d.o.g.
Forum Sage
Posts: 711 Registered: 10-12-2003 Member Is Online Mood: No Mood
posted on 12-11-2007 at 17:45
Quote:
mantrahaving a centralised pension fund is a great idea, but people need to be educated on what they will realistically need moving forward into their golden years, otherwise, when their funds run out they will be a burden to society if their familes do not step up to the plate ...
THE RETURN OF THE LONG POST
*cue Stars Wars music*
Unfortunately the government itself is responsible for this "money no enough" mess. Why? We must go back in time, to the inception of the CPF in 1955.
Once upon a time...
When the CPF was created, the contribution rate was 25% EACH for employer and employee, with no upper limit. This meant that every employee got a 50% matching rate regardless of his income level, which basically allowed everyone to have a decent chance of maintaining their current lifestyle upon retirement, even if they were not good at investing their cash, and inflation was bad.
This was a great idea because the employee's future lifestyle would be matched to his earnings over his lifetime, rather than decided arbitrarily by some pension committee doling out government funds. There would be no potential pension fund solvency problems, where future retirees might draw out more than current workers were contributing.
Turn on the CPF tap!
However, as Singapore prospered and housing prices rose, in 1968 someone got the bright idea of making housing "affordable" not by holding down prices, but by allowing CPF money to be used. What happened? There was an extended one-off "windfall" as people rushed to tap CPF money to buy homes.
What happened after that?
We are back at square one with expensive homes, and worse, little or nothing in CPF. At least before allowing the use of CPF, homes were expensive, but you had a tidy sum to look forward to in retirement.
Recession = cut CPF
Later still, someone decided to make Singaporeans "affordable" for employers by cutting the employer's matching rate and by capping the CPF contribution ceiling, first at $6,000, and then down to the current $4,500. What this means is that those earning above $4,500 today have basically no chance of maintaining their current lifestyle solely from CPF funds when they retire, as their effective salary matching rate was less than 34.5%. For people earning $4,500 or less, even though their CPF contributions over time would have matched their income levels, a full 34.5% match is still a very far cry from a 50% match.
As an example:
School principals who retired 20 years ago could have $1-2m in their CPF, since at their peak they could have a 50% match on a $10,000+ salary i.e. $5,000+ a month into CPF. Many could and do live in landed property. Today's school principals often earn a higher wage but will not have anywhere near this amount upon retirement, because their matching rate tops out at 34.5% of $4,500, or $1,552.50.
Today's landed property costs 5-10 times more than 20 years ago, and for top earners the CPF contribution is 3 times less. Translation: forget it. Even living in a condo would be a stretch if you don't supplement the monthly payments with cash - and doing so means your CPF is empty.
Now, with the majority of CPF accounts basically emptied to pay for housing, there is a sudden realization that we will soon face a retirement crisis, as hundreds of thousands of Singaporeans retire with little or no money in their CPF. Among the various solutions offered by the government, there have been:
1. Minimum Sum Scheme
Created in 1987, this aims to prevent you from spending what little you have within a few years - instead, you will eke out a pauper's existence on the allowance doled out by the CPF.
Don't believe me? Pretend you're 62 NOW, and try living on the $498 a month the CPF will pay you from the current $65,000 Minimum Sum. Not much of a life, is it?
Suppose you'll be 62 in 30 years' time. Your Minimum Sum will be $156,600 after adjusting for inflation. Your monthly payout? $1,237. That's not much today. Imagine what it will be like in 30 years' time. Let's be charitable and assume 2% p.a. inflation. After 30 years, your $1,237 buys 1.81x LESS i.e. it's the same as $683 today. Try living on $683 a month now. Not much better than $498, is it?
The payout numbers are taken from the retirement calculator on the CPF website. Check and see for yourself. Note that the retirement calculator does not take into account recent changes that push back your drawdown age to 63 or later - it assumes 62 for everyone.
Bottomline: Money from the Minimum Sum is a poverty allowance. Don't even THINK about surviving on it unless you literally become a monk or a nun. Of course, if you then set up a charity, maybe you can still draw a salary and even have generous donors let you fly first class, but that's clearly not something that everyone can (or should) aspire to.
2. Later Retirement
Obviously, given the same life expectancy, the later you stop work, the less time you have left to live. With the same amount of money, you can spend more during each remaining day, thus improving your quality of life. Also, while you work, your employer may provide some medical benefits which would delay the time when you have to pay for yourself, making your Medisave money last longer.
This also partially alleviates the labour shortage in Singapore, though it remains to be seen how many jobs can be "re-made" for older workers. Being willing to work for less money is not enough - foreign workers are also willing to work for less, and many of them are younger and willing to work for longer hours.
