Let’s take a break from talking about the CPF.
There are times when we can learn much from reading about the government public or private pension systems in other countries.
Most people think it is about money.
It is about money but its more than that.
Its about managing money for a group of diverse group of people with the objective for a diverse group of people. And this is a difficult proposition.
A good example will be if you are task to manage the net worth of all 100 of your relatives. It is not about putting into the highest return things, because when each of your relative needed the money can vary. Some high returns products have rather volatile asset value.
You cannot tell them you will keep their money forever, but only to provide a stream of cash flow over time. They will start suspecting whether you actually made more money, and just giving them a tiny portion of a bigger return!
Its more than money. Its about the relationships as well.
Malaysia’s The Star Online ran an article that the EPF, or the Employee’s Provident Fund, Malaysia’s version of government public pension system is worried about the citizen.
What they notice is that their members who are eligible to withdraw the money, used up their money in 3 to 5 years.
There are some who even used up their money within 30 days.
The main difference between EPF and CPF in this regards is:
- There is no minimum sum of money for the EPF. It is a best effort contribution system. You try your best to put as much of it into the EPF through your employer or employee contribution
- For CPF, you can only withdraw 55 on wards, after setting aside a minimum sum, or a minimum sum + a pledge of your current home. The sum in excess of this can be withdrawn. If you have not set aside for the basic retirement sum (est SG$83,000 in 2017) or full retirement sum (est SG$166,000), then you can only withdraw SG$5000 at 55
People Use up Money Fast…. Because there isn’t Much Money Saved in the First Place
One reason why money is used up fast is because to replace your existing employment income, you need a certain minimum sum of money.
If what you have contributed in your EPF is not a lot to begin with, then naturally you cannot expect your EPF to replace your money long enough.
In CPF or EPF, you are not expecting the government to support you.
You are supporting yourself.
If you have $50,000 Ringgit in your EPF and your annual expense is $25,000, it is only going to last only 2 years. Even if the EPF rate of return is 20% per year, drawing down so much will deplete your money. It is science and maths.
One of the gripes of Singaporeans with the CPF is why we have this minimum sum. The way I look at the minimum sum, is a consistently increasing indication that you need to put in more to build wealth, you need to put in more to build wealth.
It can be rather demoralizing…. but in truth… you really need to put away more to build wealth.
Nornisah said EPF subscribers would need to have Basic Savings, a certain amount based on their age in their Account 1 to enable them to have savings of at least RM228,000 when they reached the age of 55.
The amount is in tandem with the minimum pension in the public sector, which is RM950 a month for 20 years, from the age of 55 to 75.
She said as of last year, 65% of EPF subscribers aged 54 and below had savings of less than RM50,000.
When the goal post doesn’t shift, people have the indication that it is enough.
Without a Minimum Sum, the amount we have is enough, because in the worse case government will take care of us
Most of us aren’t pre-occupied with retirement planning on a very consistent basis. You will have a fleeting thought in your head “Do I have enough?”
You will not explore whether you really have enough because:
- You do not have the knowledge to know that
- It is not so important now
With the minimum sum, at least it brings up the point of contention that “Why they keep raising this minimum sum!” “Is $166,000 really gonna be enough? It is so little!”
What I think is that, it is worse if you don’t even have build up $166,000 in your CPF then the point of contention.
My counterpoint to those who feels the minimum sum is not necessary is that:
- would you have the mind share to think about your retirement, going to the extend to find out how much you require to retire with a certain lifestyle?
- would you enforce to set aside that amount for the goal of retirement, taking into consideration your whole portfolio of wants and goals?
Honestly, from this EPF article, its not just a Singaporean problem.
This is a human problem.
Retirement is not a near term goal that is of high priority in life. We will keep postponing it, with the knowledge the System (government) will take care of us because, they couldn’t possibly let every one die. It is an uncomfortable problem for the system but they will still have to tackle it.
Most of us think we are good at managing our money, but in reality we overestimate our capabilities.
Managing Money well is Common Sense but Not Many people have this Financial Quotient (FQ)
A government pension system is important because we cannot work with the hypothesis that most of the people in the country
- know how to save
- choose to prioritize saving
- knows how to build wealth in a fundamentally sound manner
- will action to build wealth in a fundamentally sound manner
- knows how to manage their sum of money to spend down over 20-30 years
- have the knowledge to scale up and scale down their money when needed
Given the level of financial education in Singapore, those who knows how to do this is considered the minority.
And thus you have people with money only able to last 3 to 5 years.
Like I say previously, they save too little. They save too little because of their circumstances but also perhaps they do not have a good financial quotient when it comes to money.
If you cannot build up, the methodology of spending down is even more rare.
Even Singapore financial planners do not focus on spending down strategies, because spending down do not earn the commissions, pushing wealth building products and wealth protection products earns the commissions.
With this premise, letting people withdraw their money will have a worse of implication because not everyone will see the benefit of buying an single premium immediate annuity like the CPF Life. Why? Again, retirement is not a sexy topic to talk about frequently, and research upon. People do not have the knowledge and also the action to push it through.
An annuity of a small amount is still a problem, but it is far better than having this problem, and a whole host of other problems.
What you can do?
To have enough for retirement, you need to build wealth and the formula to build wealth, is rather generic. Ask many experts and they usually distill to something like this formula on a high level.
The problem is reading and not being triggered to take some action.
Start motivating yourself to take more action.
While people say that CPF and EPF is not enough, there is certainly some truth to that. The richer folks have less of a mind share of CPF because, their strategy for financial independence depends less on government pension system.
It is a pessimistic form of planning that they write off their CPF but to ensure, out of that, they build up enough for this worthy goal of theirs.
So start by reading up and taking small actions, and be less of a lemming that complains things are not enough, and work with what you can control.
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