How to be a CPF millionaire

Singapore celebrates turning 59 years old this month. If Singapore was a person, it would have a CPF Retirement Account that was created four years ago when it turned 55, and it will soon be able to receive a payout through the CPF LIFE program in just six years. 

As a Singaporean or permanent resident, the CPF is a cornerstone of your social safety net including an important pillar of your retirement planning. While the CPF offers a secure way to save for the future, will just participating and saving through the CPF scheme provide us with the security blanket we are looking for in retirement?  Is there more that can or should be done and what can we do now? 

Is $1,379 really enough to live on in Singapore? 

A study conducted by the Lee Kuan Yew School of Public Policy found that a single senior citizen would require at least $1,379 a month to meet basic living needs back in 2019. With inflation and the cost of living rising rapidly since then, this could now be a gross underestimation. 

If we were to estimate the amount required at the time of retirement of 65 years old and a life expectancy of 85 years old with inflation eating into your spending power, you would need more than $450,000 to survive your retirement years for even this monthly number that seems too low to start with. 

The statistics provided by the CPF Board reveal that the average CPF member in the age bracket of 60 to 65 years, had a balance of about $194,296. Women who generally earn less also have less saved up, which is a long-term concern as they tend to live longer than men. This amount falls far below the amount required to maintain a basic lifestyle in retirement. 

Many people will have to supplement by working full- or part-time in retirement, having retirement savings outside of CPF, support from other family members etc. Still, it is a sobering fact that many Singaporeans may not have saved enough for retirement with the most important tool available to them. 

How did the growing number of CPF millionaires achieve it? 

So it was a stark reminder of how things could be very different when my friend who is called colloquially “Mr CPF” sent a message to me recently celebrating crossing $1 million on his CPF  Investment Scheme at the age of 52 investing through the CPF digital investment advisor’s app. It’s not just a one-off. We have recently seen three CPF millionaires at varying ages around me in just the past month. What made this possible? 

Many individuals have explored ways to maximise their CPF returns in the past few years through the Treasury Bills (T Bills) issued by the Monetary Authority of Singapore (MAS). 

Rising interest rates encouraged many CPF members to allocate a portion of their savings into these instruments. Some also turned to fixed deposits. However, this is a temporary fix as the returns historically have been subpar and is now vulnerable to falling interest rates.

In fact, if we look at the evidence of historical returns, a globally diversified equity market over the long term has consistently delivered superior returns compared to T Bills. 

An investor who allocated $10,000 into a developed world equity index fund in 2005 would have over $30,000 over the past 20 years. Conversely, the $10,000 invested in MAS 1-Year Treasury Bills would have grown to just $13,163. 

Of course, the volatility of returns for the equity market is higher but the average returns are also higher thus fully justifying taking that risk to achieve higher returns. The way to mitigate that volatility of returns is to invest for the long term and achieve the average returns. 

Since launching as the first digital advisor for CPF-IS in late 2019, the actual track record of a globally diversified equity portfolio on the platform has delivered an annualised return of 11% for CPF members. 

Clearly these five years were a period of severe volatility with markets falling more than 30% during COVID-19 and more than 20% in the 2022 bear market. So this is no mean feat. The fact is that the long-term returns of any globally diversified equity exposure would have been better than other asset classes including T Bills during the recent high yield environment - whether it is the MSCI World, ACWI or the S&P 500. 

For those who are more conservative, even an allocation of 100% into a fixed income investment over the long term would have yielded more returns in excess of 2.5% during the same period, with significantly less volatility as shown in the chart.

From a cyclical perspective, we can anticipate a potential continued decline in interest rates and this means that the attractiveness of T Bills and fixed deposits will diminish significantly with its fixed yield and fixed maturity that locks in your money. 

Gaining exposure to a diversified fixed income fund with exposure to duration allows you to take advantage of falling interest rates which can drive capital returns on top of the higher yield you receive from the asset class. While equities have outperformed fixed income in recent years, this is why balancing risk and returns is important and a balanced portfolio of equities and fixed income could meet the long-term needs of most CPF members. 

Building an inflation-beating portfolio

Singapore's inflation rate has averaged around 2% over the past decade. The rise in the living cost has outpaced general inflation and will eat into the purchasing power of your savings over the long term. 

This means that the real return on your CPF OA savings has to be higher.  The real challenge lies in balancing the security of guaranteed returns with the need for higher growth to ensure a comfortable retirement which can only be achieved by taking some risk through the financial markets. 

This is the basis of most national and corporate pension schemes around the world shifting to a defined contribution from defined benefit pension programs in order to solve the pension shortfall. 

Celebrating the successes of Singapore and Singaporeans

It is time Singapore’s CPF members took more control and approached the CPF as a type of defined contribution scheme with greater emphasis placed on the individual’s responsibility and ability to invest. Utilising the CPF Investment Scheme, which has been in place since 1997 but evolved to make it a much more flexible system since then, now allows all members to use the scheme to make their CPF money work harder for them.  

There is a lot to be thankful for as we approach National Day and celebrate the successes of the country, it may also be an opportunity to be reminded of some of the things we often take for granted and be thankful for them, such as political stability and safety, a robust economy, world-class infrastructure and the CPF. 

The next time you check your CPF balance on the CPF app, remember that the key to a secure retirement lies in informed decision-making and proactive management of your CPF savings. If you start early enough and remain disciplined enough, you too could be a CPF millionaire.