Don't count on property alone

Singaporeans believe - wrongly, I say - that the best investment remains property and it will eventually fund their retirement.

So downgrading becomes the buzzword.

I will get to the second way of downgrading later but the most common way is to sell your home and move into a smaller place.

And this is where it becomes a challenge.

In 2014, Associate Professor Lum Sau Kim from the National University of Singapore said the use of Central Provident Fund (CPF) monies for housing payment had constrained retirement adequacy.

"If so much of CPF funds are dedicated to housing, then we have poorly diversified household portfolios... the nest egg that we have will be vulnerable to housing sector shocks and greater risks," she said at a seminar.

Consider this: A home loan of $800,000 can mean your paying about $1.3 million in all.

For a $1 million home, that is $200,000 for the down payment, $800,000 for the principal and close to $300,000 for the interest. That is for a 30-year loan at an interest rate of 2 per cent.

Now consider the second option. The same couple buys a second-hand five-room HDB flat in Tampines, a major regional hub. It costs $500,000.

Instead of draining the CPF Ordinary Account (OA), that couple will be funding a retirement at an interest rate that is likely to be higher than the gains from brick and mortar.

EXTRA 1 PER CENT

CPF savings in the OA earn a guaranteed interest rate of 2.5 per cent each year, while savings in the Special Account earn an interest rate of 4 per cent each year.

"The first $60,000 of your combined CPF balances (including Medisave), of which up to $20,000 comes from your Ordinary Account, earns an extra 1 per cent interest per year," says a CPF spokesman.

That is not all. By not draining your CPF, you can earn an even higher interest rate when you are closer to retirement.

"When you turn 55, a Retirement Account (RA) will be created for you using savings from your Special and Ordinary accounts.

"Your RA savings can earn up to 6 per cent interest per annum and it will provide you with monthly payouts when you retire," says the spokesman.

The RA savings also help you join CPF Life which provides you with monthly payouts for as long as you live. The more you set aside in your RA, the higher your payouts.

So what is the other way of downgrading?

A recent survey conducted by DBS Bank and Manulife found that 30 per cent of Singaporeans aged between 40 and 60 expect to downgrade their lifestyle after they have retired.

Having worked for 40 years, is that something you'd be looking forward to?

Sure, that property dream can remain. Perhaps invest in a real estate investment trust (Reit) instead.

And there will not be a need to downgrade your lifestyle or home if you adopt a conservative approach to the home you buy, the amount you set aside in your CPF and the long-term investments you make.

This article was first published on September 04, 2016.
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