22 year old me is hearing things about CPF that got me curious.
Some questioned our CPF interest rate being too low despite GIC and Temasek Holdings earning huge returns – surely our interest rates could be higher.
Others worry that they cannot withdraw their CPF monies with the increasing minimum sum. Along with the recent ‘Return Our CPF’ protest, I can’t help but to find out what is so wrong with our CPF model.
Is our CPF really such a bad scheme that so many people are unhappy of?
The Ordinary Account (OA) interest rate at 2.5% per annum remains higher than any fixed deposit saving rates of major local banks in Singapore. Consider that it is risk-free, isn’t that pretty reasonable? The money in the OA could also be used to invest under the CPF Investment Scheme if you wish to grow more money at a faster pace.
With longer lifespan and increasing cost of living, it is understandable why the minimum sum increased. We need more money to sustain our retirement to achieve the same quality of living as before. However the increasing minimum sum does make me wonder if it would be achievable in the future.
I was curious about retire and home buying. I did a simple calculation to see how feasible both of these are.
I’ll use the Graduate Employment Survey 2013 for this exercise.
Tthe median basic monthly salary for a fresh graduate ranges from $2.6k to 3.7k, depending on the area of study. Lawyers, doctors and dentists could make $4k – 5k+ for a start, but for the sake of the majority, let’s just take the starting pay of a fresh graduate to be $3000 for simple calculation.
If I were to start work at the age of 23 upon graduation, I would be able to accumulate $44,401.22 in my OA in five years’ time. This is assuming a fixed salary of $3000 for five years and 23% contribution rate (under age 35) to the OA at 3.5% interest rate as it is the first $60,000.
In short, in 5 years, I would have $44k.
Based on the prices of Build-To-Order housing, there is quite a huge difference for a 3-room flat in matured and non-matured estates. The table below are just some prices for the BTO 2013, obtained from the HDB website.
Let’s say in 5 years’ time, the price for a 3 room flat in a non-mature estate increased by 10% to be $175,000 without grants. With the accumulated $ 45,303.37, it would be enough for the 10% down payment.
Without CPF, I really wonder how I can afford that $17,500 and future housing loan repayments.
Of course it will be a lot more expensive if I were to buy a resale flat, or even a bigger flat in a mature estate. If it is just a basic living in Singapore, it is sufficient.
Also, with simple calculation, even with a fixed salary of $3000 (and never getting a raise ever), I would have $ 371,948.73 at the age of 55. If I were to keep working and continue contributing to the age of 65, I would have at least $510,278.21 in my CPF account.
Surely the minimum sum can be achieved.
Based on recent statistics from the CPF board, more people are able to achieve the minimum sum now. The proportion of active members meeting the required minimum sum has increased since 2009 and 50% of them are now able to meet the minimum required sum.
Furthermore, a study done by two NUS academics, Dr. Chia Ngee Coon and Dr. Albert Tsui, showed that about 70-80% of the new entrants to the workforce would be able to meet the Minimum Sum.
People who are unable to achieve the CPF minimum sum are usually those who left the workforce after childbearing, or other reasons. The other group who are unable to meet it would be the people of the older generation where their wages were very low. In consideration of the second group, the government has the Pioneer Generation Package catered to them.
There is also an additional 1% of interest rate for the first $60,000 in the OA to grow our CPF monies faster. For those low income earners, a component of Workfare also contributes to the CPF.
It looks to me like everything in place!
The government is trying to help everyone to meet the minimum sum for retirement and everything looks alright.
The CPF model is indeed a little complicated with all its different features. On top of retirement planning, its uses for housing needs, healthcare and even education makes it unique and incomparable to what other countries have.
It’s just a contribution that results in a smaller take-home pay, they say. It’s for retirement planning and we’ll see about it in the future. Many remain status-quo as they cannot exactly opt out of CPF anyways.
It is complex, but it is also a good savings device that allows you and your employer to put aside some money for the future. Surely I will appreciate it when I retire.