Mr. Tan
Will CPF's low interest still provide adequate retirement needs for the middle-class after the value of one's BTO plunges after 35 years?
REPLY
The low interest of 2.5% paid by CPF is inadequate to take core of the retirement needs of the members. The higher interest rate of 4% paid on the savings account is just barely adequate.
The benchmark for an adequate interest rate is a return of 2% higher than inflation.
If the inflation rate is expected to be 2% over the long term, we need a CPF return of 4% per annum. If the inflation rate experiened by the middle and lower class is actually higher than 2%, they need a higher interest rate on their CPF savings.
We know that the inflation of medical fees is much higher than 2%. For the elderly, the medical expenses form a significant part of their expenditure.
In the past, most people rely on the appreciation of their HDB flats to compensate for the low rate of interest paid by CPF. They were able to sell their flats at the appreciated value to get some cash to downgrade to a smaller flat and to spend on their retirement needs.
This method is no longer possible for most seniors. They are not able to find buyers for their aging flats, which now have a remaining lease of less than 60 years.
There is a big supply of these aging flats and a small demand. The supply and demand situation had reversed and now worked against the owners.
The method that worked in the past is not working now. Many of the seniors are strugglying with inadequate cash flow from the CPF savings and an overpriced HDB flat that they are not able to liquidate.
What is the solution?
For the immediate future, the government must change the regulation to allow CPF to be used to buy a property with a shorter lease.
The current regulation actually allows CPF to be used for a remaining lease of 30 years, but the rules are quite complex. It should be simplified.
Over the longer term, the government must allow members to opt for their CPF savings to be invested in equities to earn a higher return. Although equities may fluctuate in value from time to time, this does not concern people who are investing for the long term and can ride out the fluctuations.
CPF members can be educated to understand how to manage this risk through diversification and investing for the long term.
In Australia, many people are investing their superannuation funds to earn a yield of more than 10% a year. This is much better than the "safe" yield of 4% paid by CPF.
CPF members need a better return to earn enough for their retirement needs. The current CPF regulations should be changed. We need a new approach.
Tan Kin Lian
Will CPF's low interest still provide adequate retirement needs for the middle-class after the value of one's BTO plunges after 35 years?
REPLY
The low interest of 2.5% paid by CPF is inadequate to take core of the retirement needs of the members. The higher interest rate of 4% paid on the savings account is just barely adequate.
The benchmark for an adequate interest rate is a return of 2% higher than inflation.
If the inflation rate is expected to be 2% over the long term, we need a CPF return of 4% per annum. If the inflation rate experiened by the middle and lower class is actually higher than 2%, they need a higher interest rate on their CPF savings.
We know that the inflation of medical fees is much higher than 2%. For the elderly, the medical expenses form a significant part of their expenditure.
In the past, most people rely on the appreciation of their HDB flats to compensate for the low rate of interest paid by CPF. They were able to sell their flats at the appreciated value to get some cash to downgrade to a smaller flat and to spend on their retirement needs.
This method is no longer possible for most seniors. They are not able to find buyers for their aging flats, which now have a remaining lease of less than 60 years.
There is a big supply of these aging flats and a small demand. The supply and demand situation had reversed and now worked against the owners.
The method that worked in the past is not working now. Many of the seniors are strugglying with inadequate cash flow from the CPF savings and an overpriced HDB flat that they are not able to liquidate.
What is the solution?
For the immediate future, the government must change the regulation to allow CPF to be used to buy a property with a shorter lease.
The current regulation actually allows CPF to be used for a remaining lease of 30 years, but the rules are quite complex. It should be simplified.
Over the longer term, the government must allow members to opt for their CPF savings to be invested in equities to earn a higher return. Although equities may fluctuate in value from time to time, this does not concern people who are investing for the long term and can ride out the fluctuations.
CPF members can be educated to understand how to manage this risk through diversification and investing for the long term.
In Australia, many people are investing their superannuation funds to earn a yield of more than 10% a year. This is much better than the "safe" yield of 4% paid by CPF.
CPF members need a better return to earn enough for their retirement needs. The current CPF regulations should be changed. We need a new approach.
Tan Kin Lian
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