The Moving Target Board of CPF Minimum Sum - Are You On Track?

Retirement planning is something I believe one should start as early as possible - perhaps as early as early 20s, and developing financial intelligence even earlier on. After all, time is a valuable resource and a key advantage younger people have over older people. Part of the retirement planning usually takes your CPF into account. And when we talk about CPF for retirement planning, CPF Minimum Sum would be on the mind of most Singaporeans.

Also a pretty timely moment to write on CPF, given the announcement of Budget 2020.

What is the CPF Minimum Sum
It is a sum of money one needs to set aside in your CPF Retirement Account (CPF-RA), so as to help one prepare for retirement. Your CPF Ordinary Account (CPF-OA) and CPF Special Account (CPF-SA) is transferred into CPF-RA when you reach the age of 55.

This is subsequently drawn down when you reach age of 65-70 (depending on which option you have opted for) under CPF-LIFE or Retirement Sum Scheme.

CPF Minimum Sum in broken into 3 brackets:

• Basic Retirement Sum (BRS)
• The Minimum Sum for a person owning a property with lease that can last till at least the age of 95
• Full Retirement Sum (FRS)
• 2x BRS
• The Minimum Sum for a person who does not own a property or a person who owns a property and wishes to receive the full monthly payout.
• Enhanced Retirement Sum(ERS)
• 3x BRS
• For members who wishes to receive higher monthly payout.

For Singaporeans turning 55 in 2020, BRS is currently $90,500, which translates into FRS of $181,000 and ERS of $271,500. For the year 2017 to 2020, the increment to FRS has been consistent at +$5,000. With the release of Singapore's Budget 2020, the Minimum Sums for year 2021 and 2022 are listed as below, with subsequent years expected to keep up at a +3% annual increment for subsequent cohort.

The table below shows the Minimum Sums required for Year 2020 to 2022, as well as the projected sum from Year 2023 to 2050, with increment of 3%, BRS rounded up to the next highest $500, and multiplying 2x and 3x for FRS and ERS respectively, assuming the format of the increment remains consistent. There will be some distortion baked-in in the form of the rounding up, but it might add a little bit of safety factor in planning so let's just roll with that.

Accelerating CPF Minimum Sum Accumulation by leveraging on CPF
It is possible to accelerate the accumulation of you or your loved ones' Minimum Sum by leveraging on the effects of compounding and the interest rates of CPF-OA (base of 2.5%) and CPF-SA (base of 4%).

Remember what I have said before for effects of compounding!

See old post: Effects of Compounding on Principle Amount

Some things that you can do with your CPF monies:

• Voluntary Cash Top-up to CPF account (Risk-free)
• Voluntary Transfer of CPF-OA monies to CPF-SA (Risk-free)
• Using CPF monies for investment with CPF Investment Scheme (CPFIS) (*not* risk-free)

See: Link to CPF Retirement Sum Topping-up Scheme FAQ

For those who are not comfortable with taking on risks, I do think leveraging cash top-up or CPF transfer is a good way to meet the Minimum Sum.

So question for readers at this point:

Is your retirement planning on track?

Personal Sharing - Am I on track?
Relating this to myself, I am turning 32 this year. If the increment remains consistent up till I turn 55 at 2043, I am looking at an FRS of $370,000. With my current combined CPF-OA and CPF-SA balance at about 26,000, there is a sum of $344,000 to close up on. Annualising this figure, I need to achieve an average yearly compounded growth of about $15,000. This works out to a required CAGR of 11.9%.

In all honesty, my balls shrank I found it quite daunting when I look at the figure and that made me want to see what extent am I on or off track by.

(Yes, the strikethrough bit is intentional for a bit of humour, though a bit coarse.)

I did a calculation up till age 55 with some assumptions to a particular scenario:

• CPF
• CPF Interest rate unchanged
• CPF Contribution rate unchanged
• CPF Allocation rate unchanged
• No voluntary top-ups or transfers
• Career
• Working up till age 55 in my current company, without any no-pay leaves or salary deduction.
• A base case steady salary increment of 3%, with a couple promotion increment (6% instead of 3%) in between before salary peaking mid-life.
• Yearly bonus of 1.5 months
• Gross salary peaking mid-life at 6000, and no further changes up to age 55.
• Expenses
• Owning my current home and not downgrading/upgrading
• No change to CPF-OA expenses until fully paid (Mortgage, Home Insurance)
• Investment with CPF
• Not making any investment with CPFIS

It is a rather smooth-sailing (read: no retrenchment or penalties) scenario but nothing out of the ordinary, which should lead to me hitting FRS by age 50. However, I will still miss ERS by almost $90,000 when I turn 55.

