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National Day Rally 2014: Retirement (funding) adequacy.

Sunday, August 17, 2014

I enjoyed the National Day Rally by PM Lee this evening. He talked about many things but it was the segment on retirement adequacy that I paid extra attention to because of the unhappiness in certain segments of the population with the CPF in recent times.

PM Lee's speech on retirement adequacy was quite clear and free of financial jargon. He clearly showed how having savings in the CPF and ownership of a HDB flat will work well to fund our retirement. This is not something new but the way the message was delivered in a story telling fashion with PM Lee pretending to be a financial planner advising a fictitious Tan family in Singapore made a difference, I feel.


It is quite clear in the PM's speech that he sees HDB flat ownership as a pension that can be drawn upon in retirement. This is something I blogged about before too. See related post #1 at the end of this blog post.

There are many ways in which seniors could monetise their flats:

1. Rent out a room.

2. Rent out the entire flat and stay with their children.

3. Downsize or rightsize to a smaller flat which will pay them a Silver Housing bonus as well.

4. Do a lease buyback with HDB.

With point number 4, PM Lee said that it was only available to 3 room flat owners but because many seniors who stay in 4 room flats would like to have this too, preferring not to move from surroundings familiar to them, the lease buyback scheme will be extended to 4 room flats by the HDB too in future. This change will bring cheer to some seniors. With this change, the lease buyback scheme will become available to more than half of all HDB flat owners.

This is all said with the understanding that the minimum sum (MS) of $155,000 is really insufficient to provide adequate monthly lifelong income from age 65.

Estimates show that a MS of $155,000 at age 55 would provide some $1,200 a month in lifelong income from age 65 when members of the audience mostly thought $2,000 a month is a more realistic figure. When PM Lee asked for a show of hands, no one thought $1,000 a month is sufficient.


So, there are ways to make up the shortfall and to ensure retirement funding adequacy for owners of HDB flats.

PM Lee then went on to say that the MS will be tweaked one more time next year to $161,000. There is no need for anyone to make anymore wild guesses. However, it will still be only enough for basic retirement funding, in my opinion.

Although PM Lee says that he does not think there will be need for big adjustments beyond that, the MS might need to be adjusted from time to time and they will have to study how this should be done.

Apart from what has been said so far, PM Lee has announced a major concession in the CPF scheme and that is to allow seniors to take out a bigger lump sum in their retirement (i.e. from age 65, not 55) if they wish to but it has to be within reason. There must be a limit of, perhaps, 10% or 20% of what is available in their CPF-RA. There should be valid and good reasons for seniors to do so.

If you get to choose, choose wisely.

However, the seniors who choose to do so will have to fully understand the trade off. They would have less in their CPF-RA after a bigger lump sum withdrawal and, so, the monthly payout from CPF-Life would be reduced.

PM Lee also announced a Silver Support Scheme which is to help the elderly poor, acknowledging the fact that there are seniors who do not have much in CPF savings and who might not own a HDB flat. They might not have family support to fall back on either. So, the government will do more to support them and they will be given yearly bonuses from age 65. Details to be announced in next year's budget.

The PM reminded us that the CPF is there primarily to help members achieve retirement adequacy and, together with home ownership, the vast majority of Singaporeans will be OK financially in retirement. However, he said that there will be exceptions and there is room for flexibility. The measures he has announced, I believe, will help address these issues.

The PM did not give details but I look forward to announcements by the Ministry of Manpower at a later date on how the CPF could give people more options in retirement in future.


What is my take?

In general, I think the CPF is a good system and provides basic retirement funding for its members. I like its reasonably good risk free returns and how it helps people who help themselves.


Since most in the audience felt that $2,000 a month is more realistic to fund retirement more comfortably in today's money in Singapore, the current MS is not excessive. In fact, next year's MS is also not excessive. In fact, it is too low.

Although PM Lee has suggested that citizens have "savings" locked up in their HDB flats and he suggested an average of $300,000 for 3 room flats and $400,000 for 4 room flats, I would like to caution that depending on HDB flats as pensions (i.e. for partial retirement funding) has its own set of risks.

With the MRT link to Johor and the high speed rail connection to K.L., there is no guarantee that property prices here in Singapore will continue to increase meaningfully. So, asset rich and cash poor Singaporeans who form the majority of the population here could find themselves in a bind 10 or 20 years later.

Therefore, not to be complacent and too dependent on our homes as pensions, efforts to improve financial literacy and to encourage financial prudence in our citizens must be strengthened. A national financial education program in schools should be introduced as soon as possible.

PM Lee suggested that people who are still healthy and who are able to continue working in retirement continue to do so. Although I like the suggestion and applaud the spirit of seniors who would like to continue working, I would like it more if they work because they want to and not because they have to.


Not to run the risk of sounding like a broken recorder, for anyone who might be interested in more of my thoughts, see related posts #3 and #4 below.

