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Do You Have Enough in Your CPF for Retirement?

coins in nest

Mr. Han Fook Kwang, a Managing Editor at The Straits Times, wrote an article titled Life starts at 60, how long will funds last? in the latest Sunday edition (02 June 2013) of the widely-circulated newspaper.

He touched on a topic I pay dear attention to, which as the article’s title suggests, deals with the thorny and important issue of a lack of sufficient funds for retirement if retirees were depending solely on their Central Provident Fund accounts.

As it stands, the maximum amount creditable to an individual’s CPF account every month (exclusive of various types of pay-related bonuses) is $1,800. If we make a simple assumption that an individual’s first foray into the corporate world starts at 23 years of age, we’re looking at 42 years of working-life before the ‘normal’ retirement age of 65.

Putting all CPF-account interest rates and age-related tweaks to CPF-contribution rates aside, there would be a rough maximum of $900,000 that’s credited to a person’s CPF account by the age of 65, based on my simple assumptions.

That does seem a lot, but because of the huge capital out-lay involved with purchasing a property in Singapore, the CPF accounts of most people would largely have been used to buy houses, leaving behind a much smaller amount of liquid-cash for future use.

Then, there is also the problem of an adjustment in spending habits and lifestyle when segueing from being a salaried-employee into a retiree with no income. Highly-paid professional footballers in the UK have run into financial difficulties within 5 years of retirement from the game because of maladjustment to a new phase in life without their footballing-salaries.

While it’s safe to say the majority of locals aren’t anywhere near the same pay-scale as those millionaire footballers, the problem of adjusting to a life without income should still sting. That was a concern highlighted by Han in his article as well. And, all of these issues were raised before we even mentioned the killer ‘I’ word – Inflation.

A silent killer, inflation eats away at our CPF accounts every time it creeps above 2.5% (depending on the type of CPF account, the interest rates that we’re entitled to ranges from 2.5% to 4%), as it has done lately.

But, what can we do on our own to protect our wealth and ensure a better retirement? The answer’s simple – we invest. And, we can do so not just with our own savings outside of our CPF accounts. The CPF Investment Scheme (CPFIS) allows us to utilise our CPF-monies to invest in pre-approved shares, unit trusts and other investment vehicles.

The stock market in Singapore, represented by the Straits Times Index (SGX: ^STI), has grown by an average of 6% per year over the last 25 years. Over the last ten years ending 30 April 2013, the index’s appreciation has accelerated a little, clocking in at 10.15% a year (translating to cumulative returns of 163%) and investors in low-cost index trackers like the SPDR STI ETF (SGX: ES3) would have received very similar results.

Besides capital appreciation to generate a bigger nest egg, dividends from shares can also provide valuable income during retirement. In the local stock market, there have been shares like Jardine Matheson Holdings (SGX: J36) and Jardine Strategic Holdings (SGX: J37) that have grown their dividends every year over the past 10 years. Such dividend-growers can go a long way in trying to replace salaries that were lost due to retirement.

Han’s article also mentioned that for folks who’re over 60 years old, more than half had less than $100,000 in their CPF account. With life expectancy of Singaporeans being pegged at around 85,that would leave a 60 year-old person with $4,000 a year or less to live on with their CPF funds. That’s not an enviable position for anyone to be in – would you want to live on $333 a month?

For those who’re younger, there’s still time to boost that nest egg. But, bear in mind that it pays to start investing as early as we can – it’s really never too early to start investing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.