Fake or Fact? Three CPF myths you need to know the truth about now
The Central Providend Fund, or the CPF, is Singapore’s version of a pension scheme. CPF members are required to contribute a fixed portion of their monthly paycheck into the account, with their employers contributing an addition portion as well. Upon reaching their retirement age, the CPF savings will be disbursed monthly until they pass away.
Alfred Chia, CEO of SingCapital who advises his clients on retirement, feels very strongly about the CPF and its place in Singapore society.
“It is our national pension scheme, a social safety net to ensure that we have savings that we can use to buy property, pay our medical bills, and more importantly save up for our retirement,” says Chia. “Our entire social fabric is wrapped up in it.”
Sadly, he concedes that it is often misunderstood, possibly due to its nature as a form of forced savings, which Chia says helps the general population to have savings for their retirement.
“People can accept it when you use it to buy property, people can accept it when it is used for their medical needs. But the one thing that people cannot see is retirement, because it is so far away.”
As a result, fake news and angry personal anecdotes from CPF members over the inability to use their CPF funds for more pressing immediate needs often spreads on social media like wildfire, fuelling growing discontent over the CPF scheme.
But is there any truth to those anecdotes? Here are the 3 biggest myths about the CPF and the real truth behind it, according to Chia.
Myth 1: I will never get to use my money
“CPF monies are meant for your retirement. That is what it is designed for,” Chia says firmly.
“Most of us are not prepared for retirement,” he laments. “We are an aging society, and many of us are caught up in the day to day things, paying for school tuition and enrichment, and travelling for holidays to destress.”
“So, when we are younger and able to work, we are already spending our money in many different ways. When that is the case, how many of us are actually saving up for retirement?”
Chia notes that most people don’t realise the importance of having retirement savings until they are in their 60s, which may be too late. “What if you get retrenched, or lose your employability? Then how? You won’t be able to turn back the clock. Instead, you need to consistently save over a period of time.”
“CPF provides you with a safety net,” he continues to explain. “For low income earners, the CPF is their lifeline in retirement. For middle to high income earners, the CPF should be used as their foundation, and build their retirement plan on it.”
“Many of us are guilty of spending more time doing travel planning than retirement planning,” he quips. “If you are planning to go to Japan, you will think about where you will visit, how many days you will stay there, and what you will do. But retirement is 20 to 30 years down the road, I don’t even know if I will even get there.”
“But the truth is, you will not regret having those savings when you get there.”
Myth 2: CPF is all I need for my retirement.
Chia thinks this is an even more problematic myth than myth 1, because the CPF Life payout is insufficient for the retirement lifestyle desired by many.
Take the example of a man who is 45 years old today, and plans to retire in 20 years with a monthly retirement income of $3,000.
With inflation rate set at 2%, Chia estimates he will need $4,474 per month once he retires. Assuming a 4% rate of return, he will need $994,894 in retirement funds to generate $4,474 a month that will last him until the average mortality age of 88 years old.
“How are you going to save that 1 million? Are you going to put your money into an instrument with an annual return of 1.5%? You will then need to save $3,553 per month for 20 years. That is terrible and most people will not be able to do that,” says Chia.
“Even if you can increase your investment return to 10%, you still need to save $1,299 per month. That is still taxing for many people and yet, can you find something that will pay you 10% consistently over the next 20 years?”
“You have no choice but to really start now. Start small, spread out your risk, and try to save about $2000 a month in an instrument with a 5% to 6% annual return,” says Chia, who regularly sees clients with retirement planning needs, and advises them based on their risk profile.
“For most of us who are in the balanced risk profile, investing in funds actually makes sense. You won’t get extremely rich because of it, but there’s always someone to manage it and you can always get about 5% to 6% returns which I think is okay.”
“In fact, looking back at historical performance, some of those funds that we recommend to our clients have been able to get consistently 7% returns,” he adds.
For people with a higher risk tolerance, Chia says their investment options could include private equity, alternative investments. However, he never advises anyone to use insurance for retirement planning. “It is too slow and inflexible. Investment is better.”
But what about people who are unable to save? Then Chia says their CPF remains their best backup.
How much can CPF contribute to one’s retirement? CPF members who manage to save up to the Enhanced Retirement Sum of $264,000, will get between $1,960 – $2,110 a month for life under the Standard plan, according to the CPF website.
That said, saving up for one’s retirement fund is just one part of the story. The ability to manage it, is another.
“When you reach 87 and you are still very healthy, you will need to think about how to die,” Chia says solemnly. “Because by the time you reach 88, your money will run out.”
“So, even if you have one million dollars, you need to know how to manage it. Do you park it into an annuity plan? Or do you put it into a property to receive rental income? Or do you buy REITs that can give you returns? You will need to put your money into something that you will not use up, or help to delay the end of it.”
Myth 3: My beneficiary will not be able to get my money. It will be stuck in the CPF.
Oddly enough, Chia says this is not a myth at all. This is possible under an enhanced nomination.
By default, Chia explains that the balance from our CPF will be given to our beneficiaries in cash, after we pass on. “But CPF members who are concerned that their beneficiaries will not be able to manage that cash can make an enhanced nomination to stipulate that their CPF monies be put into their CPF accounts. It is actually more troublesome to do that because you have to go to CPF board to do it.”
“But if you don’t do anything, everything is given out in cash,” he says.
Another exception occurs for children under the age of 21. Their parent’s CPF monies would be parked in a public trustee office, and will only be given to them when they turn 21. “Even if you make a nomination, the money will still be parked in a public trustee office until your children are 18 years old.”
“Once you realise this, and realise you have so much savings at stake, it is important to do estate planning. To ensure your money goes to the right people. If you do retire, you will have this pool of money, if not, then u must make sure you know who your money goes to.”
Typically, a person’s estate is divided such that their spouse gets 50%, while the remaining 50% is shared among the children. However, Chia notes that many people don’t realise that it may not be the best arrangement, especially if their children are young and their spouse will need more money upfront to take care of their immediate needs.
“A lot of husbands and wives don’t realise this, but it is more crucial the more children they have.”
In fact, Chia makes it a point to educate his clients on all these points when they come to him for retirement planning or estate planning. “The CPF is one of the important components of any good financial plan.”
“In a nutshell, CPF is really for your retirement. Unfortunately, this the part not many people can appreciate or visualise, so that is why you see all these stories where there is all this frustration when people need money now, yet they cannot use the money they have in their CPF.”
So what should people do if they encounter more of such stories?
“Get more information from the source. Go to the CPF board website, write into them. And you can look for a trusted financial adviser who is familiar with the latest CPF moves, because everyone’s situation is different.”
“Never assume that you already know everything.”