Chuin Ting from MoneyOwl got on a podcast to discuss a post they did whether you can become a CPF Millionaire even if you don’t top up your CPF:
It can be motivating to know that you could have $1 million in your CPF by the time that you are near your retirement at 65 years old. We cannot easily see it because firstly, our impression of the progression is heavily influenced by how we are acquainted with something and usually our first impression is when we are young, and relatively low in income to our later years.
It is only somewhere in the later years that most became more serious, either:
- Because we are looking for ways to reduce our taxable income, forcing us to learn more about the system.
- We are nearer to the age where we can access to the money.
- The money is more substantial that we ponder if we are doing a good job managing it.
The MoneyOwl team simulated the CPF progression if a graduate starts off with salaries of $2,400, $2,900 and $4,000 monthly. These are the median starting wages of ITE, polytechnic and university graduates respectively.
All three will have $1 million in CPF individually by 65 years old.
I think the naysayers will retort: “What can you do with $1 million in 20-40 years time?”
That is valid point, and if that is not enough, you better do better in life to supplement that $1 million because you seem to think you need more than that a few decades later.
The more important point is if we don’t tell you, does this $1 million figure come easily to you if you think about your accumulation journey? Personally, I didn’t even ponder about this so much because most of my focus has been on the cash portion of my portfolio.
If there is one flaw in this analysis, it is that many Singaporeans use their CPF ordinary account to fund their mortgage.
This is one of the reason most might never think how much their CPF can accumulate to. If you consider the mortgage payment, could you be a CPF millionaire?
That is something for me to work on next time, if I have more bandwidth.
For now, you would have to live with my humble example.
Kyith for one, never top up his CPF ever.
When we say top up there are two forms:
- The Retirement Sum Top Up or RSTU for short. Every year, you can top up $8,000 (used to be $7,000) to your CPF SA or MA (in any combi) to enjoy tax relief. You can also top up $8k to your selective love ones to enjoy further tax relief.
- Voluntary Contribution Top up to all 3 Accounts or VC3A for short. If your CPF contribution is less than $37,740 for the year, you can top up to that amount, not for tax relief but to boost more into your CPF.
These two ways, together with the old top up to your Medisave account, are ways you could put more money into your CPF to fatten it.
I am never one to consider putting additional in because:
- For most of my career, I never earn high enough salary to consider RSTU to be viable for tax relief. I just pay the taxes.
- I value the liquidity for the money.
- If I know how to invest, my opportunity cost is not 2.5%, or 4% p.a. but a higher hurdle rate. So why would I find the CPF returns to be so enticing?
- The money locked in the CPF can only be access at 55, which is such a long time to a 30 year old.
The only top up I did was to transfer about $40,000 later in my life from my CPF Ordinary Account to my Special Account when I realize most likely, I don’t need the money for housing so what the heck.
The chart above is taken from an internal CPF Projector and it shows the progression in my CPF account values from now (age 45) till 65. I have a modified version of our CPF Projector compared to the one our Providend clients will see in their report but the math behind how the numbers are computed is the same.
It is just that I prefer to sometimes see things in chart form rather than a table full of numbers. I think my average contributions to my CPF have been averaging around $25,000 or so. Definitely not the full $37,000 that some actively sought to top up.
Here are the actual numbers. It also kind of means by the time I am 55, the Full Retirement Sum is close to $289,000.
What is also important is to figure out the purchasing power of the stream of CPF LIFE income today. I think I may have a more unique way of viewing the annuity stream compare to other people. While others like to project their expenses to the age of 65 via inflation adjustment, I just figure out the purchasing power of that income stream today.
It is about $1.2k to $1.3k monthly and if you wish to know the income if you want to self manage the inflation, it will be closer to $1k.
So if you are someone who has reached Full Retirement Sum in your CPF, you can think about your spending in these three income figures. How much of your spending can you squeeze into this monthly figure. If you felt that this is not enough, you might need to top up more!
Honestly, the numbers surprised me. And since I have calculated the numbers for other staff, they were also surprised by the numbers. Why is that?
I think numbers are just surprising because we won’t fully comprehend things until we see it. I have enough experiences where the actual numbers became more optimistic or pessimistic than I originally imagine that I would rather see the actual numbers before commenting.
And I think there is too much discussion about the Kungfu of different top-up and all sorts and not enough focus on how much it could have grown to.
If you know that by staying employed, you could have this much (even if it is not $1 million) would you think differently about your money in your CPF? Would you have other deeper questions about it?
I think some would.
Think my colleague Jiamin will be very disappointed with me for not factoring in mortgage.
You are not without options if you use your CPF Ordinary Account to service your mortgage. You can do a Voluntary Housing Refund or VHR for short, where you can put an equivalent amount of what you have taken from the CPF back into your CPF Ordinary Account. This is probably the only way to put money into your CPF Ordinary Account. This is a choice that Singaporeans have to make. Those who sell off their properties will also see part of their proceeds in terms of the capital and accrual interest go back to their CPF, so that will bring them back to parity with Singles such as Kyith who didn’t use their CPF to pay for housing.
I think I will leave it for the next article if I have the time to figure this out. I will leave my comments after I see the math. Again, the numbers might surprise us.
Lastly, we couldn’t have build such a comprehensive CPF Projector for our clients if not for a few helpful souls along the way. I would like to thank Chris Tan, Lena Teng, Eddy Cheong and Tan Chong Hwee for helping me along the way.
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Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
