'These people aren't just rich, they're crazy rich.'
- Crazy Rich Asians (2018)
Singapore gets called many things: Garden City, Lion City, the Singapore Miracle, etc. Of its many nicknames, I'm sure the one the government hates most is "Nanny State".
But there is an upside to living in a Nanny State: Singaporeans are one of the best prepared for retirement in the world. All Singaporeans and Permanent Residents are forced to save a part of their earnings in the Central Provident Fund (CPF).
In 2018, a new university graduate is expected to earn S$3,500 per month. With an average bonus of 2 months and a 37% CPF Contribution Rate, they are saving more than $18,000 in their first year of work. By the age of 25 (+2 years for men), the average Singaporean female university graduate should have accumulated more than S$100,000 in their CPF account. By 36, she should have ~S$500,000 in her CPF!
Compare this with the US, where "the median American household currently holds about $11,700... almost 30 percent of households have less than $1,000 saved."
Not all of us buy a hotel as part of the standard London shopping spree, but as far as Americans go, Singaporeans are probably all Crazy Rich Asians. As far as nicknames go I personally prefer the Singapore Miracle.
There are few lessons for all of us in this:
1. Start early on your retirement plans.
CPF makes you start saving the moment you start working. When you start early, you give yourself a long runway to build your retirement savings and allow compound interest to work in your favour.
While a big portion of your salary is squirreled away for you when you start formal employment, the amount saved up for you may not be sufficient for retirement especially if you use CPF for housing. You should be deliberate about your retirement plans, especially around CPF forms 37% of your gross salary, and make a conscious effort to start saving early.
2. Have a plan for your short term financial goals
Being forced to set aside savings into a tightly controlled account helps - i.e. we can't dip into it to pay for an impromptu weekend trip to Bali. Indeed, if we did not have this discipline forced upon us, we might end up broke like Mike Tyson or the British retirees who used "'pension freedoms' for alcohol and gambling".
One easy way to look at it is to plan your investments and savings as buckets of expenses, both in nearer and longer term. This approach is known as goal-based investing, and it helps you to stay disciplined with your finances because it is outcome driven.
You can invest shorter term money such as those for your housing down payment, emergency fund in cash management solutions, which may have very low investment risk yet is able to generate higher returns than fixed deposits
3. Invest your savings wisely, and no, don't keep it in your savings account.
As much flak as the Singapore government gets for the low CPF guaranteed interest rates, it is pretty decent taking into account that Singapore is one of the few truly AAA-rated countries left in the world. It is also much better than what Singaporeans (who often keep their savings in cash) are used to getting in deposits.
This is a discussion for another time, but imagine that instead of earning 2.5% on your Ordinary Account, you were earning MSCI All Country World type returns (more than 7% per annum since inception), compounded for 40 years. The numbers are mind-boggling: You would have $19.44 for every $1 invested, versus $2.69 for every $1 invested at 2.5% per annum.
Find out how you can invest in a globally diversified, passive portfolio for your CPF monies so you can be retire even better and be a part of the Singapore miracle.