It's a complicated topic and some portions I really disagree with. I'll have to keep this post short as its draggy and something which cannot be controlled. I don't like to discuss things out of my control as there's nothing I can do about it as it is government policy and I'll just abide by it according to what is mandated.
Every month when an employee earns his salary, 20% is deducted to be saved in a CPF account.
The employer will match 16% more. Totaling 36%.
You can see the contribution rates below or here.
Some funds in the Ordinary Account, earning 2.5% return. Can be used to buy housing in Singapore.
Some funds in Special Account, earning 5% return. Used as retirement funding, can be used to pay for child's Uni fees but child must return with 5% interest.
Some in Medisave Account earning 5% return. Can be used to pay Insurance Shield plans or withdrawn to pay for some medical bills.
The problem with CPF is that you cannot withdraw it easily. The way to withdraw all is to give up your citizenship.
To add on, CPF tries to plan for your retirement.
At age 55, you need to have a minimum sum. Only after the minimum sum is fulfilled can you withdraw the excess of your retirement funds. Which is what is left in the Ordinary and Special account. Medisave can not be touched as it is to provide savings for your potential medical bills in future.
Minimum sum at 2013 is SGD148k
There is a BIG flaw in this. Every month, there is a cap on the contribution able to be made by Citizens. Maximum contribution by employee is SGD1k with another SGD800 being contributed by employers. This is the CAP when the salary of the employee has reached more than SGD5k per mth. Most people do not earn this salary.
This means that there is an absolute cap to the maximum amount which can be contributed to CPF in a person's lifetime. However, inflation is calculated off the previous year which can be any amount. Some day in the future, there will be no Singaporean who will be able to hit the minimum sum required at 55 years old. as the yearly increase due to inflation will be greater than the maximum sum contributed within a person's lifetime.
Not to mention, Singaporeans typically use their CPF Ordinary account to pay up their house. Which means their account actually does not have a large balance.
Bringing this a step further. If a person is unable to fulfill minimum sum, he must top up in cash or pledge his home equity to fulfill minimum sum. Meaning that in the future, all Singaporeans will have their HDBs pledged to the CPF to fulfill minimum sum. Hopefully, the government will change this silly policy sometime in the nearer future.
So what is minimum sum for. Well CPF, using this SGD148k, will invest this in an annuity and pay out a few hundred dollars to the individual for his monthly expenses. The annuity is a negative capital investment. Meaning that it WILL run dry as they will be disbursing the investment return plus some capital amount. This goes against my own investment idea that you should only eat some of your investment returns, reinvest some of the returns and keep your capital intact.
The government had this policy in place to prevent people from withdrawing all their funds and squandering it on women and luxuries leaving very little for retirement as some people had spent all their funds after withdrawal. Previously, there was no minimum sum and Citizens could withdraw everything by 55 yrs old. I do recognise some validity of this as there have been reports of such instances.
However, the policy needs to be changed in a number of ways for it to be useful.
1) the cap on contribution should be increased with inflation as minimum sum is also increasing based on inflation.
2) there should be some form of accredited investor validation. If he/she is experienced in managing money, the government should not force an individual to make poor investment decisions like buying an annuity. I reckon if someone has saved/invested up to a million or more in his life, they will not squander the amount in their old age and will spend responsibly.
Besides this, I actually think the concept of CPF is a good scheme as it forces Singaporeans to save 20% of their income and this can be used to pay for their housing purchases. Like most other countries, many Singaporeans also do not save enough by themselves and spend on unnecessary things in their lives. However, with the minimum sum mandate, I think CPF is now seriously flawed due to this. As the next generation of Singaporeans will struggle or never be able to hit minimum sum. Which I estimate to be any child born in these few years onwards.
I expect many comments and rants by readers about the CPF and that it is not possible to get the money back. However, I hope that there will be some good discussion on how it can be better. The concept of CPF is good. However the minimum sum has been thought of sloppily and does not work into the next generation. Such a policy should be changed. What are the better ways to prevent squandering of the CPF funds? Is there a better way besides a minimum sum?