Previously, we spoke about how CPF messed up in their community outreach such that a simple letter has managed to mislead many of the public into thinking that CPF has “secretly increased” retirement age to 70.
That is not true although it clearly points to the fact that many Singaporean are actually unclear about CPF Retirement Scheme.
If we have Singaporean thinking getting CPF Board changed default Payout Age to 70 shows how well CPF is at getting their policies across.
This has been picked up by rumour-mongers who wasted no time in creating more confusion. However, that is another article.
In this article, we will discuss about the Full Retirement Sum (FRS), widely known as the Minimum Sum. (Clap clap CPF, people still associate FRS to Minimum Sum).
We will also discuss on how the Full Retirement Sum is easily attainable by the everyday man.
Difficult to hit Minimum Sum
One damning concern is the ever increasing ceiling of minimum sum.
At first glance, minimum sum seems like a plot by the government to hold onto our monies as minimum sum increases every year and the minimum sum is at $176k this year, which is a lot of money.
Impossible to hit isn’t it? Especially when it increases every year.
Well, minimum sum increases every year so your retirement money can fight against inflation.
Whether you like it or not, inflation exist. It has been around since the ages of the Pharaohs. It is why mee pok cost $0.20 last time and $3 now.
$176k seems too high a barrier to hit, but the truth is, if you utilise the effect of compounding to your advantage and the concentrate on building your CPF pot, even the average person will be able to hit the Minimum Sum.
Heck, I am even willing to say that if you do things correctly, not only are you able to hit Minimum Sum, you would even be able to withdraw a sizeable amount from CPF at age 55.
Good Stable Interest and Compounding
How do you hit Minimum Sum easily? Good interest and compounding.
Quoting Albert Einstein;
First, let’s talk about interest.
CPF actually provides very good interest. From an finance point of view, the more stable the government is, the lower the interest rate you will receive.
Singapore is a low-debt country rated at AAA by credit raters. Which is why government bond returns are so low, unlike countries like Argentina.
For CPF, the interest we are getting range from 2.5%, 3.5%, 4%, 5% and 6%, depending on scenarios.
Next, we will take about compounding.
For a fresh graduate with an average starting salary, plus time to let compounding take effect, hitting minimum sum or even withdrawing from CPF at 55 should not be a concern.
All you need is simple mathematics.
Assume you earn $2500/month, 20% from your salary and 17% from employer goes to CPF. That’s $11,100 a year. After working for 10 years, that would be $111k
Hey, that’s more than 60% of the Minimum Sum gone after 10 years. Adding in 4% interest for 10 years, your $110 is actually closer to $140k. And that is almost 80% of your Minimum Sum settled.
And this is a over-simplified calculation that does not take into account;
- That your salary maybe higher,
- Your salary would increase over the years
- Any voluntary CPF top ups
- The additional interest CPF gives for the first $60k in your CPF
- PSEA monies that would go into CPF at age 30
- A normal salaryman would usually work for more than 10 years
Compounding tends to have a more significant impact at the later part, compounding interest upon interest.
Of course, the calculation also did not take into account the fact that not all of your CPF contribution will be go into your Special Account. It also has not taken into account how much Minimum Sum would be in the future.
Reaching Minimum Sum
To keep up with the increasing Minimum Sum, one has to make use of the guaranteed interest from CPF and the compounding effect that can be achieve through time. The tiny example shown above only shows the effect for 10 years.
As CPF members can withdraw their monies at 55, that gives a lot more time for the monies to compound. As long as there is contribution into CPF (assuming you continue working), together with compounding, there is no reason why we cannot hit the Minimum Sum, and still be able to make it away with excess cash for withdrawal.
This is just like investment and how many long-term investors such as Warren Buffett, Charlie Munger, Peter Lynch get so rich. They compound their earnings for the long time and reinvest their dividends. The effect at the first 10 years is smaller in comparison, the effect at the subsequent years will be very big.
Just look at Warren Buffett net-worth growth.
- Age 11 – $1000 networth
- Age 30 – $1 million networth
- Age 55 – $1 billion networth
- Age 85 – $72 billion networth
It took him 30 years to earn $1 million. In the next 25 years, he earned $1 billion.
In the next 30 years, Warren Buffett earned another $71 billion.
You can see that, although the time is the same, the amount differs drastically. Warren Buffett managed to compound his earnings so much that more than 99% of his wealth was made after 50.
Last Word of Caution
CPF is for retirement, other than that, there are also many other ways to safeguard your retirement. Do not leave it on the hands of one party. In the market, there are many retirement plans available for purchase to safeguard your retirement.
In a subsequent article, we will discuss these retirement plans and how having a role in your retirement can safeguard your retirement. Understanding them is important because you don’t want to be safeguarding your retirement instead of someone else’s retirement.
Not only that, you can even improve your lives financially before retirement and beyond.