There was a report that an aircraft technician was worried that he may be force to retire when he turns 65 years old this Saturday. This is because the re-employment age ceiling will increase from 65 to 67 only on 1 July next year. The technician wants to continue to work as his two sons have yet to finish their tertiary education. Apparently, there are others in similar shoes as him. (Source: http://www.straitstimes.com/singapore/manpower/workers-turning-65-before-next-july-worried )
It is quite obvious that he and many others were not prepared for retirement. Hence, I want to write on the reasons why most Singaporeans cannot retire.
The iron rice was broken long ago
It is a myth that iron rice bowl still exists. There is no such thing as iron rice bowl. This is especially so for private companies. There is no official ‘retirement age’ because private companies can simply remove headcount whenever the company is not doing well. Retrenchment is all too common. The purpose of retrenchment is to reduce cost for the company. This means expensive staff and unproductive staff are often the target of retrenchment. Unfortunately, the older you are – the higher the chance of being identified as expensive/unproductive. Therefore, when planning for retirement, it is prudent to plan to retire at a much earlier age say 55 years instead of the official ‘re-employment age’ of 67.
Behavioral biases
For those who started to save and invest for their retirement, it is likely they have done miserably. Deputy Prime Minister Tharman Shanmugaratnam recently said that for over 10 years, 80% of CPF Members who invested their CPF did worse than the guaranteed CPF interest. In fact, 45% made losses over the same period. One of the reason he cited was behavioral biases of these investors – which is to buy high and sell low.
These behavioral biases exist regardless of whether you are using CPF, SRS or cash to invest. It is likely 80% of investors who used cash did worse than money market funds or fixed deposits. Similarly, I am not surprised 45% of investors who used cash also made losses over 10 years period.
This kind of problem is not unique to Singapore. In fact, a study conducted in the US shows that US investors face similar problems. You can read my article on the evidence to show that US investors buy high and sell low: Investors always buy high and sell low regardless of asset classes.
So what are behavioral biases that led to investors buying high and selling low? These problematic behavioral are: representativeness, overconfidence, anchoring, aversion to ambiguity, gambler’s fallacy, loss aversion, self-control, regret minimization, money illusion, hindsight bias, 1/n diversification, familiarity bias/home bias, status quo bias, myopic loss aversion, endorsement effect, prudence trap and recallability trap.
High fees
Another reason cited by DPM Tharman are the high fees charged by fund managers. These fund managers charged high management fees but they do not necessary outperform their benchmarks. In fact, active managed funds tend to underperform their benchmark. I always have a problem with these high fees charged by fund manager because of their (1) subpar performance and (2) they do not (or rather they are not allowed) to mitigate the behavioral biases of investors from selling low and buying high. In fact, underperforming funds are the strongest evidence to show that fund managers are selling low and buying high otherwise their returns would have been equal or better than the index.
Although I always prefer ETFs – which have low fees, there are endless regulatory obstacles that have been place in my path to prevent that from happening. I wrote to the Straits Times forum on this but the regulator did not seem to understand what is happening on the ground. You can read my letter to forum here: Why exchange-traded funds (ETFs) are not popular here?
Unrealistic expectations
The final reason why Singaporeans will not retire is due to unrealistic expectation on what their investments can do. A survey done by Schroders found that Singaporeans expect on average a return of a whopping 9.2% from the stock market. Did they not know that average return is negative after taking into account of inflation and risk involved? The fact that 80% CPF investors did worse than 2.5% and 45% lost money over the 10 years period are evidence that the stock market is not the place to be in for the average investors.
Of course, majority of the investors are confident that they will do well in the stock market because the ‘overconfidence’ bias is strong in them.
Can a financial adviser help? Not likely
Since I am a financial planner, I have something to say about this. Will I be able to help my clients to earn better returns than if they would to do it themselves? The answer is likely no. All investors are subject to behavioral biases. I have no control when my clients invest. In fact, I get a lot of queries on investments when the market is raging high but nobody wants to talk to me when the market is depressed such as during 2008 financial crisis. Hence, any money invested through me is likely done at the peak of the market. I can tell people to go slow with their investments when the market is raging high but they will instead go to another adviser. Similarly, I can tell people to start their RSP when market is down but I will get a cold shoulder.
Another issue is I manage investments on a non-discretionary basis. This means that all transaction has to be approve by the client. Since the client is subject to behavioral biases, my transaction can be rejected.
Finally, I can get penalized for practicing ‘buy and hold’. I remember an investor complained that I ‘neglected’ his investment portfolio as he perceived the “buy and hold” as neglect. Apparently he expected me to churn his portfolio like some profession trader.
So what is the solution? I will just charge a fee for advice regardless whether the advice was accepted or otherwise.
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Engaging so called financial consultants/planners to invest your CPF or hard earned saving is doomed from the start.Why?
1. they are ONLY financial product salesmen
2. they are NOT qualified
3.the worse is they have their only interest to serve and NOT the clients’
In the last 15 years what did the conman insurance agents do for your CPF money? Double your hard/heart earned money? or cheated you of your future? Figures don’t lie, right? Since 2001 when CPF was liberalised how many of the members’ account lost money? Till today , as many as more than 85% of the accounts still reeling from losses and the rest only managed to meet the 2.5% or slightly more . What kind of ‘advisers’ are they and who go by the titles of financial consultants/planners/wealth managers? Are they not conmen and women?
The good news is CPFIS changes will stop allowing members money to be put into the hands of the conman insurance agents to gamble away their retirement funds.
What about cash? same story lah.
So the moral of the story is to save and put into fixed deposits and government securities then.
And through that, people may actually still have their savings decades later.
Hmm so far nobody commented on why the F anybody wants to continue slogging after 55, let alone after 65?!?! The problem is that people don’t take saving & investing seriously. Retirement planning actually has its foundations when you’re only 3-5 yrs old. Concepts of delayed gratification and building habits of saving pocket money, budgeting, working towards a goal (e.g. buying a toy) sometime in the future instead of NOW NOW NOW, etc have been shown in studies as accurate predictors of how these people fare financially when they’re adults.
Now most people in Singapore are unable to retire comfortably on their own even after working 40 yrs or more. They have to depend on handouts from children, other family members or from govt. Govt knows this and their main solution is for Sinkies to work until they drop dead. CPF as a retirement vehicle is broken ever since the govt opened Pandora’s Box to allow CPF money to be used to buy properties.
Soon govt will be promoting people to have 3 or more kids not because to build up Sinkie population, but as retirement planning. They will show on TV and posters images of thousands of old, sick, handicapped malnourished people sitting/lying in darkened & dirty flats on their own with nobody to support them. And the message is “You WILL end up like this, unless….”