The government is certainly not taking the first step to employing older Singaporeans - witness the recent letter to the Straits Times forum from an ex-SAF regular who was a warrant officer (eligible to work until 55) but was laid off anyway at 50. I also know people in the public service who were still productive but told to leave anyway when they hit 55. Since the private sector tends to take its cue from the government, I have little hope that older Singaporeans will easily find work.
Bottomline: Don't aim to retire later. Aim to accumulate enough assets to be ABLE to retire in the first place. Even if you WANT to work longer, you may not be able to FIND work.
3. Private Pension Plans (PPP)
In 2005 the government put out a call for the private sector to invest CPF money in the hope of better returns than the guaranteed 2.5%/4%. This would achieve 2 things. First, it would make it easier for Singaporeans to fund their retirement. Second, which was somewhat less well publicised, it would take the burden of guaranteeing the returns off the government's shoulders.
The CPF Special Account guarantees a rate of 4%, but for the last several years, SGS, which are the only things the CPF can invest in, have been paying less than 3%. This shortfall is clearly being met from either the Budget or reserves. Transferring the burden of the guarantee to the private sector would remove this annoyance completely.
This PPP thing failed when the private sector decided not to work for peanuts. Apparently, the government wanted to have its cake (low fees) and eat it (high returns) too. Good investment managers dictate their terms, not the other way around!
The government's first priority was low costs rather than high returns. Unsurprisingly, nobody wanted to do this kind of national service. The government position had a basis in logic, of course - costs are guaranteed, but returns are not, so keeping costs low is important. But if you pay too little, can you get any returns at all? And if you can get good returns, why complain about paying high fees?
It's the net returns that matter, not the fees you paid in the process. Who should you give money to, a manager charging 5% who earns you 20% net of fees, or a manager charging 0.5% who earns you 6% net of fees? The answer is obvious. I'm talking about managers with long-established records, of course, not wannabes who wave "projections" or "backtested results" in your face. And 5% is very rare even among the top managers. 1% and some sort of performance fee is much more common.
Funnily enough, the government has had no qualms about paying new ministers millions of dollars to attract and retain "honest and capable people" but balks at doing the same for established fund managers who would manage billions of dollars ($56bn in Ordinary Accounts as of Apr 2005) on behalf of millions of Singaporeans.
Bottomline: Don't expect anyone to invest your CPF for you. The government can't do it, and won't pay for those who can. You have to do it yourself.
4. HUGE increase of 1% in CPF interest rates
If you have any mathematical sense at all you will realize how laughable this is. If you will have a shortfall in your CPF money for retirement, compounding it at 1% more over 30 years will leave you with... a smaller shortfall! Either you'll run out of money a couple of years later, or the CPF will give you a bit more each month, enough for one extra bus ride a day, perhaps.
Calculate it yourself. The CPF Cartoon Booklet about this extra 1% mentions you can get "up to" $17,900 more. Here's news for you - when you are 62 in 30 years' time and the Minimum Sum is $156,600, $17,900 is an increase of just 11.4%. You will *still* be receiving a pauper's wage from the CPF.
If you have 5 times the Minimum Sum i.e. $783,000, then $17,900 is irrelevant. If you have much less than the Minimum Sum e.g. $78,300, such that $17,900 will make a big difference (22.3%), you will still be living in poverty.
Bottomline: This 1% is much ado about nothing. It makes basically no difference - if you will have enough money, it's not significant. If you won't have enough money, you still won't have enough money.
In the end, the burden falls back on ourselves. Since the government has cut the contribution rates via salary caps and matching percentages, all of us will have less money in our CPF over time. This reduced sum can only compound at 3.5%/5% if left with the CPF. This is not enough to safely beat inflation, let alone accumulate purchasing power. Therefore, we have to invest it ourselves, and wisely at that.
Furthermore, since there's less to start with, there will also be less to end with, which means we must also save aggressively and invest wisely with our cash savings, for CPF will surely be insufficient for retirement.
This will be true whether or not you buy a house. If you rent, your CPF will not be touched, but your cash will be drained. If you buy, your CPF will be drained, but your cash will not be touched. Since there are fewer investment choices for CPF versus cash, ALL THINGS BEING EQUAL (which they seldom are) it is better to buy a house with CPF and invest with cash.
This of course ignores the fluctuations in house prices, which will make a significant difference to net worth if you choose to buy. Buy low and you're way ahead for retirement, buy high and you're screwed for life. If you rent, it should average out over the long term, but then your investment choices for CPF money are very limited. Choices, choices...
As usual, YMMV.
