The two proposed schemes point to the fact that there are two phases to retirement planning: First, the savings and investment stage prior to retirement. Second, the wise investment of one’s retirement savings to cater to the expected long retirement years attributed to Singapore’s rising longevity.

There are five challenges when we address the question of retirement:

First, Almost two thirds do not even have the required minimum sum of $90,000 today, at age 55.

Second, for those with the required minimum sum, the preferred choice is to leave it with the CPF because they get a larger monthly sum of $711 from age 62 compared to what they would get from putting the money with the bank or purchasing an annuity.

Third, the Supplementary Retirement Scheme (SRS) is just not attracting enough of the younger ones.

Fourth, outside of the CPF, what encouragement can be given for private savings for retirement?

Finally, what encouragement can be given to employers to set up employer-sponsored schemes?

Money Not Enough
The first problem of the majority of Singaporeans not having sufficient money for their retirement is due to low salary and they do not have sufficient savings. In addition, a very large chunk of Singaporeans’ earnings go to their properties.

For others who have more disposable income, current spending is generally preferred over savings for the future. Making one’s savings work harder by trying to get better returns is good for those who have savings.

Investors using the CPF Investment Scheme have not done well. From 1993 to 2004, three quarters would have done better if they had not use their CPF money for investments. This is partly due to their poor judgment in investments and also the relatively higher charges that they had to incur when investing individually.

Annuities For Retirement
The present situation of the CPF offering 4 per cent per annum on retirement funds left in the CPF Minimum Sum Scheme vis-à-vis the 2.5 per cent interest rate used in most annuity computations has led to many Singaporeans leaving their retirement fund with the CPF. Is it worth it to purchase annuity under these circumstances?

Consider that the retiree can save the difference of $228 per month on a savings or investment plan that could give a return of about 3 per cent per annum conservatively in a unit trust over 20 years. The amount that will be accumulated at age 82 is $75,722. This amount can be used to purchase an annuity then if he is still alive and well. At today’s rate, $75,722 at age 82 will buy an annuity of $544.75 per month to the end of his life.

SRS
SRS often is not within the radar of many people because it appeals mainly to those who stand to gain from the tax savings. In the end, SRS seems to be a boon for those who already have much stacked up. One way to encourage the younger ones to sign up is to give monetary incentive direct to their SRS account pegged to the savings put in by the individual.

Private Savings For Retirement
Allow Singaporeans to volunteer to save more through voluntary contributions to their CPF account up to a certain percentage. These contributions should be tax deductible and be administered by the CPF. It should be beyond the minimum sum as this is not enough for ample retirement.

Employer-Sponsored Scheme
Firms should be encouraged to set aside deferred compensation for their employees as a form of retirement benefits. These retirement benefits which could be paid at age 62 should be tax deductible expense to the firm and preferably not taxable at the hands of the employees. Limits could be set in percentage or quantity terms. If desired, the employer’s contribution can match voluntary contribution from the employees.

CONCLUSION
Singaporeans are faced with the twin challenges of longer life span and smaller families. Retirement should be a reward for the years of hard work but now looms ahead as impending disaster unless adequate savings are accumulated. CPF savings is one way, and the proposed pension fund plan would go some way to provide better returns, and the proposed annuity route ensures that no one outlives his money. But more needs to be done as the minimum sum is inadequate. A more comprehensive approach should be adopted. SRS is not achieving its intended objective. More should be done to encourage private savings and employer-sponsored schemes. Retirement is not just a matter for the individual to solve but a potential social problem which requires a multi-pronged solution.


David Choo, ChFC, CFP, is the Managing Director of PromiseLand Independent Pte Ltd, a licensed Financial Adviser.