Related posts:
1. Retiring comfortably with a HDB flat.
2. Housing and the CPF.
3. Achieving level 1 financial security for Singaporeans.
4. Retiring before 60 is not a dream.
5. Purchasing a HDB flat, new or old.

40 comments:

pf said...

Aiyah....sianz. I was hoping that PM announce increase in cpf interest rates.

Btw, does he know that not many 3 room nowadays r 300k and even less 4 room nowadays r 400k.

Even in Bt Panjang (near mrt), 4 room is ard 530k!

Ok...nvm...enough of complaining.

AK71 said...

Hi pf,

Hahaha... PM Lee should be happy that 3 room flats and 4 room flats are worth much more now. It would make his point on how HDB flat owners have significant wealth which can be unlocked to partially fund their retirements more powerful. :)

I am of the opinion that HDB flat prices are inflated now and that they will fall in the next few years. ;p

AhJohn said...

Not so excited for this time speech, although jurong development maybe good news, but people more care about personal living rather than one more garden.
For CPF, more compromise. Actually, this is worry part that government maybe no longer tough enough to hold on some good policies, but follow noise, if that happen, singapore will be in trouble very soon.

JK Holdings said...

As for CPF topic , I have same thought as you with some dollars value as example ... Feedback & comments are welcomed !!

http://jkfund.blogspot.sg/2014/08/moment-of-truth-cpf-having-good.html?m=1

Handsome boy said...

PM Lee should also have done some simple calculations on how the guaranteed 2.5-5.0% interest can easily meet the increase in MS each year with just 60k-100k in the CPF.

And maybe show the younger generation the power of 5% interest compounded by the time they reach 65 years old.

But I guess he is afraid of putting pressure on themselves (the govt) to maintain this high interest rate ? haha, cos if he mentions this then next time they want to reduce the interest rate for whatever reason will be difficult.

pf said...

The hdb market is really make believe. Govt control supply and demand. Govt control valuations.

AK71 said...

Hi Ah John,

You know how a complaint is that the Singapore government is overly paternalistic. Allowing seniors who wish to do so to withdraw a larger lump sum from age 65 is a step in addressing this complaint. I am sure it was a difficult decision for the PM to make.

In my open letter to PM Lee, I said that we could consider allowing seniors with genuine needs to micro tap their CPF savings. We should consider requests on a case by case basis. I wonder now if the measure announced by PM Lee is open to all seniors regardless of needs. If so, it is more than what I had in mind.

Will have to wait for more details on this change.

AK71 said...

Hi Handsome,

You mean like this blog post?
How to upsize $100K to $225K in 20 years? ;p

The PM is probably being cautious since the CPF interest rates, like you said, could change in future. In fact, they will change. The plan is for a peg to the 10 year SGS + 1% in the long term, after all. :)

AK71 said...

Hi pf,

I will say that the government has control over supply. Demand? Hmmm... The PR angle? Somewhat but that is a small number. Nonetheless, if rules can be relaxed, demand would probably go up.

Anyway, people who are thinking of their homes in Singapore as a pension plan should tread carefully.

pf said...

By reducing bto, demand for resale up lor.

AK71 said...

Hi pf,

That makes sense but I wonder how big an impact that could have? How many people bought resale flat because they could not get a BTO flat, I wonder? What is the percentage of total demand?

I am more interested in their policy changes. For example, allowing singles to buy BTO flats. By not allowing singles to buy BTO flats in the past, the resale flat market was propped up. With the recent change in allowing singles to at least buy BTO 2 room flats, it probably took some wind out of the resale flat market.

Julian Chan said...

HI AK,
PM did a good job in presenting the CPF and the different ways to increase one's retirement funds.
I feel that more should be done to quash the angst and unrealistic expectation of the ppl who are making all these noises.
More townhall meetings and inviting all these naysayers to such townhall meetings will be a good start. Of cos, there is not always need for PM to go to such meetings. such meetings can be easily made to facilitated by PA and the a director of the stat board (depends on what is the theme). These townhall meetings should invite any concerned individuals and not restrict of "publicise" any individual.
Just my 2 cents worth. Ppl who don't read the official websites and just listen to "coffeeshop talk" with their friends "spreading rumors" really pisses me off...

AK71 said...

Hi JK,

Thanks for sharing your thoughts and the link. :)

I will include your blog in my list of resources in the left sidebar of my blog. ;)

AK71 said...

Hi Julian,

I know what you mean. I just had a conversation last week with a colleague when she spouted some nonsense about government using our CPF money for this and that. After our chat, she looked at me with suspicion. Not the result I was hoping for. LOL.

More outreach programs are needed to communicate more effectively with the masses, definitely.

Julian Chan said...

