Is your CPF enough?
- Is the CPF Minimum Sum of $161,000 enough?
What is the right way to save?
- When should you start saving?
- How regularly should you save?
- Are guaranteed returns completely risk-free?
- How to invest in a risk-controlled manner.
Is the CPF minimum sum of $161,000 enough?
Meeting the CPF Minimum Sum
The CPF Minimum Sum currently stands at S$161,000. It is the figure that the Government believes is needed to deliver an adequate income at retirement.
What is the right way to save?
When should you start saving?
The earlier you start, the better. This is because with cumulative compound interest, you end up with more on the amount you saved. So even if you start with small contributions at a young age, you are able to increase the amount over time. This will help you reach your goal more easily.
If you started saving earlier at age 25
Monthly contribution: $100
Total contribution: $49,200
If you started saving later at age 40
Monthly contribution: $197
Total contribution: $61,566
How regularly should you save?
Regular savings in comparison with lump sum savings can have a significant impact on the eventual size of your savings. Regular investment – called a dollar cost averaging strategy – can reduce the focus on investing at the right time, so you can benefit from staying invested during market lows.
Regular investment scenario:
$1,000 invested annually
Total value after 15 years: $25,600
Lump sum investment scenario:
Lump sum of $15,000
Total value after 15 years: $23,600
Guarantees still come with risk
Many Singaporeans invest in saving plans coupled with life insurance, that come with a guaranteed return, as they are perceived as “safe” investments. While an insurance policy’s guaranteed rate is fixed, the level of guarantee has been falling together with bond yields (insurance companies invest in bonds to provide guaranteed returns) - see Figure 1.
With low bond yields, the returns may be low and not match the long-term inflation rate of 2%*.
Lower bond yields may result in insurers reducing the guarantees they offer at present, and may make it harder to deliver on past guarantees.
A more balanced, risk-controlled way of investing
With guaranteed funds, the risk is losing out on long-term investment returns, which affect the eventual size of your savings. Compare these four investment methods (see Figure 2):
- CPF: Unlikely to generate an adequate return to reach the savings level required.
- Life Insurance Participating Fund: Unlikely to generate an adequate return to reach the savings level required.
- Balanced Fund: Gives the highest potential, however, associated with greater return is a larger degree of uncertainty.
- Singapore Equity Fund (Multi-Asset Fund): Neither too risky nor too conservative, offers savers a balanced, risk-controlled way of achieving the desired outcome.
- Guaranteed: offers certainty, albeit limited growth opportunity
- Non-guaranteed (through CPFIS, or soon to be launched LRIS, or other private schemes): offers opportunity to generate greater returns
The Pre-retirement Phase
In the next paper, we delve into the impact of maintaining growth exposure in the years before retirement. We also learn the importance of volatility management and the different ways that this can be achieved to grow your final account size.