How to maximise your CPF for greater retirement income
Informed decision-making and proactive management of your Central Provident Fund savings is key
SINGAPORE celebrates its 59th birthday this week. If Singapore were a person, she would have a Central Provident Fund (CPF) Retirement Account that was created four years ago when she turned 55, and she would receive a payout through CPF Life in just six years.
As a Singaporean or permanent resident, the CPF is a cornerstone of your social safety net and an important pillar of your retirement planning. But while the CPF offers a secure way to save for the future, will just participating and saving through the CPF scheme provide us with the security blanket we seek in retirement? Is there more that can or should be done?
Living on S$1,379 a month
Is S$1,379 a month really enough to live on in Singapore?
A study conducted by the Lee Kuan Yew School of Public Policy found that a single senior citizen would require at least S$1,379 a month to meet basic living needs in 2019. As inflation and the cost of living have risen rapidly since then, this could now be a gross underestimation.
If we were to estimate the lump sum required at the time of retirement at 65, with life expectancy at 85 years old and inflation eating into your spending power, you would need more than S$450,000 to survive your retirement years. This would yield the indicated S$1,379 a month – which seems too low to start with.
The statistics provided by the CPF Board reveal that the average CPF member in the age band of 60 to 65 years has a balance of about S$194,296. Women, who generally earn less, also have less saved up – which is a long-term concern as they tend to live longer than men.
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This amount obviously falls far below the amount required to maintain a basic lifestyle in retirement. Many people will have to supplement their incomes by working full or part-time in retirement; having retirement savings outside of CPF; or relying on support from other family members. Still, it is sobering that many Singaporeans may not have saved enough for retirement with the most important tool available to them.
How to be a CPF millionaire
It was a stark reminder of how things could be very different when my friend, who has been dubbed “Mr CPF”, sent me a message celebrating crossing the S$1 million milestone in his CPF Investment Scheme (CPFIS) account at age 52, by investing through the CPF digital investment adviser app.
This is not a one-off phenomenon. We have recently seen three CPF millionaires of varying ages in just the past month. What has made this possible?
Many individuals have explored ways to maximise their CPF returns in the past few years through the Monetary Authority of Singapore’s (MAS) Treasury Bills (T-bills). Rising interest rates encouraged many CPF members to allocate a portion of their savings into these instruments. Some also turned to fixed deposits. However, this is a temporary fix as T-bills and deposit returns historically have been sub-par; they are now vulnerable to falling interest rates.
Based on the evidence from historical returns, a globally diversified equity market over the long term has consistently delivered superior returns compared to T-bills. An investor who allocated S$10,000 into a developed world equity index fund 20 years ago in 2005 would have over S$30,000 today. Conversely, MAS’ one-year T-bills would have grown to just S$13,163.
Of course, the volatility of returns for the equity market is higher – but the average returns are also higher, which fully justifies taking that risk to achieve higher returns. Investing for the long term is the way to mitigate the volatility of returns, and you reap the average returns.
Since our launch as the first digital adviser for CPFIS in late 2019, a globally diversified equity portfolio on the platform has delivered an annualised return of 11 per cent for CPF members.
Clearly, the past five years were a period of severe volatility with markets falling more than 30 per cent during the Covid-19 pandemic and more than 20 per cent in the 2022 bear market. So, the annualised return of 11 per cent is no mean feat.
The fact is that the long-term returns of any globally diversified equity exposure would have been better than other asset classes including T-bills during the recent high-yield environment.
For those who are more conservative, even an allocation of 100 per cent into a fixed income investment over the long term would have yielded returns in excess of the Ordinary Account’s (OA) 2.5 per cent rate during the same period, with significantly less volatility.
From a cyclical perspective, we can anticipate a potential continued decline in interest rates. This means that the attractiveness of T-bills and fixed deposits will diminish significantly with their fixed yield and fixed maturity that locks in your money. Gaining exposure to a diversified fixed income fund with exposure to duration allows you to take advantage of falling interest rates which can drive capital returns on top of the higher yield you receive from the asset class.
Even though equities have outperformed fixed income in recent years, balancing risk and returns is important. A balanced portfolio of equities and fixed income could meet the long-term needs of most CPF members.
Singapore’s inflation rate has averaged around 2 per cent over the past decade. The rise in the cost of living has outpaced general inflation, and will eat into the purchasing power of your savings over the long term. This means that the real return on your CPF OA savings has to be higher. The real challenge lies in balancing the security of guaranteed returns with the need for higher growth to ensure a comfortable retirement – which can only be achieved by taking some risk through the financial markets.
This is the basis of most national and corporate pension schemes around the world which are shifting to defined contribution from defined benefit pension programmes in order to solve the pension shortfall.
The CPF qualifies as a defined contribution scheme with greater emphasis on the individual’s responsibility and ability to invest. Hence, it is time CPF members take more control by utilising the CPFIS, which has been in place since 1997. Since then, it has become a much more flexible system, allowing all members to make their CPF savings work harder for them.
There is a lot to be thankful for as we approach National Day, and we celebrate Singapore’s achievements. It is also an opportunity to remind ourselves of some of the things we often take for granted and be thankful for them – such as political stability and safety, a robust economy, world-class infrastructure and the CPF.
The next time you check your CPF balance, remember that the key to a secure retirement lies in informed decision-making and proactive management of your CPF savings. If you start early enough and remain disciplined enough, you too could be a CPF millionaire.
Samuel Rhee is chief investment officer and Min Axthelm is head of research at Endowus, an independent wealth platform with over S$8 billion in client assets across public, private markets and pension savings (CPF and Supplementary Retirement Scheme).
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