RetireSmart

Saving up for retirement The smarter way to save.

Is the CPF minimum sum of $161,000 enough?

Meeting the CPF Minimum Sum

The CPF Minimum Sum currently stands at S$161,000. It is the figure that the Government believes is needed to deliver an adequate income at retirement.

To live comfortably, the median worker would need to have additional savings of $193,315

What is the right way to save?

When should you start saving?

The earlier you start, the better. This is because with cumulative compound interest, you end up with more on the amount you saved. So even if you start with small contributions at a young age, you are able to increase the amount over time. This will help you reach your goal more easily.

To reach the same goal, saving early requires less contribution. Scenario: To save a total of $85,000 by retirement age 65
  1. If you started saving earlier at age 25 Monthly contribution: $100
    Total contribution: $49,200
  2. If you started saving later at age 40 Monthly contribution: $197
    Total contribution: $61,566
Contribute early - 25 to 65 with $100 per month Contribute later - 40 to 65 with $197 per month
Both receive real investment returns of 2.5% per annum for each year there are funds invested. Source: Schroders. For illustration only.

How regularly should you save?

Regular savings in comparison with lump sum savings can have a significant impact on the eventual size of your savings. Regular investment – called a dollar cost averaging strategy – can reduce the focus on investing at the right time, so you can benefit from staying invested during market lows.

Investing regularly can pave the way for a smoother outcome The chart shows how dollar cost averaging would have been beneficial over the last 15 years.
  1. Regular investment scenario: $1,000 invested annually
    Total value after 15 years: $25,600
  2. Lump sum investment scenario: Lump sum of $15,000
    Total value after 15 years: $23,600
$1,000 invested annually over 15 years $15,000 invested as a lump sum at 2000
Example allocates 100% of investments to the Singapore Straits Times Index (total return). Sources: Bloomberg, Schroders. For illustrative purposes only

Understanding investments

Guarantees still come with risk

Many Singaporeans invest in saving plans coupled with life insurance, that come with a guaranteed return, as they are perceived as “safe” investments. While an insurance policy’s guaranteed rate is fixed, the level of guarantee has been falling together with bond yields (insurance companies invest in bonds to provide guaranteed returns) - see Figure 1.

With low bond yields, the returns may be low and not match the long-term inflation rate of 2%*.

Lower bond yields may result in insurers reducing the guarantees they offer at present, and may make it harder to deliver on past guarantees.

*Source: Bloomberg, as at end of 2015.
Insurance company accepts insurance premiums.
Insurance is not foolproof
Premiums are invested in bond market.
Bond values are falling.
Figure 1: Bond yields have fallen
US 10 yr bond Japan 10 yr bond German 10 yr bond Singapore 10 yr bond
Source: Bloomberg, as at 31 May 2016. For illustrative purposes only and does not constitute any recommendations to invest in the above asset class.

A more balanced, risk-controlled way of investing

With guaranteed funds, the risk is losing out on long-term investment returns, which affect the eventual size of your savings. Compare these four investment methods (see Figure 2):

  1. CPF: Unlikely to generate an adequate return to reach the savings level required.
  2. Life Insurance Participating Fund: Unlikely to generate an adequate return to reach the savings level required.
  3. Balanced Fund: Gives the highest potential, however, associated with greater return is a larger degree of uncertainty.
  4. Singapore Equity Fund (Multi-Asset Fund): Neither too risky nor too conservative, offers savers a balanced, risk-controlled way of achieving the desired outcome.
Savers may be wise to separate their retirement savings into two categories:
  1. Guaranteed: offers certainty, albeit limited growth opportunity
  2. Non-guaranteed (through CPFIS, or soon to be launched LRIS, or other private schemes): offers opportunity to generate greater returns
Figure 2: A guaranteed fund will not get savers the additional cash savings needed at point of retirement
CPF Guaranteed Rate
Life Insurer Participating Fund
60/40 Multi-Asset Fund
Singapore Equity Fund
0 100,000 200,000 300,000 400,000 500,000
Top 25% Median Bottom 25% Bottom 5% Target
CPF guaranteed rate based on aggregate current rate of 4.5% assumed constant for 40 years. Life insurer participating fund based on an allocation of 72% Singapore bonds, 23% Singapore equities and 5% cash. Balanced fund comprises 60% Singapore equities, 40% Singapore bonds. Equity fund comprises 100% in Singapore equities. Salary of S$3,949 per month. Contribution rate of 4.5%. Inflation of 2% p.a. applied to salary. Results shown in today’s dollars in order to compare against target of S$350,000 required in excess of the Minimum Retirement Sum. Source: Schroders. For illustrative purposes only.

The Pre-retirement Phase

In the next paper, we delve into the impact of maintaining growth exposure in the years before retirement. We also learn the importance of volatility management and the different ways that this can be achieved to grow your final account size.

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