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Young working Singaporeans, you are OK. Really?

Thursday, September 20, 2012

This was just in the news:

Young Singaporeans in the workforce today will have adequate savings in their Central Provident Fund (CPF) accounts by the time they retire, according to an independent study by the Ministry of Manpower.

A recent study using the Income Replacement Rate or IRR indicates that Singaporeans are adequately covered.

Pension economists measure retirement adequacy by using an IRR, which is the ratio of retirement monthly income to pre-retirement monthly earnings.

The study found that a median male earner who enters the workforce today will be able to achieve an IRR of over 70 per cent through his CPF savings.

For the female median earner, the equivalent IRR is 63 per cent.

These figures are similar to those of countries of the Organisation for Economic Co-operation and Development (OECD).

The IRR for the median OECD economies is 66 per cent. The World Bank recommends a range of between 53 and 78 per cent.

The rate is significantly higher in Singapore when it takes into account the fact that Singaporeans have their own homes when they retire.

Cash is freed for other living expenses as they do not have to pay rental fees.

With Workfare, which supplements the wages of low-income workers, the IRR is even higher -- at 93 per cent.

Read the full article: here

I find it impressive that a young Singaporean male who joins the workforce today would be able to have a retirement income equivalent to 70% of his pre-retirement earnings just by drawing on his CPF savings. I suppose this is assuming that he is gainfully employed without significant periods of unemployment till age 65.

I have always thought that it is impossible for us to retire and have a standard of living comparable to pre-retirement if we were to rely on our CPF money alone. Now, if someone is able to have an IRR of 70 to 93% at the official retirement age of 65, it comes rather close.

So, does this mean that people no longer have to make their savings work harder and learn how to invest their money to beat inflation? Ah, inflation!

I assume that upon retirement, our monthly withdrawal of our CPF money is a constant number. This is what CPF Life will do for us, if I understand it correctly. This means that our monthly "allowance" from our CPF would stay the same nominally till the day we bid farewell to this world or am I wrong? So, even though someone could have an IRR of 70%, that someone's standard of living could worsen with time due to inflation, could it not?

I would still encourage all Singaporeans to be more pro-active in managing their money and growing their wealth. It is risky to think that our CPF money will be enough, financially, to provide for our old age.

Of course, there are those who would like to retire before hitting 65 but that is another story.

Related posts:
2. Do you want to be richer?
3. Wage slaves should be fearful.


Howyuan said...

Of course we will do OK!

While all the cash has already being sucked up by HDB, at least we don't have to sleep under the bridge.

AK71 said...

Hi Howyuan,

Haha... Well, if you read the full article, it ends by saying that older Singaporeans could monetise their flats.

Actually, two uncles of mine have done so. They sold away their larger HDB flats and downgraded to studios built for the elderly which are on 30 years leases, pocketing some $200k-$300k in the process. For old folks with only elementary education and not much savings, I guess this is considered quite fortunate.

I have always said achieving financial freedom is not only prudent, it is also the responsible thing to do. We should not shuffle along in life and think that everything will be OK when we retire.

My CPF savings, I feel, is an important part of financial security at retirement. However, it is not the be all and end all.

SnOOpy168 said...

Perhaps we should have 2 or more property, 1 for staying and the others for passive income. Both should be fully paid for by the time we retires, at 55 perhaps ?

HDB is our rights to own and should not given up or traded up for larger apartment or private condo etc. It is cheap to own and it is protected from creditor by law. Rental yield is fantastic if you can legally rent out the unit.

How to fund the 2nd property ? Well, prudent cash management and some patience for the initial down payment is required. I am working hard on this.

Will REITs do the same ? I seriously do not know, as there isn't sufficient data & years of the S-REIT to conclude. But I am sure it will be and a good start.

FoodieFC said...

honestly, I do not know what he is saying.. and my friends did not understand too.

AK71 said...

Hi SnOOpy168,

I am not allowed to buy a HDB flat now because I own private property. :(

I bought my first condominium before I was 35 which is the age when singles are allowed to buy resale HDB flats. Too bad for me.

I like the idea of having two properties or more. Stay in one and rent out the rest. However, private properties are so expensive in Singapore and the yields so low now that we won't be wrong to wonder if it is worth it.

AK71 said...

Hi FoodieFC,

This is what people call "Cheemology"? ;p

I believe that our CPF money is going to be a cornerstone in funding our retirement but it cannot be the whole foundation.

Kyran Tan said...

