The Dive: Is CPF A Good or Bad Retirement Scheme?

By March 14, 2020Current, Work

TL;DR — Don’t make CPF LIFE your only retirement scheme, even though it’s a guaranteed way to stash your backup retirement savings.

CPF — a hot potato topic that either elicits gratefulness or anger, and sometimes both.

Actually, I didn’t really bother much about my CPF when I started working as the 20% ownself-contribution and 17% employer-contribution were automatically saved in CPF every month.

CPF was such a convenient tool to put aside backup savings for my life’s milestones, which I only had two in my mind then — housing, and retirement.

When I first started working, the main thing that I wanted to use CPF for was to save up for my first HDB (provided I found the right guy to marry, and I eventually did).

With CPF helping me save up for my HDB, I didn’t really feel that guilty living my #yolo life then, splurging on hair and wax packages, taking taxis and having regular restaurant meals.

Perhaps I was only living for the now and near future, because I didn’t pay attention when CPF started offering CPF LIFE* in 2009.

*It was then estimated that about half of Singapore residents above 65 would outlive their CPF savings under the Minimum Sum Scheme. In 2009, CPF LIFE was introduced to manage the longevity risk caused by longer lifespans. CPF LIFE is a life annuity that provides you with a monthly payout from age 65 (the current payout eligibility age) for as long as you live based on the retirement sum you have set aside in your Retirement Account.

CPF LIFE is a hot potato topic because although this policy helps you to get monthly payouts for longer (and potentially even get back more than you put in if you live beyond 88 years old), the common perception is that CPF locks up our money.

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There is some truth to this because there are certain conditions before we can use our CPF. It is not completely wrong though.

Our CPF monies aren’t intended to be as liquid as cash for a reason. After all, CPF was designed to support us for retirement, not for anything and everything we want to spend our money on (we should have a separate account for this).

That being said, CPF is not a perfect scheme.

Here’s what I like about CPF

1. CPF LIFE = a life annuity, even if I run out of CPF savings

Like all life annuities, I don’t have to worry about running out of savings. I’ll get payouts for life.

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2. I can still use my CPF for other purposes before retirement age, unlike life annuities

For private life annuities, we are not able to withdraw what we put in until the specified maturity date. If we want to withdraw cash from our life annuity, we will have to surrender the policy and potentially suffer a loss if we withdraw before our break-even date.

But the government has opened up our CPF to use for non-retirement expenses (although we do have to pay back the accrued interest for some of them):

  • Education
  • Housing
  • Medical bills, integrated plan insurance premium etc

So there is still some degree of freedom if we need to use our CPF monies for purposes other than retirement.

3. Guaranteed CPF interest rates

For private life annuities, I personally dislike it when financial advisors refer to potential payouts based on the non-guaranteed 4.75% interest rate with overconfidence. At least for CPF, I know the interest rates are guaranteed (for now).

The great part is that even if I don’t have a lot in CPF, I get extra interest of 1% on my first $60,000 of combined CPF balances.

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Where else can you find guaranteed interest rates that high?

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Why do people dislike CPF?

1. It’s complicated

Unless I thrive in financial volatility, I prefer to have my financial instruments easy to understand. The drawback about CPF is that it has a lot of legacy issues.

Because X happened in the past, that’s why Y policy was introduced, which then makes it difficult for some Singaporeans to understand the logic of certain policies and why they are affected.

2. It cannot and shouldn’t be the only retirement scheme I have

Firstly CPF isn’t as liquid as cash, and CPF LIFE is a life annuity which means I cannot cash out all the CPF monies at once if I had a big-ticket expense to pay for.

Hence CPF should be part of a basket of financial instruments that I can use based on my needs. CPF should NOT be the only instrument I have for saving for retirement.

Personally I have purchased and am still servicing other annuities, together with life insurance policies so I have more options if I need cash in my older years.

To rely solely on CPF LIFE is something I am very uncomfortable with, and a narrative the public should just stop perpetuating. So please don’t refer to CPF as the be-all-and-end-all solution to retirement. It is not enough.

3. It is dynamic

This trait of CPF is both a boon and a bane. It is great when the government can tweak CPF policies to suit what the public wants, such as extending its use to housing, education etc.

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But citizens may feel helpless and held hostage when policies are changed to make the CPF monies harder to use, although the intent behind the change may be to improve the sustainability of our retirement income streams.

It is hard to win the heart over with “head” arguments, because humans are emotional creatures.

This is why I would like to emphasize the earlier point, that CPF cannot and should not be the only financial instrument you have for your retirement. Give yourselves more options by having multiple income streams to tap on as and when you have planned for extra cash needs.

Dear Singaporeans, stop complaining about CPF – it’s a good scheme for Singapore & Singaporeans


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