Archive for August, 2007

The unspeakable ‘A’ word

Tuesday, August 28th, 2007

‘A’ is for Annuity
‘B’ is for Broke
‘C’ is for CPF

Article: Annuities scheme begins to take shape | pdf copy

Is $250 a month enough?

Is it possible to live today, on an allowance of $250/mth? That works out to about $8/day! Why then does our esteemed government feel that it’s possible, in 20 years time, for it’s citizens, 85 years and above, to live on that amount? If the purpose of a compulsory annuity is to make sure we are not helpless in our old age, then isn’t the proposed amount of $250/mth kind of laughable?

Start planning for your retirement

Yes, I’m aware that we are suppose to do our own retirement planning. But in the first place, if we did do our retirement planning, we wouldn’t face the problem of a lack of money to live on in our old age. Offering this compulsory annuity scheme to this group is like preaching anti-piracy to a group of cinema goers.

The compulsory annuity is a scheme to make sure that people who somehow failed to plan for retirement, are still able to get some money every month to live on should they live to an old age, so that I’m assuming, they won’t end up ‘the government’s burden‘ or ‘the future tax-payers nightmare‘.

To complement this scheme, they need another campaign to teach them how to live on $250/mth.

Minimum Sum

The way this is looking to work is that a sum of money will be set aside from your minimum sum to purchase this annuity. This would probably affect the monthly payouts that you’ll received between 65-85, since the amount available for drawout has been reduced.

It seems like this scheme will have more negative impact on the lower income then any other group.

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I think it’s ridiculous for the government to tell us what we must do with our cpf money. To limit (and to keep pushing back) the age at which we can withdraw our money was already pushing the limit. To tell us we have to buy this compulsory annuity is just totally crossing the line.

But … if it’s really enforced, it’s not like we can do anything to change it. What we going to do? Stage a mass protest? Nah, that won’t happen in Singapore. We’re too … … accepting.

So the next best thing to consider is, is there anyway to help us not have to pay so much for this scheme?

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Starting Early – The power of compounding interest

Assuming the government does enforced this compulsory scheme on our cpf savings, how much then would have to be taken out of our minimum sum to purchase it?

1 month = $250
1 year = $3000

Let’s assume that the majority will probably not live beyond 95.
Therefore number of payout years = 10

10 years of annuity = $30000

If we are made to buy the annuity at age 65, taking a 4% cpf interest rate and the power of compounding interest, one need only set aside about $14k to ensure a $250/mth payout from 85-95 years old.

But lets say we are given the option to purchase the annuity at a younger age:

If purchased at age 55, it would only cost about $9.3k.
If purchased at age 45, it would only cost about $6.3k.

That is to say, if you are now 45, and you set aside $6300, at an interest rate of 4%, over 40 years, that $6300 would become $30000.

Along those lines, if you are 25 years old now, you have 60 years to accumulate $30k. By setting aside a mere $2.9k, over 60 years, it would have snowballed to $30k. The baseline is, the earlier you start setting aside your money, the better.

Till 2 weeks ago, CPF interest rates were guaranteed at 4% for SA. With the changes being made to the system, CPF interest rates will no longer be guaranteed. Of course, if your money is placed in investments which gives you higher than 4% in annual returns, you’ll find that the start amount will be a lot smaller.

Too bad we aren’t like New Zealand or the US, with banks offering 8% and 5.05% in interest. Although the banks do adjust their interests now and then, the rates are still higher than even what CPF is currently offering, and the bonus is your money is not locked in. Just like any ordinary current/savings account, you can freely withdraw your money as and when you need it!

Can we really trust our world-class highly-paid government to determine what’s best for us? *suck thumb*

*All figures mentioned in this blog are estimates.