Our national average individual income is $4717, I always use this as a benchmark on a regular basis just to track on my own progress. I am just doing slightly better than this...I am 32 this year, not really a young working Singaporean anymore, but the next 8 years will be defining how well i do financially before i reach 40 haha


AK71 said...

Hi Kyran,

A male university graduate starts work at, say, 25 years old and retires at, say, 65. So, halfway through at 45, he should make at least $4,717 a month (the average individual income). Can we say this?

At 32, if you are earning more than $4,717 a month, you are way above average. ;)

Anyway, if 32 is not young, what is 41? O_o .... Ok, ok, I know. I always tell people I am old. Haha..

I have friends who are into benchmarking and refer to statistics but I have decided years ago not to compare. It gets easier with time although it is in the nature of our competitive society to compare.

Decide on our goals, set our pace and walk the walk. We might be slower or faster than average, it doesn't matter. What matters is that we should be happy on our journey. :)

SnOOpy168 said...

I seriously think that HDB prices in the resale market will not come crashing down. While there are mad $ spikes on several deals, the trend is up up and away. For a simple reason, if it ever did come crashing , me and my cohort will throw bricks at the ruling party & government. We loved to have value of investment increase over time. Whatever pace it is, it is still a basic roof over the head. AND it is the right of all citizens to own one. Nowhere else in the world you have such generosity, which unfortunately attracts a lot of "free loaders" who bought their way into the systems (i.e. FT & new citizens).

No need to get married and can buy "subsidized" HDB from government. Yes, it is in the pipeline but it will have loads of restrictions.

AK71 said...

Hi SnOOpy168,

I am a believer in the saying that nothing goes up in a straight line. If they do, the fall, when it comes, will be harder.

Humans have a short memory but we just have to remember the GFC and the AFC to know how housing prices could fall badly, especially in such an open economy like Singapore's.

However, I also believe that the market can stay irrational for a long time. Mr. Market is, after all, a sentimental being. :)

Mad Stranger said...

I am more concerned on how the 70% payout is being given.

Based on MON statistics:

The median monthly salary is $3249 in 2011.

Based on the CPF retirement calculator at https://www.cpf.gov.sg/cpf_trans/ssl/retirement/Ret_Est_home.asp?chkDis=1

You need more than 500k of savings to generate that 70% of post-retirement payout for 20 years!

For the 70% payout to hold true, CPF minimum sum has to increase to more than 500k which is not possible for many with the high housing costs these days. Further more, the above calculations are based on today's median income. Median incomes 30 years from now are expected to be even higher.

AK71 said...

Hi Mad Stranger,

Mind boggling, isn't it? I really wonder how the calculations were made. ;)

No matter, I have quite a realistic attitude towards what my CPF money is able to do for me. Haha..

I will have to grow my wealth to provide for my old age. :)

Kyran Tan said...

Hmm. When I was younger, I used to transfer my ordinary account $ to special account just to earn more interest. But I was chided by my friends because now I have less $ to pay for my housing since special account cannot be used.

Of course I see the compounding effect of my special account kicking in which is quite Shiok haha. And this same compounding effect could be the key to the elusive $500k

AK71 said...

Hi Kyran,

I did the exact same thing! For the first few years of my working life, I transferred funds from OA to SA.

I let the government and time help meet my minimum sum requirements. Every 10 years, the money will grow 50% even without new contributions! Power of compounding!

In the current low interest rate environment, it actually makes sense not to use money in the OA to service housing loans. It earns a minimum of 2.5% while money in the bank earns 0.1% or less.

I suspect you are in a better position financially than your friends who chided you. ;p

Related post:
Do you want to be richer?

Kyran Tan said...

Haha AK, u are always so encouraging and see something positive out of every situation. As of now I have about 70k in my special account and around the same amt in my ordinary. My idea back then was also to ensure I can eventually hit the min sum requirement with this compound effect.

AK71 said...

Hi Kyran,

Haha... Nah, I cannot see something positive out of every situation. I say it as it is. ;)

Your idea is sound. My own experience bears it out. My SA has already met the minimum sum requirement and my monthly CPF contributions go totally into my OA. :)

So, have you bought a residential property yet?

Kyran Tan said...

At least u don't sound overly pessimistic when things are not rosy ;)

I have not bought a property yet, but i was looking at a 2 bedroom apt which is around $750k. So downpayment being 15% OA which works out to $112,500, I am $40k short in my OA that i need to cover with cash instead...

So i was questioning my wisdom in putting $ in SA, else i would have enough for the downpayment.

SnOOpy168 said...

AK & Kyran

It is a brilliant idea to make use of the system to earn higher interest.

