We build on to the latest articles written to shed light on perhaps some misconceptions about the CPF in the midst of all these noises. The past three commentaries are:
- The CPF is giving us a higher rate
- I thought the CPF Life Annuity gave a high 8.5% return, perhaps I was wrong
- 2004 SAF Speech shows not all plans for CPF will work as it should
I have explained to a colleague about the general workings of the CPF, Minimum Sum and CPF Life. He message me one day that, perhaps it will be better that we shed more light on what happens when the money in your CPF is less than the minimum sum.
He explains that much of the anguish from folks that are not in touch with the topic so well is the sucky thought that they would never return the CPF to you with such a high hurdle. This hurdle is unfair and is as if the goal post is shifted.
As per the CPF,
- If you have at least $40,000 in your RA at 55 or at least $60,000 in your RA at 65, you will be automatically included under CPF LIFE
- If you have less than $40,000 in your RA at 55 or less than $60,000 in your RA at 65, you can apply to join CPF LIFE; otherwise you will be on the Minimum Sum Scheme.
This means that, regardless of the hurdle rate (minimum sum), its either they return whatever that is left in the minimum sum to you at age 65 or you can choose to enrol in CPF Life, where they will pay you an annuity every month.
Either way, it means that 65, some money comes out.
Possibility of not hitting the minimum sum
This is entirely possible. An Australian guy who used to be one of us projected that by 55 years old for me, the minimum sum would be nearly SG$540k. (growing at 6%+ per annum compounded)
If this sum is not splashed in front of me like that, I would not have thought that amount is so gigantic. It looks so far and so unattainable.
And it can be. If you choose to reach financial independence early, your CPF might stop growing and be stuck there growing at the pitiful 2.5%/4% for some years.
There will always be haters
One thing i realize with all these discussion is that, I disagree with my colleague this helps at all. The folks that have form an opinion will just bring up the following stuff:
- The sum return is so pitiful
- The rates they should give should be at least 10%!
- Once you nearly smell it they will shift the retirement age to 75 years old!
- I just want them to return ALL MY MONEY TO ME BECAUSE I AM SO SAVVY
This is suppose to address one isolated point and should be view as such. I don’t have the energy to write a long grandfather story to address everything or my point of view. I would just use this medium to reiterate what the policy is meant to be.
thank you for linking my post but I’m Singaporean, not Australian.
hi there. i thought you have already given up the citzenship or am i mistaken
The forecast that min sum will hit $540k is totally out. The inflation rate for past 12 years is not 6% (on average). You forget (or didn’t know???) that min sum adjustment has the other component where it increase $80K to $120K (in 2003 term). So after 2015, min sum will only be increase by inflation rate (unless they decide to change the CPF rule change).
Hi there, the 50pk estimation was cited based on the 6% growth rate by the author. In any case the main point should be on what if a person fails to hit it.
Very plausible and hence the explanation
Hi Drizzit,
Do note the much talked about min sum of 155k is only one of the two min sums we have to meet at 55. The little other known min sum that CPF members have to meet is the medisave min sum. As of 1 July, it is $43,500. Dont forget to include it, otherwise you will be given a rude awakening at 55 when you realize you cant withdraw the amount you expected
In my view, our country’s inflation is unlikely to be 6% due to MAS policy of maintaining a strong currency to counter import inflation. A 3% p.a. inflation projection is more plausible
Hi CY,
I almost forgot about this, the medisave minimum sum. The surprising part is why aren’t people asking for this portion back (or perhaps they are!). This is a portion that most folks won’t be thinking of meeting. Its a rather high hurdle rate.
I only put 6% based on what the author says. I disagree with the 3%. Inflation as you have said is a function of politics and what the government wants it to be. In the past even though currency is strong, there are cases of 4.5 to 5% inflation.
Kyith
Hi Kyith,
This is really a hot topic in Singapore these days 😉
Let’s try to look at it from the other side: What are the possible choices for SG Government to reform the CPF today? What if you were in their shoes? (and forget about their million dollar salary, and other criticisms, etc…) Is there a one fits all model?
We can spend the rest of our lives criticising, it would be wiser to bring new ideas on the table. Complaints and criticisms alone have never brought any solution.
Some ideas of possible change below.
1. Make a revolution in the system. Transform it into something that looks like European countries: common pot to pay pensions for the whole population. This means that if there are less workers and more retirees, contributions increase and pensions decrease. In this model people don’t own their contributions, so they cannot ask to “withdraw” their contributions.
This will absolutely not be compatible with the Singaporean culture (God bless Singapore 🙂 )
2. Progressively increase the employer’s and/or employee’s participation. Increase the maximum sum that can be deposited on the CPF with some tax incentives.
This would be my preferred option, but I am subjective.
3. Increase the return rate of the SA and OA. In my view this is not sustainable unless the CPF board starts to take risks.
4. Open the RA to competitive annuity plans from private sector rather than keeping the CPF life monopoly.
5. Give a CPF bonus to Singaporeans who have a second kid. Why not hitting two birds with one stone since natality is also an issue in Singapore.
6. Double the COE for people buying their second/third car and use this to fund some extra return/bonus.
Any idea???
Hi Regis,
Thanks for going through these options. They have been valuable. Indeed, those subjective options can have more issues than benefits. The average folks are just not good at handling money, no matter how well they say they are. External economics are required.
My thoughts are things be more progressive.
1) Take a portion of CPF contribution to put it in a higher growth fund. 2) Allow citizen’s to be able to voluntary participate in the growth fund. Provide good nudges such as tax incentives. The longer you put it in there the higher the tax incentives. Allow the people to withdraw at various milestones, be it 40,50,60,70 years old. So people don’t see this as a lock in.
3) Bring in better products! I have a talk with some folks familiar with Vanguard in Singapore and its not feasible because no one wants to carry a no sales charge funds! The government might be able to work something out. 4) Allow part of the growth fund be invested in growth bonus from GIC and Temasek
5) As you say, improve annuity to be inflation linked
6) back to 3, keep the fund with good products not lousy stuff
Just my thoughts.