Dr Wealth was invited to attend the IPS Forum on CPF and Retirement Adequacy. The Forum is aimed to provide a discussion on the CPF system and seek ways to improve it. It was divided into 2 segments, with the first focusing on what the CPF system intends to achieve and what it has done so far. The second part is more focused on investments and how the CPF system can be improved.
Some pretty interesting points were shared during the speeches and it was definitely a good learning experience.
Difference Between Life Expectancy and Healthy Life Expectancy
All the resources you'll ever need as an investor
We've gone ahead and done the work. Compiled here are all the resources you'll need as an investor.
Associate Professor Kalyani Mehta spoke on how health and social trends can influence the future retirement landscape. Apparently other than life expectancy, there is another term known as Healthy Life Expectancy (HALE). HALE basically refers to the number of years a person can reasonably live healthily. The reason this is important is that once a person passes the HALE, he/she might be disabled or disease stricken such that healthcare costs rise dramatically and quality of life drops substantially.
While females in general have a higher life expectancy of 84.5 versus males of 79.9, females are expected to spend slightly more time in disability as their HALE is 79.9 (84.5-77.7 = 6.8) while males HALE is 73.3 (79.9-73.3 = 6.6).
It is also important to note that stroke is the largest cause of disability. So to keep retirement expenses low and have a good quality of life, effective measures should be taken to reduce incidence of stroke, such as healthy lifestyle, diet and good knowledge on recognizing a stroke.
CPF Not A Big Portion of Retirement Assets
In a survey of seniors by Associate Professor Tan Ern Ser gave some pretty good insights. Apparently the CPF made up only 4-9% of the retirement assets. So is that a case where CPF has not done enough to help accumulate retirement assets?
Housing a Large Portion of CPF Withdrawals
Associate Professor Lum Sau Kim spoke on the housing system in relation to the CPF. She mentioned that CPF housing form a huge part of CPF withdrawals. While this is nothing new, one of the reasons put forward is lack of viable alternative assets. This brings back the question of should CPF money have more investment options? Having a large portion of the nest egg in house is definitely not a good thing. The house is illiquid and it is not diversified, a housing shock could wipe out a large portion of the nest egg.
In fact, at Dr Wealth we advocate looking at retirement assets which excludes the house you are staying in. The simple reason being that you need a place to stay so you are unlikely to sell or rent out the house.
Another key point brought up is the leasehold value decay over time. The value of the leasehold decreases exponentially over time.
Leasehold Decay of HDB from Associate Professor Lum Sau Kim’s Presentation
The above diagram shows the leasehold value dropping at a much faster rate as the remaining lease term runs out. The value of a leasehold with 0 years is basically zero, so a freehold premium should always exist. Having most of the nest egg in housing makes generating retirement income difficult unless one is able to generate rental from the house. For those opting for the lease buyback scheme, it only leaves the individual with 30 years lease, what if he/she outlives the 30 years?