Hi JK,
Just a courtesy call to tell you
I have included your post on my FB.
I am not as financial savvy as you guys (to be able to blog your thoughts and money management). but I do understand a thing or 2... LOL...

Cheers,
Julian

AK71 said...

Hi Julian,

Got include mine or not? LOL. ;p

If we can all do our part to be the voices of reason in our social circles, hopefully, reason will prevail. :)

Merlin z said...

Regarding topping up of SA, there is a ceiling to the amount we can keep in SA right? Most people are calculating numbers as if there is no ceiling to the amount you can put in SA. I'm confuse but I can't find any answers in CPF board. Hope that the experts here can help me out with some questions.

 

1. What happens if we continue to top up after SA exceed the ceiling?

 

2. After SA hits ceiling, does interest still accumulates in SA or OA?

AK71 said...

Hi Merlin,

There is a ceiling for voluntary contributions (VC) to the CPF-SA (with tax relief) and OA transfers to SA. Once our CPF-SA hits the prevailing MS, no such VC or transfers will be allowed.

However, if we are still receiving an income from work, the monthly CPF contributions will still have a portion going to our SA even if we have hit the prevailing MS. It will be paid the same interest as the rest of the money in the SA. :)

Julian Chan said...

Hi Ak,
I thought you will never ask...
just shared... lol...
advertising for you is not my money so, I really don't care.
but if good govt schemes, investment and financial advise will be able to benefit more Singaporeans. Why not?

AK71 said...

Hi Julian,

Kamsiah you. ;p

Yes, good things, must share, especially if it doesn't cost us anything to do so. :D

Julian Chan said...

Hi AK,
correct me if I am wrong.
If next year MS is 161k, and govt will not increase further unless there is a pressing need to. Doesn't this mean that once you hit 161K, you will not be able to do a VC into your SA? you can only rely on your monthly contributions into your SA.
this is not good news for me... Arghhh....

AK71 said...

Hi Julian,

Well, you said it is a good problem to have on my FB wall, didn't you? LOL.

Since savings in my SA hit the minimum sum years ago, I have not been able to do any VC to my SA (with tax relief). sigh...

Of course, the interest I earn on my SA money, year after year, is typically able to meet the increases in the minimum sum without me doing anything too.

So, what to do?

Well, we can still do VC to our CPF but the money will be divided amongst our OA, SA and MA. If MA has hit limit, then, just the OA and SA. ;)

See:
CPF Annual Limit and voluntary contributions.

JK Holdings said...

Strange , I see a different group of people here who wants to contribute more to CPF and yet "outside noise" keep saying return my CPF money and yet people here love to put more money into CPF , you guys get what I mean ? ๅฅ‡ๆ€ช!

AK71 said...

Hi JK,

I can only hope that we are the rational ones and the rest are paranoid. Time will tell. -.-"

Julian Chan said...

Hi AK,
it is a 'good' problem to have for you because you are older than me (sorry, no offense).
as long as I am working and paying taxes. I will reach a stage where my MS will be hit this stagnant MS and my MS will be stagnant due to these idiots complaining (causing PM to make this move)...
Arghh.... there goes my 4% of risk free SA interest down the drain (If I am no longer able to do VC due to this fixed MS)....
these idiots effectively cause me & many others to "lose" 1.5% interest.... shucks big time...
thanks leh.. you just saved the govt some money by doing this stupid act... real pissed.... but I will wait for CPF to announce if this is going to be true....

Julian Chan said...

AK,
"Well, we can still do VC to our CPF but the money will be divided amongst our OA, SA and MA. If MA has hit limit, then, just the OA and SA."
it is not the same, I want my additional 1.5%....
sob sob....

AK71 said...

Hi Julian,

I know what you mean but we can only play the game. We don't make the rules. Just play the game well. That is all we can do. ;)

Julian Chan said...

Yes AK,
we can only play to gain as much as we can... according to the rules...
Sigh....

Rebel said...

:o(

I hope the MOM news on cpf will be exciting.

Lizardo said...

BTW, past age 55, the surplus above the minimum sum gets transferred over to the OA account.

AK71 said...

Hi Lizardo,

At age 55, I think our RA is created by using money in our SA first. If the SA's money is insufficient to meet the minimum sum, then, money in the OA will be drawn upon.

If we should have much more money in our SA than is required by the minimum sum, the OA is untouched. The excess funds in the SA should stay in the SA then.

The SA would still exists and it has to because many people do work beyond 55 and will still contribute to their SA like they did before they turned 55.

Capricon said...

Since there is a minimum sum to meet, may be the govt can consider a max as well, so as to allow people who are aware of the benefits and believe in the CPF system, to add on more beyond the minimum sum so that they can have higher payout after DDA. However, then the govt would be worried about the sustaining the compounding effects ... ๐Ÿ˜๐Ÿ˜๐Ÿ˜

And I guess all ASSI readers would Q to do so ...

