What methods should risk-averse Singaporeans use to grow their retirement nest eggs?
Most Singaporeans are risk-averse. Despite our being a financial hub, the need to take risks and “win big” just doesn’t seem to be in our DNA (except maybe at Marina Bay Sands). So for those of us who like to make money the boring-but-reliable way, here are the safest options.
Voluntarily Raising Your CPF SA
There’s a guaranteed way to beat inflation, and to secure your money so well that even a divorce or bankruptcy can’t touch it. That’s your CPF Special Account (CPF SA), which provides a guaranteed rate of four per cent per annum (five per cent if you have less than S$60,000 in your combined CPF accounts).
You can raise your CPF SA by voluntarily topping up your CPF - but if you’re serious about using it for retirement (e.g. you have no other retirement plans besides CPF monies), you can go further than adding a few hundred dollars a month.
One method is to transfer your CPF Ordinary Account (CPF OA) funds into your CPF SA. Your CPF OA only grows at 2.5 per cent, which is under the rate of inflation (about three per cent). By transferring it to your SA, you ensure an interest rate that can properly keep up with the rising cost of living.
However, this means you won’t have CPF OA funds to pay for your housing. You’ll have to be prepared to service your home loan in cash, or to make the down payment on your flat in cash (HDB loans finance up to 90 per cent of your flat, so the remaining 10 per cent will have to be paid in cash).
- This is the only guaranteed way to grow your money faster than inflation.
- CPF is government run. Unlike private sector financial products, you don’t need to worry about things such as high fees, or the fund imploding.
- Your CPF money is protected, even in the face of issues such as bankruptcy.
- Once you commit the money to your CPF, it’s stuck until your draw-down age (55). Even then, you cannot withdraw all the money. You must leave an amount to make up the retirement sum*, unless you are exempted (i.e. you have a life annuity or other pension plan). This makes CPF quite inflexible, as you cannot just “cash out” as and when you want.
- If you want to transfer your CPF OA to your CPF SA, you’ll need to service your home loan in cash. If you opt to transfer it all even before you buy a house, you’ll probably also need to make the down payment for your house in cash (a minimum of 10 per cent if using HDB loans, and a minimum of 20 per cent if using bank loans).
*S$166,000, if you turned 55 on 1st January 2017 or later
Singapore Savings Bonds (SSBs)
SSBs are bonds with a variable payout. The bond’s coupon (interest) steps-up every year, until the bond matures in 10 years. Should you hold on to the bond for all 10 years, you would have gained interest of around two to 2.6 per cent per annum.
When you buy SSBs, you are loaning money to the Singapore government. That makes them some of the safest bonds in the world, as the government has a sterling reputation for always repaying its debts.
You can calculate the returns from SSBs on this website (note that the rate fluctuates, as it’s pegged to the rate of Singapore Government Securities. You should check the current rates before buying).
SSBs are sold in increments of S$500, and can be purchased from participating banks (currently these are DBS/POSB, OCBC, and UOB).
- You don’t have to wait the full 10 years to get your money back. SSBs allow you to cash out at the end of every month, while keeping any interest you’ve accrued. You’ll still make less than you would have by keeping it for 10 years; but this means SSBs are flexible, and you can get your money when you need it.
- The interest rate on SSBs, while not high, are still better than most fixed deposits (if you hold them for at least five to six years). Fixed deposits also don’t let you withdraw your money without penalties (you lose the accrued interest), whereas SSBs do. This makes SSBs a generally superior alternative to fixed deposits.
- SSBs are safer than many financial products, being backed by the Singapore government.
- At two to 2.6 per cent, the coupon rate for SSBs are below the rate of inflation. This is not suitable as retirement product, for young investors. However, for older investors (e.g. 50 years and above) it may be suitable, as emphasis changes from growing wealth to protecting it in later years.
An annuity is, frankly, an insurance policy in name only. While there are some basic insurance benefits (a death benefit), it is more for retirement than protection. Annuities shield you from the risk of running out of money, before the end of your life.
There are immediate and deferred annuities, but for the purposes of this article we will only look at deferred annuities (they are more commonplace).
With insurance annuities, you will pay a premium over a fixed period - for example, S$10,000 a year, for 20 years. Once you reach a certain age (most commonly retirement age at 62), the annuity will start to provide periodic payouts. For instance, you might receive S$1,000 a month, for the next 20 years.
- Due to the effect of compounding, annuities can be worth much more than you paid for them, when given time to accumulate.
- You have the option for your payout increase in pace with inflation.
- Annuities provide a consistent and predictable source of income, during retirement.
- While you can “cash out” your annuities, you are always guaranteed to lose money doing so. You will receive less than you paid out for the annuity. As such, the money is mostly committed, and annuities cannot be considered flexible.
- Annuities require you to do a lot of homework. There are many such products on the market, and it will take time to compare and find the best deal.
- Annuities are of limited benefit if you start late. If you start paying for them when you’re 55, for example, and then retire at 65, you won’t get much more than what you initially put in.
Bonds were once the province of the affluent, as it could easily cost a minimum of S$250,000. However, new regulations permit companies to issue “tested” bonds over-the-counter, at lower costs to the companies. This means there are now bonds available for as low as $1,000.
The corporate bonds made available to the public are all investment grade (they are from creditworthy companies), and are always of the type described here (vanilla bonds).
A bond is essentially a loan to a company. It consists of three parts: the par value (the amount being loaned), the coupon (the interest paid to the bondholder), and the maturity period.
For example, a typical corporate bond may have a par value of S$5,000, a coupon of four per cent, and a maturity period of 10 years.
If you buy the bond, you would receive four per cent of the par value (S$200) every year, for the next 10 years. After that, the bond matures and you would receive the par value of S$5,000 (effectively giving you S$7,000 for purchasing the bond).
Note that the par value is not always the same as the bond’s price. A bond can be discounted (cheaper than the par value), or sold at a premium (higher than the par value).
- Unlike stocks, bonds must pay out the coupon. Regardless of how well or how poorly the company is doing, they are obliged to repay their debts.
- In the event that a company is liquidated, bondholders are paid before shareholders.
- Bonds are ideal for older investors, as they provide a consistent income. While inflation eats into bonds, older investors are less worried about this than younger ones.
- You can usually sell bonds, but to our knowledge, the bonds sold to the general public cannot be sold. They must be held to maturity. As such, bonds lack flexibility.
- Bonds are usually a bad choice for young investors. The coupon rates and par value do not change to match inflation. A par value of S$10,000, if the bond matures in 30 years, will have the equivalent purchasing power of just around S$4,000 today (factoring in three per cent inflation).
Slow and Steady is Boring, But Safe
We know this is all a little dry and not very exciting. But sometimes, boring is best.
Nothing on this list is going to make you a millionaire overnight. But it fulfils the first and most important step: ensuring you don’t lose money.
You can put the rest of your portfolio in riskier, more rewarding assets, once you have the basic needs covered.