As a Certified Financial Planner™, whenever I even mention the word “investment”, people are way too eager to ask about “stocks/equities”, “bonds”, and “funds/unit trusts”, thinking that these are the best, sure-fire ways to financial security and financial freedom. But they are always surprised when I instead mentioned CPF. Although most people think CPF is a retirement tool, I’d like to think of CPF as an investment tool. What other investment is low-risk (or virtually no-risk) and has a guaranteed return of 2.5% up to 6%? What other investment is inflation-adjusted, commission-free, out of reach by creditors, and has an annuity payout that you cannot outlive? To learn more about CPF, please visit the CPF website.
Here’s an infographic showing you that an average Singaporean (monthly wage of $4000, assuming no wage increase) can be a CPF Millionaire in their mid-50s by just using one simple trick to maximise CPF. It also summarises 3 other common scenarios (even one with $0 wages) and the length of time it takes for all of them to be millionaires:
- Average monthly wage of $4000 for all profiles except the last one.
- No wage increases, no bonuses.
- Does not account for the additional 1% on the first $60,000 or the additional 1% for those age 55 and above.
- CPF interest rates remain at 2.5% to 4% throughout all years.
In each graph, the 31st year is demarcated. I used 31 years as a baseline for comparisons since in the first scenario, it is possible to obtain $1 million in 31 years. All the graphs stop once the total CPF amount crosses the $1 million mark. In the last scenario, there are no contributions; this graph just shows you the “magic” of compounding at 4%. If in all of these scenarios, year 0 begins at age 25, then all of these people would be able to retire anywhere between 56 and 73 years of age with at least $1 million dollars in their CPF account. How cool is that?!?!?!?
Tips on How to Maximise CPF and get >$1M in Less Time
1. Move funds to the SA (Special Account). The MA (Medisave) and SA both get a minimum of 4% interest per year. You can elect to move funds from the OA (Ordinary Account), which earns 2.5%, to SA. Please note that this election is irreversible and has consequences. Basically, you are trading flexibility, as OA is commonly used for housing payments, for an additional 1.5% increase in interest. If you are considering this and are not sure about the consequences, please consult CPF if you have any questions.
2. Leave your MA funds alone. I just had a day procedure done at one of the restructured hospitals and it cost over $1000, but I paid cash. Why? Because my MA earns 4% and my cash doesn’t.
3. Make use of the extra 2%. The highest interest rate for CPF is 6%. Currently, there is an additional 1% earned for the first $60,000 of combined CPF balances. This means if you have that $60,000 in SA (and nothing else), you’re getting 5% but if you have that same $60,000 in OA, you’re getting just 3.5%. CPF members aged 55 and above also earn an additional 1% extra interest on the first $30,000.
4. Top up your CPF. Under the Retirement Sum Topping-Up Scheme (RSTU), you can make cash contributions to build your own CPF SA (for members below age 55) or RA (for members age 55 and above) or the SAs/RAs of your family members/dependents. These top-ups are tax-deductible.
5. Make a Voluntary Contribution. You can make a non-tax-deductible Voluntary Contribution to your CPF account up to the Annual Limit ($37,740 for 2016), which is the maximum amount of mandatory and voluntary contributions to the total of all 3 CPF accounts in a given calendar year.
6. Don’t use funds in the OA to invest in the CPF Investment Scheme. According to a Straits Times article, most people are better off leaving their money in CPF rather than investing it through a CPFIS because most people through self-directed investing cannot beat the returns CPF guarantees.