How To Optimize And Have SGD 1 Million In CPF
Tags: Singapore Pension, Retirement Planning, Singapore, Personal Finance, Pensions

How To Optimize And Have SGD 1 Million In CPF

CPF is the pension system in Singapore that provides old-age income for both living and medical expenses. Compared to some European countries, the Singapore pension system has a relatively high-interest rate. This is the key to accumulate SGD1million. But there is more than that. yasi Follow Dec 23, 2020 · 6 min read

Photo by Skyler W on Unsplash

Due to the rather ‘complex’ CPF system, most people do not understand what it is and what they can use it for, or how they can optimize it. It is then a waste of years while they are contributing to CPF and not growing it at its optimal speed.

CPF in One Glance

For PR and citizens in Singapore, contributing to CPF is compulsory. The percentage varies from age bracket to age bracket. Not only that. the employer also contributes a significant amount to the employee’s CPF. The contribution rate is in the table below. This applies to PR from 3rd year and citizens.

source: CPF Board

There are three accounts in CPF: Ordinary Account (OA), Special Account (SA), and Medisave Account (MA). Your CPF money is split based on the table below:

source: CPF Board

Contribution Limitations

It is not that you earn more you can have more money in your CPF, it is capped at a salary of $6000. If you earn more than $6000 per month, your contributed amount will be the same as someone who earns $6000.

You can top up voluntarily, the total amount of CPF contribution is capped at SGD 37,740.

If you are at age 30 and your monthly income is SGD6000, your yearly CPF will be SGD26,640 (37% of your total salary). However, it is less than the maximum cap of CHF37,740. You can top up SGD11,100 yourself. This part is called a voluntary contribution. You will see how a voluntary contribution can make a big difference in your CPF retirement sum.

Interest Rate Per Account

Money in CPF accounts accrues interest, and the interest rate is not bad at all, thanks to the Singapore government.

Ordinary Account: 2.5%

Special Account: 4%

Medisave Account:4%

And the first SGD60,000 in your CPF has a 1% more interest rate.

You can move your money from OA to SA to accrue a higher interest rate, on the condition that you have limited access to the money. Because the criteria for using the fund in OA and SA are different.

Thanks to the compound effect, your CPF money will grow to a big lump sum if you start early. And you can even speed up the process if you do not withdraw and contribute the voluntary amount every year.

Having SGD Millions in CPF

I made 5 scenarios to show you the effect of

Transferring money from OA to SA vs. not transfer Top up with voluntary contribution vs. not top-up Starting contributing to CPF at age 25 and 30

1.Comparison of Transfering from OA to SA and No Transfer

Working adult Peter and Rachel, both start at age 30 to contribute to CPF with an annual salary of SGD 72,000. No salary change for the simple illustration. Not considering a 1% additional interest rate in the first SGD60,000 in the calculation for simplicity.

Peter moves his money from OA to SA to accrue a higher interest rate every year. Rachel does not.

source: own computation

Download the spreadsheet to calculate your own pension amount here.

When they are 65:

Rachel has SGD1,6 million in her CPF, and she reaches 1mil in CPF when she is 55.

Peter has SGD 1,9 million in his CPF, and he reaches 1mil in CPF when he is 53.

By moving money from OA to SA, Peter has gained more than SGD 300,000 than Rache, due to the 1.5% interest rate difference.

2. Top up with voluntary contribution vs. not top-up

Working adults Tom, Lisa, and Edwin all start at age 25 to contribute to CPF with an annual salary of SGD 72,000. No salary change for the simple illustration. Not considering a 1% additional interest rate in the first SGD60,000 in the calculation for simplicity.

Tom moves his money from OA to SA to accrue a higher interest rate every year, and he tops up SGD 11,100 to reach the maximum CPC contribution amount.

Lisa only moves money from OA to SA, she does not top-up.

Edwin does nothing.

source: own computation

Download the spreadsheet to calculate your own pension amount here.

When they are 65:

Tom has SGD 2,9 million in his CPF, he reaches 1mil when he is 43

Lisa has SGD2,53 million in her CPF, she reaches 1 mil when she is 48.

Edwin has SGD2 million in his CPF, he reaches 1 mil when he is 50.

3. Starting contributing to CPF at age 25 and 30

Even though Rachel and Edwin do not take any action for the CPF, by starting earlier, Edwin has around SGD 370,000 more than Rachel. Because his early contributions in the first 5 years snowballed to a big lump sum over the next 35 to 40 years.

Conclusion

Starting early to contribute to CPF has a huge advantage over starting late.

Moving OA to SA can help your CPF money grow faster over the years

Topping up CPF to the maximum amount can result in a half-million difference in the case of Tom and Lisa.

If you are still in your 20s and 30s, you should focus on contributing your CPF to the maximum amount and moving money from OA to SA. This way, your CPF money will have many years to grow and when you retire, you will have an awesome amount for your retirement, when, you don't have the physical strength, probably the mental strength to take on jobs anymore. It is always important to build a strong safety net for your future self.

You can even use your CPF money to invest in ETF, it might bring you a higher than a 4% annual growth rate. There are many ways to optimize and activate your CPF money. But you should not risk them too much because they are your retirement fund.

If you are planning to use CPF money to purchase a home or other uses, plan the amount and do not transfer all money from OA to SA, read the details of what can do you do with each account, based on your personal needs, then you can optimize your CPF.

Download the spreadsheet to calculate your own pension amount here.

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