Wednesday, September 19, 2012

Young working S'poreans will have enough CPF savings by retirement: MOM study

I came across this article today. Based on an independent study by the Ministry of manpower (MOM), young Singaporeans in the workforce today will have adequate savings in their Central Provident Fund (CPF) accounts by the time they retire.

The article went on to state that "the median male earner who enters the workforce today will be able to achieve an IRR of over 70 per cent through his CPF savings" and "For the female median earner, the equivalent IRR is 63 per cent. "

So what is this IRR (income replacement rate) ?
Based on investopedia, the definition provided is as follows:

Definition of 'Replacement Rate'

The percentage of a worker's pre-retirement income that is paid out by a pension program upon retirement. In pension systems where workers get substantially different payouts due to their differing incomes, replacement rate is a common measurement which can be used to determine the effectiveness of the pension system. In some cases, workers can use replacement rates to help estimate what their retirement income might be from the plan.

Investopedia explains 'Replacement Rate'

Replacement rates are commonly mentioned in the debate over the U.S. Social Security system. Under the current Social Security law (as of 2010), replacement rates are at about 45% for the average worker. The replacement rate can allow for individuals to plan for retirement. For example, a worker with pre-retirement income of $100,000 their can estimate their pension at around $45,000 at the current 45% replacement rate.

Read more:

Basically, IRR is a ratio of the retirement income to the pre-retirement income. The article mentioned that a median male earner can achieve over 70% through his CPF savings.

So how much is a median income earner earning today?

 Based on MOM statistics:


With a median monthly income of $3249, it works out to be $38,988.
A 70% IRR will mean that he will take home $27291.60 per year after retirement.

I find these numbers unbelievable. So I did a bit more on the number crunching.

Retirement calculator (CPF)
Based on a retirement calculator on the CPF website:

 This calculator has an option to "calculate the amount required to have a 70% of last drawn salary for the next 20 years"

I input some numbers to test the above scenario. The results are as follows:

Is the CPF minimum sum going to increase to s similar amount of $500k in 32 years time? In one of my earlier posts, I only estimated the minimum sum to hit $348,934.93 by 2042. However it was only based n an inflation rate of 3% per year. The above estimates are much lower as it is based on income levels now and not 30 years later. It seems that I could have underestimated the projections earlier.

Related posts:
CPF Minimum Sum to be raised to S$139,000
CPF minimum sum for Jul 2012 [predicted]
What if CPF minimum sum continues to increase at its current rate

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