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Relying On CPF Money For Retirement Is Risky. Here’s Why And How You Can Plug That Risk

Most Singaporeans grow up with the mindset that our Central Provident Fund (CPF) is our surest bet for our post-retirement life. It is no surprise if you think that way too, just like many Singaporeans. But relying on CPF money as your only source of retirement funds can be a risky move. Here’s why.

Risk 1: CPF May Reduce Payout In The Future, Thanks To The Low Interest Rate Environment

In the recently released Melbourne Mercer Global Pension Index (MMGPI), Singapore’s CPF ranked as the top retirement system in Asia. On the global front, Singapore’s CPF ranks 9th in the world. Given such good ranking for Singapore’s CPF system, you might be thinking, “What is there to worry about?”. While Singapore’s CPF system is the best in Asia, but it isn’t fool proof.

Even The Best Pension System In The World Is Facing Payout Reduction Problems

Well, the thing is, even the world’s best pension system is facing problems in the past decade of low interest rate. The world’s best pension system (i.e. the Netherlands’ pension system) is planning to reduce monthly payout for its pension members starting from January 2020. According to the Netherlands, it is a direct impact of the low interest rate environment in the past decade. This is a worrying sign for the rest of the world given that even the best pension system in the world is planning payout reduction as early as 2020.

In other words, Singapore’s CPF could face the same worrying trend of payout reduction as The Netherlands. It is only a matter of time.

Risk 2: CPF Is A Single Tier Retirement Pension System With No Plan B

One of the weak links in Singapore’s CPF system is that it is a single tier pension system. This is unlike The Netherlands which uses a two-tier pension system. The first tier is a basic state pension that is paid for by yourself, similar to Singapore’s CPF system. The second tier is a supplementary pension fund that is run by employers. If either tier fails, there is still a backup in the other tier. This ensures that every Dutchmen will not be left hanging without any pension money.

Solution: Don’t Over-Rely On CPF for Retirement. Supplement It With Your Own Plan

Nope, we are not here to lament about how bad our CPF system is. While Singapore’s CPF system might not be the best, it is probably one of the more cost efficient one in the world. Rather, we are here to brainstorm about how to supplement the gap in our CPF system to ensure a better retirement life for every Singaporean. As a Singaporean, how should you address the gap in the CPF?

Create Your Own Two-Tier Pension With A Private Retirement Plan

The most effective way to plug the gap is to model after The Netherlands’ two-tier pension system by creating your own. You can do that by simply supplementing your CPF money with a private retirement plan. Having your own retirement plan will ensure that you aren’t over-reliant on your CPF money for retirement and provide financial security for your retirement lifestyle.

Want to build your own two-tier pension? Check out the 3 Best Retirement Plans in Singapore to see which retirement plan suits your needs.

If you are not sure about which retirement plan to choose, you can reach out to Moneyline.SG for a comprehensive review of your retirement goals and financial plan for retirement. Our consultants will provide a recommendation of the best retirement plan based on your retirement needs.

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