Why Your CPF Saving Scheme Is Not Good Enough For Retirement

To avoid ‘paralysis by analysis’, let’s understand the definition of this fund at first.

The Central Provident Fund, commonly known as the CPF, is a fixed benefit account to provide a
healthy retirement plan to Singaporeans. The Progressive Party introduced the CPF in 1948 to ensure
that all Singaporeans save up for retirement.

Purpose of CPF

The purpose of this fund was to make sure that those reaching retirement can have a sound support
for critical financial needs like healthcare, retirement, and home possession.
These funds are then managed and invested to get an adequate return.

Breakdown of CPF

CPF is mechanically removed from your wages along with your employer’s contribution.
To help understand this theory, below is a table with the age and percentage of contribution from
you and your employer:

Age Limit	Employee contribution	Employer’s contribution
Till 50 years old	20% of the income per month	17% of the income per month
51 to 55 years old	19% of the income per month	16% of the income per month
56 to 60 years old	13% of the income per month	12% of the income per month
61 to 65 years old	7.5% of the income per month	8.5% of the income per month
Over 65 years old	5% of the income per month	7.5% of the income per month

Can you bank on CPF alone to retire on?

Most Singaporeans will say ‘yes’ to this question, but there are some factors that you need to
consider before you think this is a good idea.

1. Paying for a house can be a tough job:

Many Singaporeans use their CPF savings to buy a house. When you apply for an Housing and Development
Board Concessionary Loan, the CPF can be used to pay at least 10% of the home price.
This retirement scheme also pays for legal filing for the purchase and mortgage repayments.
This is where the tough part comes in. If you use your CPF money too much to make all sorts of payments
there are high chances that you might see all of your savings vanishing right before your eyes.

Hence, if you want the CPF savings to back you up during your retirement days, avoid overreaching
and buying a property beyond what you can afford or else you might have to sell it in the future.

2. Barely keep up with the inflation:

Singapore’s inflation is approximately 3%, which is at par with most developed countries.
This means that the basic cost of living of every Singaporean goes up by 3% each year.
The CPF’s return of 3.5%-5% gives you a real return of around 0.5%-2%.
Hence, relying only on CPF savings will provide for a very basic retirement.

After you have retired, if you have major travelling goals or have the responsibility of taking care of your
children or grandchildren, then depending on this retirement scheme alone may not be such a great idea.
In this case, you should talk to a financial consultant or a wealth manager about various investment
opportunities, which can accompany your CPF.

3. A lot depends on your after-retirement goals:

Every individual is used to a certain standard of living. If you enjoy a good income of S$15,000 per month
switching to S$1,200 a month may be a difficult task for you. Therefore, it is important for you to sort out
the Income Replacement Rate (IRR), according to your requirements. This can be achieved by practising
healthy financial planning habits, which tells you about the amount you need at retirement and how long
you will take to reach that goal. It is advisable to speak to a financial advisor to figure out the sum you
need to spend your retirement days in peace.  

Bottom line

Christopher Ng Wai Chung, a blogger at ‘Growing your tree of prosperity’, said,
“If you are relying on your CPF for retirement, then you are not ready at all.” But, you could be that rare
unicorn in Singapore with strong financial planning. In that case, none of the factors apply to you.
If your elaborate planning shows that you can retire before the age of 65 and have enough savings to live
a good life, then go ahead and use CPF for the dream house or for other short-term loans.