The importance of equities for retirement

The Business Times
30/7/2013

LAST week, the Singapore Exchange (SGX) and consultancy Oliver Wyman released a paper on retirement savings. It suggested scrapping the $40,000 requirement to invest Central Provident Fund (CPF) Special Account so that Singaporeans can start early, have a chance of accumulating high returns and ride out market volatility.

The paper said that the average Singaporean reaches the current $40,000 threshold too late, at age 40, to start allocating money to higher-risk equities through the CPF. Also, just 12 per cent of the CPF was put in equities, compared to 49 per cent in Malaysia's pension scheme equivalent, 68 per cent in the US and 69 per cent in Australia.

Stock markets have a propensity to reward people who can stomach its wild gyrations. But the rewards can be decent. The US S&P 500 index has returned an average of around 8 per cent a year over the last 60 years. Singapore's Straits Times Index has returned 9.3 per cent a year in the last 10 years, though this was distorted by a low point in 2003 and a 20 per cent surge last year. Still, these 10-year returns are noticeably better than fixed deposits (1.3 per cent), inflation (2.7 per cent), Singapore government bonds (2.6 per cent) and even property (6.3 per cent).

Stocks, particularly solid, income-generating businesses, should be promoted as a viable investment choice. To promote retail participation, a lot more investor education is needed. This can be on basics such as the benefits of diversification and the concept of investing over a time period to cut costs. However, SGX's suggestion to do away with the CPF Special Account limit is not necessary.

The current floor rate of 4 per cent a year for the Special and Retirement Accounts is a decent, risk-free return. The study itself said that the CPF will provide 68 per cent of a Singaporean's working income in retirement. This is within the World Bank's recommended range of 53 per cent and 78 per cent.There is no need to fix something that isn't broken.

What is also interesting is SGX's conclusion that the expense fees for many investment products are too high and people are paying more for middlemen expenses than actual investment management. This is true for structured products, many investment funds and investment-linked insurance policies. Singaporeans need to be warned against investing in products they do not understand, promoting minimal returns at low risk levels but high fees. Online brokerages offer a low-cost alternative that many are not aware of.

Many Singaporeans tend to view stocks as a form of gambling. Others are scarred by their memories of the global financial crisis. Yet those who shied away from the market missed out on a strong rally over the past four years, and many dividend payments in between. Ultimately, investors lose money because they trade too much and too hastily. If they invest for the long-term and start early, their eventual portfolio can help bolster their CPF retirement savings.