TL;DR – Just tell us where to sign up!
Remember that we wrote about a certain Mike Yeo? He used to work as a regional marketing/sales manager and was earning SGD15,000 a month. He was retrenched in 2015. By the time he was retrenched, it appeared that he had no savings. Instead, he had debts of SGD100,000.
When we wrote about his story, Mr Yeo seemed to be working as a taxi driver. True, he may be struggling now to clear his debts. He probably has to make massive adjustments to his lifestyle. But he’s still able to work. If not for his debts, he actually isn’t in that bad a state.
And thanks to CPF, which forced him to put aside a significant proportion of his salary every month, he doesn’t have to worry about not having any money when he gets to the age where he can’t work. Otherwise, when he gets to the age where he can’t work, who’s going to support him? The government?
You know where the government gets its money from, right? Yup. Taxpayers like you and I. Do you want to support someone who could have, but didn’t save for his own retirement? I’m sure there are far better ways to use our tax dollars.
Help in building retirement nest egg
This story highlights the importance of a scheme like CPF. We may gripe about it. But rationally speaking, if we didn’t have something like the CPF, how many of us would have the discipline to set aside money for our retirement? And how many of us would proactively grow our nest egg?
A survey in 2014 commissioned by NTUC Income found that only 18% of young workers aged between 18 and 29 have done up a financial plan for themselves. Many polled also didn’t have a strong knowledge about financial planning. As the report about the survey in the TODAY newspaper stated:
“For example, while respondents cited about S$1 million as the perceived amount needed for retirement, their projected mean savings by retirement — at the average age of 57 — were only S$382,872.”
That’s an issue that CPF tries to help with. True, relying on CPF alone will not allow you to have all the S$1 million you think you need to retire with. But with its mandatory nature enforces a discipline in saving, and its steady returns ensure that your retirement nest egg grows steadily.
But is it a scam?
The CPF scheme is not perfect. The returns on your CPF savings in your Ordinary Account (OA) is at most a measly 3.5%. The returns on your CPF savings in your Special Account (SA) is a little higher. But you still get at most 5%. And many Singaporeans have indeed complained about the seemingly low returns. Why can’t we get better returns?
The perceived low returns have made some Singaporeans feel cheated. Some people seem to think that the government is taking our money, investing it, earning more than the 5% that they are giving, thus somehow profiting from our hard-earned cash. How not to feel scammed?
No… CPF is not a scam.
Actually, you can choose how you want to invest our CPF money. After setting aside S$20,000 in your OA and/or S$40,000 in your SA, you can try to earn greater returns by investing whatever other amounts you have in your OA and/or SA in the investment products under the CPF Investment Schemes (CPF-IS).
Some of you may already have put some of your CPF money into CPF-IS. If you did, chances are, you would have been better off if you had left your money in your OA and/or SA. According to the 2015 CPF-IS profit and loss report, only 15% of investors who used CPF savings to invest in CPF-IS made profits larger than 2.5%. 40% of those who invested in CPF-IS actually lost money.
Why? What happened?
Economists, financial advisors and bankers have suggested numerous reasons. Chief amongst them are that CPF members may not have sufficient financial knowledge and discipline when it comes to investing. They buy and sell at the wrong time. They speculate and churn their investment, rather than leaving their investments to grow. They get spooked when the market gets volatile instead of giving their investments the chance to recover.
What’s the alternative then? Can there be something that does the following three things all at once:
- Ensure that most Singaporeans have at least a some money for their retirement, come what may
- Let Singaporeans have some sense of agency, allowing us some room to decide how much risk we want to take
- Maximise our returns, even for those who can’t dedicate time and effort to become investment gurus
That’s a real tall order.
In Part 2 of the report, the CPF Advisory Panel recommended introducing an optional investment scheme called the Lifetime Retirement Investment Scheme (LRIS):
“The Lifetime Retirement Investment Scheme will offer CPF members access to a small number of low-fee, passively managed investment choices that adopt a long-term investment approach and that will be simpler for members to choose from.”
The panel engaged Mercer as a consultant to study the feasibility of this LRIS. While Mercer didn’t exactly recommend any underlying product for this LRIS, it did do some simulations based on the principles set out by the CPF Advisory Panel.
Money for nothing!
Based on those simulations, if you were to put your CPF savings into the LRIS, you could potentially earn an annual return of 6.5%. If you follow the principle of the LRIS, which is that you leave your money invested in LRIS and not touch it until you retire (that’s why it’s called Lifetime Retirement Investment Scheme), then you will get to gain from the two of the greatest benefits of LRIS.
First, it averages out the ups and downs of financial markets. Share prices spike and plummet. Entire markets can develop into bubbles and burst. But over any rolling 30-year period, all financial markets have grown. If you have the discipline to consistently invest a fixed sum of money over a 30-year period into the LRIS, you have a very good chance of making decent annual returns of about 6.5%.
Second, the amazing power of compounding. If you were to put just S$200 every month for the next 30 years into something that gives you an annual return of 6.5%, then, at the end of that 30 years, you would have about S$207,000. If you just left that money in your SA, then at most you would have about S$165,000.
In other words, when the LRIS is eventually implemented, all you have to do to make an additional cool S$40,000 is to invest $200 a month of your CPF savings to LRIS. Then do nothing. Boom. Free money.
Well… not quite…
As with any investments, there is a risk. According to the simulations done by Mercer, there is an approximately 20% chance that the LRIS might underperform the SA. In other words, when the LRIS is eventually implemented, if you were to put money into it, there is a 20% chance that you would have been better off just leaving your money in your SA.
But you know what? That’s still far better odds than the CPF-IS. What’s more, YOU HAVE A CHOICE!
You have the power!
If you are comfortable with taking a bit more risk for potentially higher returns, go ahead and put more money into CPF-IS. Or maybe your risk appetite isn’t so big, then put some money into the LRIS and keep some of it in your SA. Or you are really risk averse, then just continue to keep all your CPF savings in your SA.
Whatever the case is, when the LRIS is implemented, you would have more options on how you want to grow your retirement nest egg.
The Labour Movement responds
NTUC Assistant Secretary-General Cham Hui Fong said
“The Labour Movement is happy that the accepted recommendations are in line with our call to provide members with more options and flexibility in managing their CPF savings to better meet individuals’ retirement needs.
We also urge the Government to ensure that proper public education and advisory services are made available to all so that members can make informed choices which best meet their needs.”
So when is this LRIS going to be implemented?
Erm. We don’t know. MOM hasn’t committed to an implementation timeline. I for one hope that they would implement it soon so that I can benefit from it. I hope you will join me too!
(Featured image via Business Times)
MOM | CPF Advisory Panel: More options for different needs
ST | Navigating through the new CPF options
ST | Simpler investment scheme to grow retirement nest egg
Opinion | When I’m 64, what kind of Singapore can I grow old in?
Why the new CPF Lifetime Retirement Investment Scheme could be a game-changer