AK done it, meeting the minimum sum at this youthful age. Super envy and role model for us leh. That is if one accepts the "MS providing pocket $ for old age" currently implied onto us by CPF.

I just did a bit of homework and found this "The first $60,000 in your combined CPF accounts earns an extra 1% interest. " Combined, er meaning OA, SA & Medisave.

Assuming the 1% addition, the OA will be 3.5% and MS + SA = 5%. OK, I am not complaining as I am not likely to touch the cash from this account. I am unsure of what interest % am I being paid. Perhaps I should check check a bit. It will feel good that the interest can sustain my insurance premiums.

thanks guys for the heads up. ^-^

(Additional 1%) http://ask-us.cpf.gov.sg/efa/cs/idcplg?IdcService=GET_FILE&RevisionSelectionMethod=LatestReleased&dDocName=EFA_000088&Rendition=Primary&allowInterrupt=1&noSaveAs=1

(Interest Rates) http://mycpf.cpf.gov.sg/Members/Gen-Info/Int-Rates/Int-Rates.htm

AK71 said...

Hi Kyran,

Well, things don't go up or down in a straight line. We have to roll with the punches and soldier on. Take the good with the bad. :)

As for buying your own apartment, I don't know where is the 2 bedroom apartment you are looking at or how big it is but, personally, I would shop for an apartment with my budget in mind.

So, in your case, if you are a bit short of cash, look for a property that is lower in quantum. Problem solved. ;)

I did a quick check in Property Guru and got a couple of results which you might want to look at:

OneRobey (999yrs) $558k

Central Imperial (Freehold) $650k

Happy house hunting. :)

AK71 said...

Hi SnOOpy168,

I like the idea very much and I read yesterday that the government has extended the 4% paid on SA, MA and RA money for another 1 year until December 2013.

The extra 1% in interest is paid on the first $20k in our OA and the first $40k in our SA/MA/RA. I have been enjoying this extra 1% fully since its introduction a few years ago. It does make a difference. :)

Kyran Tan said...

Hi SnOOpy, the only issue i foresee is the min. sum will keep creeping up since it needs to be adjusted for inflation as well. So I predict that by the time i am ready to retire in 30 years time, it could be around $200k or even higher maybe? So just have to do some compounded calculation with that in mind ya!

AK, so nice of you! I was actually looking at Notting Hill in Toh Tuck, because i am staying in the west side, so don't think i wanna buy a property too far away from my parents place. Unfortunately, not many new developments in the west side. Hopefully that will change in time so that I have more choices haha!


AK71 said...

Hi Kyran,

Nottinghill Suites are really overpriced for a small development in Toh Tuck. Recent private launches in Choa Chu Kang, Hillview and Bukit Panjang were all overpriced.

There is a consortium including Hock Lian Seng which just got the GLS on Dairy Farm Road. It could end up selling at an average of $1,200 psf!

Singapore really isn't that big. My parents stay in the west too but I moved to my own place in D3 some 6 years ago. The idea is to buy when we see value. Don't be restricted by geography. :)

SnOOpy168 said...

About the OA to SA transfer, I did some asking and got a reply from CPF.

"" CPF members who are below 55 may transfer their Ordinary Account (OA) savings to their Special Account (SA) to build up their retirement savings more quickly.

Q: Is there a minimum sum that needs to be retained in OA before the transfer is allowed.

A: There is no minimum amount required to be retained in your OA.

Q: Is there is minimum or maximum of transfer from OA to SA that is allowed? Is there a maximum amount allowed or in SA account ?

A: You can transfer any amount (minimum is $1 and total savings in SA must not exceed the prevailing CPF Minimum Sum), and as often as you like.

The total savings in your SA (inclusive of the amount withdrawn under the CPF Investment Scheme - Special Account, if any) must not exceed the prevailing CPF Minimum Sum after the transfer. The prevailing Minimum Sum is $139,000 as at 1 July 2012 and is revised every July.

Please note that the transfer from OA to SA is not reversible. As such, it is important to plan the use of your CPF savings carefully before you make the transfer.

If you would like to proceed with the transfer, you can make an immediate transfer online on the CPF website at www.cpf.gov.sg. To make the transfer, just login to my cpf Online Services and follow the steps given below:

>> Click on "My Requests"

>> Select "Building Up My / My Loved One's CPF savings" and click "Proceed".

>> Under "Using CPF", click on "Transfer from my Ordinary Account to my Special Account". ""

MS by the time I retire ? I am using $200k, that is the current $139k + 2% pa increase. So, assuming that the 4% remains stable, I will need to top up the SA by $6k annually to achieve this goal.

