and in the long run, to earn interest of 2.5% – 5% for contributions that they and their employers make. Gradually, you will learn that building up your nest egg through the accumulation of compound interest can be a very powerful tool.

If you take away CPF, it is likely that there will still be Singaporeans who continue to save 20% or more of their pay. While we are not sure what they will do with the money, perhaps buy some stocks or invest in some retirement plans offered by financial institutions, it is likely that these alternate  retirement plans may give a deal worser than CPF Life. Should he invest in one of them, Roy Ngerng may have a lot to comment on it.

However, there will always be some, a majority perhaps, who will simply spend the additional income that they have.

We cannot manage month-to-month expenditure, but we can somehow manage $126,000 at the age of 55?

Some people, such as Roy Ngerng, claim that CPF is giving them a poor return. That is in his opinion.

If the government were to simply return all money to Singaporeans at the age of 55, how would people use it? How would Roy Ngerng suggest you use it for the better returns that he claims you should be getting? We doubt that he has any real idea on how he can get you a better return than 4% without increasing your risk exposure.

While some may put the money into stock investing, at the age of 55, you should be taking lesser risk – not more risk. You should be aiming for wealth preservation. Well, what other instruments are there? Maybe Bonds. But what will the returns be like?