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Here is why (and how) parents should try to beat the CPF system

By March 14, 2020Current

TL;DR – If you can’t beat the CPF system, use it to your benefit.  

These three letters have divided people for decades in Singapore – most either love it or hate it. (No… we don’t mean PAP hahaha!) Instead, we’re talking about CPF aka the Central Provident Fund. 

Fundamentally speaking, the Central Provident Fund (CPF) is Singapore’s version of a social safety net, where monthly contributions from both yourself as an employee and your employer go into several accounts. This comprehensive system gives you interest on your monies in these accounts, helping Singaporeans and Permanent Residents build their retirement funds. 

OA, SA, CPF

CPF accounts and their uses (via)

 

As parents, we are often focused on our own savings, investments and retirement. Partly so that we are able to have a comfortable sum to retire with (cue NTUC Income’s Last Sandwich Generation ad – which touches on the poignant topic of retirement adequacy so parents do not burden their children) and partly so that we can have savings to leave to our future generation.

However, in the midst of juggling parenting as well as #worklife, parents often forget that we have a great tool that we can wield. 

The magic of compounding interest and how to hack it 

Albert Einstein famously once said – “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”.

These words are profound in the sense that compound interest is the manner in which an investment can have exponential increases. It is basically the result of reinvesting the interest on an investment and therefore getting additional interest on the interest of the principal sum. Hope we didn’t lose you there!  

The effect of compounding interest (via)

 

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The key that makes compound interest effective is the length of time it has to compound and this is precisely why parents should make use of the compounding interest of their children’s CPF accounts from an early age.

Here are two ways you can consider investing: 

Putting money in your children’s Ordinary Account (OA) 

The money you invest now into your children’s OA will compound at 2.5% (with an additional 1% for up to $20,000 in OA).

Money from the OA can be used to offset housing down payments and across a horizon of about 20 years, would turn a $20,000 lump sum deposit into a sizeable $39,796. Based off the prices of HDB’s BTO, this sum would be enough to entirely cover the down payment of a 4 or 5 room BTO. This headstart could really help a young family so that they can focus on saving up for their other needs. 

Housing aside, one’s OA monies can also be used to pay for higher education. For time-strapped parents who cannot monitor investments or are not as savvy with endowment planning, setting aside just $20,000 would be more than enough to cover local higher education fees and partial overseas higher education fees. With a guaranteed sum and no risk of losing the capital. If that’s not a great way to hedge against education costs, we’re not sure what else is. 

The Dive: Is CPF A Good or Bad Retirement Scheme?

Putting money in your children’s Special Account (SA) 

The money that you put into your children’s SA will compound at 4% per annum (with an additional 1% on the first $60,000 in combined balances). This means that even a sum of $10,000 that you put into your children’s SA would yield close to 13 times that amount when they are at retirement age.

Example of compounding interest in OA and SA

Yes, it might be a far fetched idea to start planning for their retirement but you have to bear in mind that the Retirement Sums are shifted every year. This is because more money is required to be set aside for every subsequent cohort as inflation means the cost of living for each subsequent cohort will increase. 

The Basic Retirement Sum for 2020’s batch is $90,500 and doubling that gets you the Full Retirement Sum of $181,000. The Enhanced Retirement Sum is 3x the Basic Retirement Sum.

Dear Singaporeans, stop complaining about CPF – it’s a good scheme for Singapore & Singaporeans

Now… think about what that number might look like if your children retire in 2075! Still think it’s too early to give them a headstart in retirement planning?   

Retirement Sums per cohort according to CPF website (via)

Starting to make use of CPF

All in all, CPF is a great risk-free tool that builds on the exponential power of compounding interest to help parents and their children alike generate wealth and get a headstart in retirement planning.

It’s never too late to re-look at how to use CPF to your benefit!

Lifelong critic of the PAP government says, “CPF is good for you goondus”

(Featured image via Endowus.com)

 

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Jasmine C

Author Jasmine C

Pens random musings of life for anyone who would listen to an idealistic yet practical soul. xx

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