I am more worried that the current MS won't be able to allow me retire comfortably.

AK71 said...

Hi Capricon,

Don't have to worry about the current MS not being adequate for a comfortable retirement. It is definitely inadequate. We only worry about the unknown; if something is known, no point worrying, right? ;p

Now, we know we have to take action to plug whatever shortfall we might have in terms of retirement funding. :)

At the IPS Forum on CPF, there were suggestions similar to yours but DPM Tharman said quite clearly that the CPF is to help more the lower middle income members.

Indirectly, he was probably telling us that it is not something for financially savvy folks who are more well off to exploit. ;p

AK71 said...

Mr Lee had said the CPF scheme would be changed to allow members over the age of 65 to make lump-sum withdrawals from their CPF savings. However, he added that the amount cannot be excessive and could perhaps be capped at up to 20 per cent of total savings.

Economists said that unlocking the cash from CPF savings could benefit the economy. But they noted that making such withdrawals means the retirees will have less monthly payouts as they have less funds in their CPF account.

The other new initiative announced is the Silver Support Scheme, under which the Government will pay an annual bonus to low-income elderly Singaporeans from the age of 65, to help them cope with their living expenses. Economists estimate that the scheme could benefit about 80,000 needy elderly and cost the Government up to S$200 million a year, assuming the payout is S$200 per person per month, which adds up to S$2,400 a year. Details will only be announced at the next Budget.


Source:
http://www.channelnewsasia.com/news/singapore/cpf-scheme-refinements/1319122.html

amoose said...

Hi Ak,

I just shared your blog post.

I think that no matter what measures/policy is announced, haters' gonna hate.

Thought I should balance some of the negativity I see, with some love from AK. :)

AK71 said...

Hi amoose,

Thanks for spreading the message and love. ;p

I just shared with a fellow blogger recently that we need to be the voices of reason. :)

Casey said...

Hi Ak,

If CPF is talking about retirement, should it be benchmarked against the domestic living cost or the essential inflation? The domestic inflation is in many ways driven by domestic property price and external energy/material price. The MAS is doing a good job to shield Singapore from external shock by regulating the monetary policy and gradually strengthen the SGD currency against major trade partners. External price inflation more or less alleviated. How about the domestic property prices (and should I say COE also) which is the main factor that is affecting the inflation? The local property price is affecting inflation in many ways, shopping mall rental, office rental, food court rental, housing rental, etc... all directly or indirectly affecting the consumer prices and living cost. The main beneficiary here are the asset class investors. We know that the type of income that is most tax friendly is the asset class income, they attract lesser tax in terms of percentage of income being taxed. Other than the government itself, the government link corporations like JTC, or its investment link arms like Mapletree, and other big corporate private entities, etc are the bigger landlords here. Should the CPF board has become the biggest commercial and residential landlord of Singapore, could it form a natural hedge on future inflation? I don't know. But, the property price index of Singapore has been generally moving up....and at the same times it generates regular income, do these returns outpace the CPF's interest in the past 20 years? Would such investment is more relevant to improve CPF investment transparency and more effectively hedge the CPF members from monster of high inflation? Perhaps AK, you can share your views?

AK71 said...

Hi Casey,

If we exclude the cost of accommodation and private road transport, we will be looking at inflation that affects everyone's daily life which is more representative, the core inflation. This figure isn't so monstrous and is generally under 3% per annum.

So, what the CPF pays for our savings in the SA (from 4 to 5% per annum) is more than sufficient to address core inflation figures, I feel.

I agree with your point that real estate owners are beneficiaries in an inflationary environment.

If we can help to spread the message that by owning income producing assets, we can help ourselves to have a financially more secure retirement, more people would hopefully take up this responsibility instead of having the government do it for us. :)

Casey said...

Hi Ak,

Looking at how the lower tier group struggle, I guess we should look into lowering the income generating asset investment entry qualification, the easier way is through a structural scheme. Asking an individual to invest in property or income generating share? even if one ignores the 'entry fee', is the trivial majority could make it to a desirable return? It is the vital man's game, that is what differentiating the richer and the... Having said that, HDB scheme is an example of the form of investing that hedge against inflation, but it seems lacks liquidizing and recapitalizing mechanism for now.

Haha... I guess you know what I mean, I shouldn't be too explicit...

Cheers.

AK71 said...

Hi Casey,

I agree that banking on our homes as the main asset to fund our retirement is not ideal. As mentioned before, this option has its own set of risks. We should have other options. Housing and the CPF.

As for investing in income generating assets, yes, the barrier to entry could be too high for the lower income group. They could possibly consider a low cost way to gain access to blue chips: POSB Invest Saver.

I know quite a bit hinges on education and I don't mean the kind that leads to a diploma or degree. When I see someone in his 30s who makes $2,000 a month having quite a bit of savings and people who make much more money having negligible savings, I know.

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