CPF stands for Central Provident fund. It is a national social security scheme for Singapore workers. Every month we have to deduct a certain percent from the salary and contribute to the CPF account. When we reach the age of 55, money will be transferred into the retirement account of a certain limit and this will then be used to buy a national annuity scheme called CPF Life. An annuity by the way is a type of insurance that will pay you an income for life to the day you die. The payout usually starts from the age of 65 and the latest from 70. The later you choose to withdraw your money, the more payout you will receive and the earlier you withdraw, the lesser the payout will be.
There are basically three groups of people out there when it comes to the topic of CPF contributions and CPF Life in Singapore. We have the group that is against CPF, the group that for CPF and the group that doesn't care at all.
Maybe to be fair, let's examine what are the thoughts of the people who are for or against CPF.
People who are against the idea of CPF.
They feel that the government is controlling their money.
They feel that they need cpf to address their short-term Financial plans.
They may not live long enough to see the money.
They believe that the government took their money away.
They want to withdraw the money to use for urgent situations such as running out of income due to getting unemployed.
They believe that the government is taking the money to invest it for the country and against their will. Because they believe that it is suggested by the ruling Party and they are opposed to whatever ideas suggested by them no matter what they may be.
Because they heard it from the coffee shop or their friends said so.
They don't need the government to help them save for their retirement and they can handle their own money.
These are merely stuff that I heard online and I'm just posting it here. I shall list more of it here when I come across more of their reasons online.
They understand how an annuity works and want to top up their CPF more so that they can achieve $1,000,000 by the time they reach 65.
They like the idea of getting more tax rebates by contributing more to the CPF accounts.
They are usually financially Savvy and they understand the meaning of compounding. The retirement account and a special account earns an interest of 4% so does medisave. The ordinary account however earns an interest of 2.5% and that is so much better than what any bank can offer in any savings account.
They want to leave a legacy behind for the next generation of the family
They're usually very familiar with the financial industry on how things work. There are even groups that are advocates for CPF.
When I was young I didn't see the value of CPF. What I saw was I had lesser take home pay after deducting CPF. I even had this belief that I would never be able to make it earn the then minimum sum scheme amount for that time. At that point in time they didn't have the CPF Life scheme yet. Back then what they had was a minimum sum amount that will be increased year after year at the rate of about 3%. I think that's about the average inflation rate. You had to keep the minimum sum amount and only withdraw the balance after setting aside this amount at the age of 55. The minimum sum will slowly be released month by month from the age of 62 onwards.
The former GM of CPF board once told us that there were three options to choose from at age 55.
1) Withdraw everything after setting aside the minimum sum. However, putting the amount in a bank account is not a good idea because of the very low interest rate. Inflation will chew up the value of the money in the bank account. Investing it also exposes it to a lot of risks. Unless you are very good at making positive gains with your investments.
2) Don't withdraw anything if you don't need the money. Leave everything there until you need it. It will continue to earn the interest of 2.5% for ordinary account, 4% for the special account. The monthly payouts of the retirement account will start from age 62 onwards. However, this payout will stop once the balance is exhausted. So this option is also not foolproof.
3) The last option is to put all your money in an annuity plan and that is the wisest thing to do. Says the GM of that time. An annuity will guarantee you to receive an income for life. He told us that he was going to do the annuity plan option. At that time they didn't have the CPF life scheme at all so you have to go to a private insurer to buy an annuity insurance plan. I continued to remember his words for many years to come even to this day. When they finally came up with the CPF Life scheme, I thought of that GM a lot. He was wise man. I don't know where he is today. I don't think I even remember his name. And we are so lucky to benefit from the national annuity plan. It's definitely cheaper than going to a private insurer. I personally am into the idea of having an annuity because I've seen people use up the CPF money even before they die. There are people who even outlive their retirement accounts under the old scheme. Sad to say, my parents are one of them. Even the idea of collecting a lump sum of cash at the age of 55 is a bad idea. Some people feel rich and put it in all the wrong places. They will regret it in their senior years when they can no longer work or get employed.
I googled and learn that Singapore is not the only country with a CPF scheme. Most countries have it. In America they call it 401K and in Malaysia it's called EPF scheme. I even found a list of the best national social security schemes in the world. Singapore ranks 7 in this list and America is at 14. The top country is the Netherlands. I am curious how their plans work. I will probably check it out and blog about it another time.
