02 June 2014

CPF - a lifeline for retirement, or till death do us part

The subject of CPF has been a hot topic of late.  I guess a lot of that comes from the sense that one's money contributed to the CPF is constrained to only certain things that one can do with it.  Some individuals will always have issues with all things compulsory that the government imposes.  But in reality, there are plenty of things that one can do with your own CPF funds.

Minister Tan Chuan Jin gave a good go at explaining what the CPF scheme is all about: Tan Chuan Jin on AsiaOne.  CPF Board is of course the authoritative source on CPF Life.

Blogger SG Young Investment also weighed in to explain All About CPF Minimum Sum and CPF Life.

For an estimate on how much CPF Life would provide, try CPF Life Estimator (tool).

An article from MoneySmart.sg discussed about the adequacy of CPF to Cover Home Loans

There's more than one can do with CPF money, and Cheerful Egg (Blog) elaborated on What You Can Do About this CPF Thing.

Pay for housing, support your child's education, prepare for retirement for a lifetime post-retirement and pay/or for hospitalisation insurance.  Invest or do nothing; leave it in there to collect small but risk-free interests.  There're just so much that one can actually do!

Going beyond CPF, Epsilon Luxe addresses Inflation and Tackling the CPF, SRS and other Tax Saving Tips.  CPF/SRS, these are conceptually not very different from the US Social Security/Roth-IRA, the UK's Pension/ISA or the Aussie's Superannuation.  Every country has similar systems, albeit with implementation differences. The differences tend to be on whether you are paying to a pool or paying to your OWN account. The earlier has generally seen a lot more problems due to politicking and under-funding, resulting in future generations bearing the cost of an inadequate system.

Alas, some individuals choose to take the lazy way out, remain ignorant and just complain and complain and complain.  Sheesh.

Investment Moat Thought CPF Life Gave a High 8.4% Return but realised that it wasn't quite so. The $155,000 minimum sum is taken out at age 55 to contribute to CPF Life which is effectively an annuity scheme. Given 10 years to age 65, that means the future value at a growth of 5% would grow this capital to $252,479. I did the same maths for varying growth rates and produced the following result:

Growth Future_Value Yield
4.0% $229,438 5.8%
5.0% $252,479 5.2%
6.0% $277,581 4.8%
7.0% $304,908 4.3%

I would expect a growth of 6.5% from investment returns to be realistic. That would produce an annual yield of 4.5% for the subsequent payouts which I view as reasonable when we compare against the expectation of 4% withdrawal rate for a "perpetual" retirement income.

Personally, I'm glad to see the minimum sum being raised yet again. I expect this to continue with each passing year to keep pace with inflation. It just means that there is more room for me to do voluntary contributions to my wife's CPF Special Account and benefit from the tax deductions for my personal income tax bill.

There is of course the risk that retirement age will be extended beyond age 65. Hence, if's really difficult for the younger ones, considering that it is so far, far away. Perhaps a softer policy touch is needed to alleviate this concern. Raise the retirement age if need be, but leave the age at which one can touch their CPF (and SRS!) as it is. Or have a 2-step approach, allowing part of the CPF Life payout to begin at a lower amount at age 65, and scale up thereafter. Give people the choice and the confidence that it wouldn't go further and further away. Let's see how this unfolds.

Tan Chuan Jin on AsiaOne [AsiaOne]
CPF Life | CPF Life Estimator (tool)
All About CPF Minimum Sum and CPF Life [SG Young Investment]
CPF to Cover Home Loans [MoneySmart.sg]
What You Can Do About this CPF Thing [Cheerful Egg]
Inflation and Tackling the CPF, SRS and other Tax Saving Tips [Epsilon Luxe]
Thought CPF Life Gave a High 8.4% Return [Investment Moats]

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