Thats an ouch for $$ that I cannot touch and see. But I think with a bit of planning, it is achievable.

What will I do with the MS when it is finally available ? I will want to put it to a with bonus annuity, like those from INCOME. If Income is still around and that the rule does not change by then.

Meanwhile, I am asking about using OA's $ for the 2nd residential property. This will help on the OA to SA transfer decision.

Still, I have to thank you all for the idea.

Huat ah....

AK71 said...

Hi SnOOpy168,

Thanks for sharing the information here with us. :)

The transfer of funds from OA to SA will see the greatest benefit for younger people because time is on their side and they will see greater benefits from compounding.

As for using CPF OA money for purchase of second property, with interest rate on bank loans as low as it is now, you might not want to use your OA money for this. ;)

SnOOpy168 said...


The $$$ in OA, might be counted towards the 20% down payment needed. This will in-turn affect the price range of property that I would look at and it's subsequent affordability.

I certainly wished this and a few other blogs existed over 10 years ago. Perhaps I will be in a much different position today. Anyway, enuf of ranting. The past is history, it is the future that I can plan for.

AK71 said...

Hi SnOOpy168,

That is the spirit! Be forward looking! :)

If you do spot a good deal in real estate and have to utilise your OA savings, why not? ;)

SnOOpy168 said...


Using our own hard earned monies, also have to face all sorts of rules. Perhaps it is good to prevent spindrift or squander of this pool of $$, that for some, it may be the biggest amount that they have ever touched on withdrawal age.

In short, the reply from CPF is that for 2nd property, I need to keep at least half of the minimum sum in OA. Beyond that, I can use all towards the valuation limit of the property.

Anyway, here is the reply from CPF

""a. Am I allowed to use the OA amount towards to the payment of the purchase ?

b. Any limit of the OA amount that can be used or required to be retained in the account ?

e. Any other useful information regarding this use of OA monies for 2nd properties.""

If you own a HDB flat, you may need to check with HDB on your eligibility to purchase a private property.

If you are eligible to purchase the private property, withdrawals of your CPF savings towards the second property would be affected by the Multiple Properties rules.

If you are below age 55, you would need to set aside half of the prevailing Minimum Sum (currently at $69,500) before you can use the excess amount in your Ordinary Account (OA) for your second property even though your HDB flat is fully paid. Savings in your Special Account [including the amount used for investments under CPFIS-SA (if any)] and OA can be used to meet this required amount.

Please note that the Minimum Sum will be raised in July each year and the amount you have to set aside in your CPF accounts will be adjusted accordingly.

The Minimum Sum from 1 July 2012 to 30 June 2013 is $139,000 and half of the prevailing Minimum Sum is $69,500.

The total CPF you may use for your second property would be capped at the property's Valuation Limit (VL) if it has a remaining lease of at least 60 years. VL is the purchase price or valuation price at the time of purchase, whichever is lower.

To proceed with the purchase of the private property with your CPF savings, please instruct your lawyers to submit an application via "my cpfOnline Services". Your application should be accompanied by:

i. a copy of the Valuation Report as at the time of purchase

ii. relevant documentary evidence showing the relationship between the co-owners (if any)

The Board will release your OA savings upon completion of all legal documentation and after you have paid the first 5% or 10% of the property’s VL in cash. You would also need to settle any cash difference between the purchase price and the CPF lump sum and the loan in cash before the Board releases your OA savings.

c. Any restrictions as to what is the type of residential property that this OA amount can be used for ?

Under the Private Properties Scheme, CPF members (except undischarged bankrupts) may withdraw their Ordinary Account savings to:

i. make direct payment to the property developer or vendor to buy a freehold residential property or residential property with a remaining lease of at least 30 years in Singapore. However, the remaining lease must last you up to at least 80 years old.

ii. repay a housing loan taken to buy a residential property

iii. repay the stamp duty and legal fees incurred (provided you are also using your CPF for any of the points above)

d. What is the interest payable for the use of this OA amount ?

The interest is computed on the principal amount withdrawn for housing on a monthly basis (at the prevailing CPF Ordinary Account interest rate) and compounded yearly.

The current CPF Interest Rates are as follows:

Ordinary Account 2.50 % per annum
Special Account 4.00 % per annum
Medisave Account 4.00 % per annum

Accrued interest is the amount of interest you would have earned in your CPF account had you not withdrawn your CPF savings for the purchase of your property. ""

AK71 said...

Hi SnOOpy168,

Thank you very much for sharing this with us. Very useful for any HDB flat owner thinking of buying a private property. :)

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