In a nutshell, it is possible for everyone to achieve their retirement savings goals with higher retirement and re-employment ages, increased CPF contributions and tax reliefs for making voluntary CPF top-ups
The CPF Board’s most recent announcement on CPF tweaks — paired with its June announcement that the CPF contribution rate for older workers will be increased by 2 percentage points (for workers aged 55 to 65) and 1.5 percentage points (for workers aged 65 to 70) starting in January 2022 — means Singaporeans have more time and incentive to plan, invest and grow their retirement savings.
But as always, the biggest question pertaining to CPF policy changes is whether it will be enough to help Singaporeans with their retirement.
While sceptics may feel that the CPF doesn't do enough, the truth is, as citizens, how well we retire is largely dependent on what we do with our money while we are still working.
Even if the new CPF tweaks are the government’s way of updating policies (and a great first step in helping a new generation cope with longer life expectancies and the rising cost of living), it is still up to each of us individually to explore how we can react to the new changes to ensure our own retirement adequacy.
Here are some considerations on what we can do.
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Invest & grow
With these changes, and as we continue to work well past age 55, monies in both our CPF and bank accounts will have the opportunity to grow. As such, we may want to take stock and reassess how we plan to save up for those post-employment years, which, quite possibly will stretch into decades.
The Covid-19 pandemic has brought interest rates for Savings and Fixed deposit accounts down to a level that does not even cover inflation. According to MAS, interest rates for savings and fixed deposit accounts are unlikely to top 1%, while Singapore’s inflation rate is forecasted to be between 1% and 2%.
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Parking our savings in CPF makes sense for many, given the low risk, high interest earned and relative ease and stability. It is a worry-free way to build up that retirement nest.
So those with excess cash sitting in banks, and others who might want to make their CPF savings work harder, may want to consider researching and exploring alternative investment opportunities to grow that cash, depending on one’s financial risk appetite. It is also possible to leverage our CPF Ordinary Account to invest in various approved financial instruments as an added avenue to grow our wealth.
The CPF Retirement Account acts as an annuity product, providing stable monthly income throughout our retirement years. As a retirement planning tool, CPF LIFE is generally considered low-risk and safe. For all Singaporeans, it will be prudent to save and grow one’s CPF balance to the Full Retirement Sum (FRS), at minimum, to ensure that baseline retirement income is met. They should also consider helping other family members reach FRS through voluntary contributions.
Apart from that, it would also be prudent to look at how you can best grow your excess cash by looking at longer-term investment products, especially if you would like to have a lifestyle above what the baseline retirement income can provide. Investing in a globally diversified and low-cost portfolio would be crucial to achieving this while limiting exposure to any single security or concentrated risk.
For those who are unfamiliar with investing in single stocks, or prefer to take a more hands-off approach, investing in diversified financial instruments such as unit trusts or ETFs would be a great way to get started. All investing involves risk, but you should be compensated over the long-term for the risk that you take (otherwise you are losing out on what you should be earning). Financial markets may be volatile over the short-term, but have historically rewarded investors over the long term and provided wealth growth that has more than offset inflation.
Aiming to “retire early” is key
According to Endowus' retirement report, one in three Singaporeans (or around 39%) are worried about retirement inadequacy and 45% of Singaporeans have yet to start planning for their retirement. The lack of confidence is most profound for those within the 35 to 44 years age group.
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The data proves the saying "it is never too early to start planning and preparing for retirement" to be very true. Therefore, it may not be a bad idea for those who are currently in their 40s and 50s to take advantage of this latest move by the government to plan, invest and grow both their CPF accounts as well as other liquid assets of their own.
However, this also applies to the younger generation and first jobbers — the aspirations and the job environment of the current generation of youths are noticeably different. They understand the need to plan for their future, simply because there is no longer such a thing as an “iron rice bowl”. They also have goals to be financially independent and pursue their passions before retirement.
According to OCBC’s Financial Wellness Index, the younger generations are investing a lot more this year as compared to last year (up to 22%). Using their own savings or capital from their parents, they’ve invested in a wide range of products such as cryptocurrencies and foreign stocks.
Younger investors have a longer runway to grow their wealth and achieve their financial goals, and they also have the benefit of a wider range of investment products, such as digital wealth platforms, that can allow them to set up a regular savings plan even with small investment denominations. Some of these platforms even allow them to invest their CPF in a basket of funds at a low cost.
Given that the younger generation is pretty much digitally native, the array of tools they have at their fingertips can greatly enhance their financial literacy and give them access to the right products that ensure better financial outcomes over the longer term.
Wanting to be financially free is a positive aspiration that helps one start planning early, but it also means that they should plan for a longer time spent in retirement, as opposed to those who only plan for a runway of 10-15 years should they only retire at 70.
While it is helpful that the government adjusts CPF policies to make them more relevant to the challenges of an ageing society, it is critical that Singaporeans take greater personal responsibility for their finances and leverage favourable policy changes. While some younger Singaporeans are getting more hands-on with managing their money, many are still very conservative with their investments or take a more speculative view on the markets. Taking a long-term view of retirement planning, the markets and growing CPF will help them better manage their finances and post-employment ambitions, and have a successful wealth journey through retirement.
So Sin Ting is the chief client officer at Endowus
Cover image: File photo