Quote:
xinqundont trust all those insurance or financial analyst that sell you carrot of 5% return. I want to laugh. The most possible return are about 3% the most but hard to sustain that level too and you need to include the service charge they bill to you.If you have an income of $4k and below and have family , you can forget about retirement. It never exit and wake up. take care of your health and pray no major sickness.
I personally wouldn't be so negative. You have to do your homework with regards to unit trusts. The well-run ones can and do return 5-10% per year, sometimes more, sometimes less. But you should take a long-term view, ideally 10 years or more. If your time frame is short, and you trade in and out of the funds, your returns will be eroded by the sales charges.
In fact, at least one study in the US found that although mutual funds in aggregate earned something like 6-7% p.a. over the very long term (30 years), the investors themselves only earned about 3% p.a. due to excessive trading. In their trading, they paid sales charges multiple times, and very often they bought in bull markets and sold in bear markets, so they got most of the losses and very little of the gains. Buy-and-hold investors would pay sales charges only once, and while they got 100% of the losses, they also got 100% of the gains, so they came out ahead.
As for trying to retire while raising a family on $4,000 a month, I do not think it is impossible. If you are willing to lead a modest lifestyle now, you should still be able to set aside some savings each month. Wisely investing these savings should allow at least a decent retirement, certainly one better than what the CPF's payouts alone would imply.
IMHO a 10% savings rate should be achievable for anyone except those living below the poverty line. Anyone earning five figures monthly should be able to save 20%, and those in the six figure zone should be able to save 50% or more.
It's a matter of priorities. We all have to eat, but we can choose to eat at Lau Pa Sat instead of Lei Garden. We have to get to work, but we can choose to go by bus or MRT instead of by car. We have to wear clothes, but we can choose Giordano instead of Gucci.
Let's take the $4,000 per family case. Put aside $400 monthly, and invest it at 6% for 30 years. In 30 years, you will have $401,806. Compare this to the future Minimum Sum of $156,600. It's about 2.5x the Minimum Sum! Let's add the $17,900 from the bonus 1% to the Minimum Sum to get $174,500. Your investment assets are still 2.3x the new Minimum Sum amount. Clearly, this would support a MUCH better lifestyle than that from the Minimum Sum alone.
But is $576,306 (investment assets + Minimum Sum + $17,900) enough for a couple to retire on? Suppose we use the same drawdown rate as the CPF, which is calculated to last 20 years - $1,237 monthly from $156,600. So:
$576,306 / $156,600 * $1,237
= $4,552 pre-inflation, or $2,500 post-inflation
As you can see, this is not too bad at all. $2,500 per couple per month is not enough to travel continuously round the world, but it's sufficient for daily expenses and probably a modest holiday once or twice a year. Not rich, but certainly not poor.
Now let's suppose we save more aggressively and can manage a 20% savings rate i.e. $800 per month. We end up with $803,612. Together with the Minimum Sum and the bonus $17,900 we have $978,112.
This works out to $7,726 per month pre-inflation and $4,268 post-inflation. In other words, you can IMPROVE on your current lifestyle ($4,000 income) and quality of life if you are willing to save 20% of your income and invest it wisely.
Here's a spanner in the works: suppose you have NOTHING in your CPF because it all went to paying the house. Assuming you don't want to eat bricks, your investment assets will be all you have. What kind of lifestyle does that mean?
Invested nothing= you have nothing. Duh.
Invested $400/mth= $401,806 in assets
= $3,173/mth pre-inflation
= $1,753 post-inflation
Invested $800/mth
= $802,613 in assets
= $6,346/mth pre-inflation
= $3,506 post-inflation
Clearly, $1,753/month beats nothing, and $3,506 sure beats $1,753...
The data above also imply that WHATEVER you earn now, if you can invest $400 a month for 30 years at 6%, you can fund AT LEAST a $1,700/month lifestyle in retirement (assuming NOTHING from CPF). If you can invest $800/month, you can get AT LEAST a $3,500/month lifestyle
....and if you and your spouse EACH invest $800, together you can support a $7,000/month retirement lifestyle without problems. This would allow frequent holidays overseas, even for months at a time.
Note that although I assumed a 6% p.a. return, I also subtracted 2% p.a. for inflation, so the net real return was in fact only 4% per year. This is NOT demanding! It just requires some common sense when investing. Especially: don't trade your funds, and don't time the market. Either invest the same amount regularly, or invest less in bull markets and more in bear markets.
Bottomline: Save hard and invest wisely. The harder you save now, the easier you will live later. And yes, you CAN retire despite supporting a family on $4,000 a month.
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posted by ikaira @ 12:10 PM,
