Drawing a parallel from the Covid Circuit Breaker extension and personal finance
Yes CCB, the abbreviation that everyone likes to use so much.
On 7 April 2020, Singapore entered into an enhanced control measure to curb the spread of the virus, tentatively for a month till 4th of May. It was subsequently extended for another 4 weeks until 1 June 2020.
This was met with much dismay and resistance as many people was expecting life to slowly progress back to normal, or at least an easing of the restrictions come the 4th of May.
While I wasn't surprised by the extension nor the reaction to it, I would say that I am rather disappointed by the majority of the citizens adopting such a narrow mindset, which tends to reflect very similarly in personal finance nowadays. More on that later.
Coming to the point of this article,
My observation from this is that people are terribly fixated on an arbitrary date or end-point without understanding the fundamentals underlying it.
Given the amount of cases, irresponsible people, lack of enforcement, we are seeing nothing that can point to an easing of the CB. However, we still see plenty of posts assuming that the CB will end at the 4th of May, counting down - "just 2 more weeks!!", and also what seemed like the extension being very unexpected. Clearly these expectations are not in line with what is actually happening.
What does this have to do with finance? If one might recall, there are 2 'deadlines' which every Singaporean knows about and tends to attract a lot of furor. They are your CPF withdrawal age and Retirement age.
1. CPF
The most common argument is that people don't even want a single cent of their money going into CPF.
I don't even need to search for examples of people complaining about this, just head over to https://www.facebook.com/CPFBoard and have a field day.
Yes the amount being 'locked up' is pretty substantial, and yes it is your money, but if one actually needs to depend so heavily to spend their CPF money (only 20% of income) for whatever reasons - starting a business, enjoying one's silver age, paying for medical bills, kids, holidays, etc., congratulations you are screwed.
If one haven't noticed, the amount of CPF accumulated up to the age of 55, and spreading/amortizing it across another 30 years of expected lifespan, the amount per month is extremely little and just barely enough for you to get by. (Quoted from CPF: 'The Retirement Sum Scheme provides CPF members a monthly income to support a basic standard of living during retirement.' )
See the word basic? This is with interests that are nearly unbeatable for a typical person, and even finance professionals over such a long period of time (approx 4-5% risk free).
This is where I feel that some people's understanding of personal finance differs widely from the scenario they are in. They shouldn't even be complaining about that amount 'locked in', because if they can't do well without it, they will definitely not do well with it.
If your survival or basic needs relies on spending this amount meant to be set aside to keep you alive, then you might have to euthanize yourself when you hit retirement age. which brings us to the next point;
2. Retirement
'The current retirement age is 62 years, but employers must offer re-employment to eligible employees from retirement age to age 67.'
Once again those age are arbitrary, very arbitrary. As mentioned earlier, assuming one works till 62-67, without any substantial savings, their only source of survival is CPF.
This measly amount means that there is no way to guarantee you can have a nice retirement as long as you hit a certain age. I am sure many people understands that, but just consider among the people you know, how many are actually saving and are on track towards retirement? Don't even need to talk about early retirement.
Assuming you are 25, you want to retire at 60. That's 35 years to accumulate, sounds like a lot, but not really. At a reasonable risk-free rate of
2% growth per year
$2000 a month
35 years accumulation
One will have $1,217,120.76*, sounds like a lot, but taking inflation of approx 1.5% pa into account, it will only be worth $722,806.74 in present day terms (PV). Not great, but not terrible. But take a look again, who is saving $2000 a month at 25 years old? How many can do that? How many are doing that?
Some people are well into their 30s with barely any financial assets to their name (House/CPF doesn't count, see point 1).
If you start at 35 years old, saving $1000 a month, you will only have $389,469.16, equivalent to $268,424.42 PV at 60 years old. Screwed.
30 years old, saving $1000 a month = $315,752.57 PV at 60 years old -> Screwed.
"It's fine I will start saving much more when I have worked for awhile and are in higher positions"
It takes on average 10-15 years experience for one to be in management, which might pay say $7k.
40 years old, saving $2500 a month = $548,106.82 PV at 60 years old -> This is still pretty terrible.
With all the above scenarios being mentioned, it is amazing how people are blatantly procrastinating on their personal finance with regards to retirement and building of wealth as a whole, with the mindset of "There's still time, I'm still young, I'll deal with it in the future."
In conclusion, two things, one of which can be summed up in a proverb:
"The best time to plant a tree was 20 years ago. The second best time is now."
The other is that returns on investments matter, do not let unnecessary risk-averseness result in plenty of opportunity costs.
Please feel free to refer to my other article about this: Time-adjusted-volatility-and-returns-of-equities-and-risk-free-assets.