Plan for retirement early, but not wise to spurn CPF for higher returns
GETTING people to start retirement planning early has always been problematic - behavioural science tells us it is a human tendency to mentally postpone difficult financial decisions, and for most individuals more immediate financial priorities such as buying a home and raising a family would take precedence.
It is therefore heartening to see, from a recent survey on retirement planning among Singaporeans conducted by Fullerton Fund Management, that the Covid-19 pandemic has forced many to start planning for retirement early, particularly those in their 30s.
However, the problem is the survey also found that only 45 per cent of those in the 21-30 age group said their Central Provident Fund (CPF) savings would be one of their sources of retirement income. Moreover, reliance on CPF is even lower - at 35 per cent - for those aged 31 to 40. And 59 per cent of the age 21-30 cohort and 64 per cent of those aged 31-40 said they are prepared to give up guaranteed capital in exchange for high potential returns.
In a society grappling with challenges brought on by an ageing population, it has to be a concern that a significant proportion of people aged 21-40 might be willing to lose everything in order to make bigger investment profits while also reducing their reliance on CPF. This is all the more worrying when one considers that not only does CPF guarantee a minimum return of 4 per cent compound interest per annum for retirement account balances, it includes CPF LIFE, a national longevity insurance annuity scheme that guarantees participants a monthly income from age 65 for as long as they live - provided of course, they have sufficient savings in their retirement accounts to begin with.
One reason for growing risk preference among the young is the advent of more digital tools. Today, anyone can download financial apps on their smartphones and engage in day-trading with zero fees. Robo-advisory services are also readily available to help retail investors grow their money.
Another factor is the perception among younger investors that although risky assets may encounter significant periodic volatility, they will likely prove rewarding over time and thus make for better investments. A major reason for this is the fact that interest rates have been depressed for the past 20 years as the major central banks struggled to boost their economies following crisis after crisis, starting with the dot-com crash of 2000 and extending to the ongoing Covid-19 pandemic.
An added motivator has been the explicit guarantee delivered by the US Federal Reserve that it will pull out all the stops to provide liquidity to support Wall Street - a guarantee that has bred widespread investor complacency, enabled the US stock market to keep rising over the past decade, and thus tempted an ever-increasing number of retail investors to try their hand at investing.
Those starting their retirement planning now should understand that while some investing as a means of augmenting retirement income is to be commended, relying solely on investments to the exclusion of safer avenues, such as CPF or low-risk options such as endowment insurance plans, is not. If markets do not perform as hoped over the next 20 to 30 years, those who ignore the benefits of CPF while taking on inordinate amounts of risk could very well find themselves facing the unsavoury prospect of having no retirement safety net when they reach their 60s and approach the end of their work-life.
