CPF Tips: A “1-sided” story?

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Shouldn’t we also be telling the pros and cons, when giving “CPF tips”?

I refer to the article “Roadshow gives tips on maximising CPF savings” (Sunday Times, Oct 29).

It states that “Panel speaker Soh Chin Heng, the CPF Board’s deputy chief executive (services), told the 660 or so people present to take advantage of avenues to increase their “pay cheque”. This is the portion of our retirement income that fulfils our daily needs such as utilities, transport and food expenses.”

If we look at it from the perspctive of the restrictions to the use of your money – this topping up “pay cheque” cannot be used for anything before you turn 55, and only after 55 (provided you meet the prevailing Full Retirement Sum (FRS) ($166,000 now or pledge property for half the amount) or age 65 under CPF Life – not for “daily needs such as utilities, transport and food expenses” – not even to pay for your medical expenses, mortgage, children’s education, etc, because the Special Account has the most restrictions for withdrawal before age 55 or 65 (CPF Life), as the case may be.

As to “For instance, CPF members could top up their CPF accounts and refrain from withdrawing their savings at age 55 if they do not need to.

Mr Soh considers the CPF Ordinary and Special Account savings the “best emergency fund” for members over 55 as they can enjoy interest rates much higher than bank rates and can get the money within a few working days after a withdrawal application” – I understand that funds that you can withdraw at 55, but choose not to withdraw – only get 2.5 per cent interest and not four per cent.

You may also need to be aware that this “best emergency fund” works only if you have met the FRS or BRS when you reach 55.

For example, with the FRS and BRS increasing by about three per cent per annum – after topping up your CPF – by the time yo reach 55 – you may not have enough CPF to meet your future FRS or BRS. In such a scenario – your “best emergency fund” after 55 may not work.

With regard to “Another avenue is to use cash instead of CPF savings for mortgage payments. After all, CPF Ordinary Account savings attract an annual interest rate of 2.5 per cent, higher than some housing loan rates” – if you run into financial difficulties in your lifetime – cash may literally “save your life”, as your OA may only be used to pay for your mortgage, children’s education, etc.

In respect of “CPF statistics indicated that many members have caught on to this. Last year, the top-up amount in Special and Retirement Accounts rose 96 per cent to $1.8 billion while CPF withdrawals fell by 1.1 per cent to $18.53 billion” – as I believe that the $18.53 billion refers to total CPF withdrawals for all purposes in a year – is there any connection between this and the increase in “top-ups” – to come to the “linked” conclusion that “CPF statistics indicated that many members have caught on to this”?

As to “Calling the national annuity CPF Life scheme a cheque book that never stops paying, Mr Soh said that a CPF Life plan with an escalating payout option to hedge retirement savings against inflation will be available from Jan 1 next year” – since “It will take a member about 25 years under the Escalating Plan to receive the same amount of cumulative payouts compared to the Standard Plan” – does it mean that one has to reach about age 90, in order to “receive the same amount of cumulative payouts compared to the Standard Plan”?

Does this statement factor in the time value of money? If not – does it mean that one may have to live to age 95, 96 or whatever is the computed age – in order to be better off?

Are there any life annuity schemes in the world with escalating payouts which need one to reach such an advanced age, before one is arguably, better off?

With regard to “Another panel speaker, CPF member Loo Cheng Chuan, outlined his “1m65″ ($1 million by age 65) strategy. This involved him and his wife diligently transferring money from their Ordinary Account to Special Account from the age of 30 to earn the higher interest rate of 4 per cent.

By the time Mr Loo and his wife turned 34, they had hit the then prevailing cap of around $120,000 in their Special Accounts.

Assuming the interest rate remains at 4 per cent, his savings and those of his wife in these two accounts could compound to almost $1 million by the time they reach 65, even if they choose to stop working and contributions to these accounts cease. However, he cautioned that such transfers are one-way only” – what percentage of Singaporeans are like him –  whereby both the husband and wife had managed to hit the prevailing cap of their Special Accounts by age 34?

In respect of “Parents can also opt to set aside some cash to grow their children’s CPF savings. Mr Loo said that $10,000 placed in a newborn’s Special Account will grow to $100,000 in 60 years” – one needs to be aware that you may arguably, literally be locking up the money for decades until your children reach 55 or 65 (CPF Life) as the case may be

Also, if you apply the cashflow principle of “first-in-first-out” – your children may start to withdraw their own CPF contributions first – and may end up not ever seeing your top-ups to their accounts now, if they die early after age 65 because of the relatively low bequests under the CPF Life Standard Plan.

In respect of “time in the market is more important than timing the market.

By staying invested, you get average returns and it is less stressful – but ensure that you have time, at least 10 years, to ride out the market volatility, he added.

Other important factors to consider when investing include the use of low-cost tools like exchange-traded funds and index funds, as well as assessing your risk profile, which should take into account your need, ability and willingness to take a chance” – wouldn’t arguably a globally diversified portfolio of your CPF funds in equities, bonds, commodities, property, etc – give a higher annualised return than CPF interest rates?

Isn’t this what most national pension funds in the world do, instead of paying relatively low interest rates, and keeping the excess returns?

Leong Sze Hian

 

About the Author

Leong
Leong Sze Hian has served as president of 4 professional bodies, honorary consul of 2 countries, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been a radio talkshow host, a newspaper daily columnist, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), invited to speak more than 200 times in over 30 countries, CIFA advisory board member, founding advisor to the Financial Planning Associations of Indonesia and Brunei. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.