Net Savings rate for Singaporeans with CPF

Well, as you know, many online articles (especially US, at least from my experience) advocate saving at least 20% of your income.

And as we all know, whether we like it or not, 20% of our salary is usually saved automatically into an account we call CPF.

But that's not the full story.

Fortunately for us, similar to the 401k, there's sorta a matching contribution, just that instead of 1:1, we get along the lines of ~1.2:1.
They would contribute about 17% every month as well.

One day, I was pondering about why are we so hard up on money for retirement, despite the significant amount set aside for us?

One reason, I thought was overextending ourselves for housing, depleting our OA, but surely, our SA help to buffer somewhat no?

So I decided to do some simple estimation on the actual net savings we have via CPF.

To make things simple, my example scenario assumes:

• The person starts working at age ~22 onwards
• Retires at age 55
• CPF from Income does not reach the contribution cap
• No OA to SA transfers
• No CPF topups
• House repayments deplete OA all the time (be it upgrading, etc), no funds are returned to the OA
• MA does not reach the cap 

Here are the tables you may all know:

So I did a rough calculation, weighted average amount of money going to the SA as part of the 37% CPF is about ~0.20 .

So 0.20 out of 37% is about 7.4% of the CPF contribution.

7.4% of 117% (Employee + Employer contribution), makes up to be 6.35%!

That's not even half of the targeted savings rate! This also means that we cannot solely rely on CPF and would require to budget out cash (perhaps into the SRS? VC back into CPF? Buying SSB? Laddering fixed deposits? Whole Life policies? Annuities?) to ensure that the overall savings rate reaches 20% (could require a higher savings rate if interest return on the savings is low).

That led me thinking further, what about using CPF like the 401k?

This means that housing expenses cannot be paid with it, so it is solely for retirement (and for us Singaporeans, maybe a side of medical savings).

Assuming the OA is not used at all, you'll have an weighted average of 0.766 of your CPF, which makes up to be 28.3%.

28.3% of 117%, makes up to be 24.2%!

Now that's a better figure. So if the OA is not used for housing, perhaps, the CPF could be enough. It is also good to remember that because CPF is illiquid, one must have a buffer (perhaps 6 months of salary) for liquidity.


Although the interest rates aren't high, assuming we totally forget about the CPF funds and don't even perform a CPF OA to SA transfer, don't even invest them (due to this article) and preventing losses (a good article here), by letting it compound with a long timeframe, one might have a sizeable amount of money by the age of 55 to withdraw yet hitting the Minimum Sum for CPF Life. You will probably give it a good boost, if all of it went to the SA.

Those excess funds can be wisely budgeted or used to purchase annuities (less management at a cost), to further ensure a better quality of life during retirement. (Yes, talking about not investing at all).


Just a side note - One might point out that by purchasing a house, net worth increases faster than the CPF yet we are not worried that the value becomes zero unlike stocks. But the question now lies is will you liquidate your house? If you do, where will you live? (FD points it out well here). Separating your home from your retirement plan would be ideal unless you intend to downgrade and unlock money locked within.

Also, I would like to point out that property is the same as any investment, purchasing it at a crazily high price would make it a bad investment, a rental property have operating costs (there's an article about it here), so buying high and believing that prices will only go up is crazy thinking. Not saying we can't make money in property, but perhaps purchasing only at fair value, after due diligence in finding out operating costs to determine net rental yield, peer comparisons, to find out whether it is worth it or not (the same as investing in equities). Then probably followed by refinancing loans often to ensure you get the best rates to reduce interest costs, and trying to keep other operating costs low. Do remember that owning rental property, is like running a REIT not buying shares of a REIT.