Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Friday, 16 January 2015

You need Stocks to Retire

With record low-interest rates set to stay and expected to almost never go back to levels during 1970s-1980s, retirees must now start planning to a pathway for their retirement via stock investing.

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CPF Interest for those Aged 55 & Above
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
CPF +1% Interest for those age Below 55

In Singapore, our government pension system CPF guarantees our retirement fund a minimum interest of 2.5% on the ordinary account and 4% on other accounts. However, when compared against history, this is one of the periods where we are actually getting really low returns even though it is above normal savings accounts' interest.

We had had a period of 10 years where interest rates were at 6.5% and from 1963 to 1986, interest rates on the CPF were above 5%. Today, we are earning a minimum interest of 2.5% on our retirement fund.
Interest Rates here:

If our parents and grandparents are currently having trouble enjoying their retirement because they have an insufficient retirement fund, we might need to reconsider if our retirement fund is enough for us to retire. Especially since we are getting returns almost half or less what their generation got.

Relying on CPF's minimum interest alone for retirement is no longer possible - in fact, it was never a possible goal financially. This is not the fault of the government but rather, this is just how the economy works. Demanding the government to make 6.5% interest mandatory is not possible because it would create a financial hole that would need to be covered by future generation.

The market currently gives an interest of less than 1%, the government by providing 2.5% interest, is actually putting up its money to cover the extra 1%+. If the minimum interest is raised to 6.5%, it will create a 5% hole that the government has to cover, which is a heavy financial burden.

To retire, we must now start saving and put money aside for investment - invest in your retirement.
As written in many of our other articles, investment is not like gambling, is less risky and more rewarding if done correctly - which is not really difficult.
"An investment in knowledge always pays the best interests" - Benjamin Franklin
Investment is a knowledge that pays one of the best interests.

Above is an index price chart that tracks 500 US biggest companies.
You can invest in the index above, and had you done that, you would have reaped enormous returns.
As seen, there will be ups and downs in investing, but if you do nothing - buy and hang tight, over the long-term, it will work out.

As age 20, if you bought the index in 1970 at around USD $90, 40 years later today (2010), each index share you own is worth USD $1170, that excludes all the annual dividends paid out to you.
How could you have lost money during this period?
A lot of people did because they buy but did not hang tight.

So, buy today, and hang tight for your retirement!

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  1. Hi,

    Agree that stocks are essential to retirne.

    In addition, will like to point out the comment "the minimum interest is raised to 6.5%, it will create a 5% hole that the government has to cover, which is a heavy financial burden." This is not necessarily true, this is because our CPF proceeeds are transferred to GIC for management. And from GIC records, their portfoilo has returned 6.5% per annum over a 20 year period. In this sense, a 6.5% rate will not create a 5% hole. However, I too agree that 6.5% is too much; a 5% interest rate is technically possible given GIC's track record.

    1. Hi,

      You made a great point regarding the difference in the returns we get and what GIC earns. But I would say it is because of volatility that this has to be made this way.

      GIC makes 6.5% pa over 20 years. If we split the 20years into 4 5-year period, and assuming it made 10% pa for the first 4 years and loses 20% of its value during the 5th year. If we retire within the 4-year period, our retirement returns are pretty good. But if we were to retire during the 5th year, we immediately lose 20% of our retirement fund. I don't think this is a exposure that retirees can expose themselves to.

      GIC use the money to invest, and every investment is risky. If GIC loses our 50% money, can we accept that our CPF value inside drop by 50%? So I guess this is a risk-return trade off.

      Currently our CPF is backed by government, so sure 2.5% is horrible, but at least it will be there (interest + principal) instead of being directly with GIC where I might lose maybe 20% of my CPF money in a day.