It is likely there will be a lot of deviation from this, but:

• At least I have visibility of numbers if this is the direction I chose to take and my life decides to play out as per this particular scenario 
• I also have visibility how the numbers will change if I make any decisions or if there is any other events that will reduce the balance in my CPF accounts (e.g. upgrading to a more expensive property, investing with CPF-OA monies).

New Feature - Introducing Stock Database
While still in its infancy, I am excited to try out starting this project to maintain a database of stocks and personally tracking major announcement of shares.

You can check it up by accessing the the Database here! On the desktop website, you can also access the Database page via the tab on top, while you can also select the page from the dropdown box.

PRIME US REIT and Lendlease Global Commercial REIT represents my initial entries to the database, with Elite Commercial REIT being the latest entry - feel free to check it out too!

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CPF Musings

Figure I want to do a write-up on CPF after thinking about its usage and my planning for long-term goal.

First, let's start with reviewing the benefits we receive in CPF.

Benefits

• CPF-OA gets a 2.5% guaranteed interest rate.
• CPF-SA, CPF-MA and CPF-RA gets a 4% guaranteed interest rate.
• First 60k in CPF gets an extra 1% interest rate, of which up to 20k is contributed by CPF-OA.
• CPF-RA will get an additional 1% on top of the first 60k
• We can transfer funds in CPF-OA to CPF-SA (however this will not be tax deductible.). This is irreversible.

Next we look at some limitations we have for CPF

• First 20k in CPF-OA cannot be used for investment.
• Only 35% of the funds in CPF-OA can be used for investment instruments barring gold or gold ETF.
• Only 10% of the funds in CPF-OA can be used for purchasing gold or gold ETF.
• First 40k in CPF-SA cannot be used for investment.
• Any CPF grants taken will be subjected to also compounded interest needing to be paid back to CPF Board when returning the amount (e.g. selling your home which you took a proximity grant for).

CPF-OA and CPFIS
It is mentioned most investors loses money or is unable to beat CPF-OA's 2.5% interest rate using CPFIS to invest their CPF-OA money, and that if one is not confident of outdoing the CPF-OA interest rate or is generally risk-averse, it will be better to park the money in CPF-OA.

It is still my opinion, however, to have a CPFIS Account set up so as to be ready to take advantage of any bottoming of the market (risk management to limit downside).

Remember, the general rule of thumb is still the amount of effort, time and risk management put in is proportionate to your rate of returns.

If one is confident he or she will no longer touch your CPF-OA, he or she can consider topping up CPF-SA to earn in that extra 1% of interest.

Using rule of 72 (divide 72 by the percentage of interest you get annually to approximate the amount of year taken to double the initial amount), an amount subject to the 5% interest rate will compound to double in ~15 years.

Time is a resource and compounding should be put to work as early in your life as possible (within reasons).

Myself personally, although I have just started out on my investment journey, there is a few reasons why I would like to take more control of how I get returns on CPF-OA money.

• I enjoy a do-it-yourself  approach.
• I strongly believe I can get a better rate of return than 2.5% based on my risk tolerance for my CPF money. This is especially crucial as I would like to beat inflation rate.
• I would want to have the flexibility to put funds back into my CPF-OA after I used up my CPF-OA balance getting my first home.

(Of course, bearing in mind I sold Singtel shares from my CPF-OA, if it weren't for the HDB purchase, I would have hold for at least a few years as I remain confident it will remain resilient amidst the Telco fears. Haha.)

Come end-May I will see my CPF-OA zeroed out and unable to accumulate any more money as it will all go to mortgage unless I see performance bonuses over the years. I do not intend to top up my CPF with cash either. Guess beyond all that, I can only hope to get the top ups from reservist. :P

CPF-SA

With CPF-SA, besides the interest rate being already decent, we are much restricted in the instruments we can invest, not to mention most of the instrument you are allowed to use probably will hit nowhere near 4% rate of return or the reward-to-risk ratio loses out. Let's look at the instruments one can invest in using the CPF-SA (link here). There's next to no reasons to using your CPF-SA monies to invest.

One thing's not sure though - I'm very sure relying on CPF alone is not going to go well for retirement planning.

CPF-OA versus Inflation rate

Ever since I started my investment journey, I have emphasised a core rule both to myself and my friends that must not be broken no matter how risk-adverse one is:

"No matter how you achieve it (savings plan, bonds, stocks, bank accounts with high interest rate etc), hedging must be done against inflation, with the minimal eventual goal of having all your money and asset beat overall inflation rate of 3% p.a." This would include your CPF monies.

For the sake of this discussion, I would decouple CPF from non-CPF rate of returns and treating CPF-OA as a separate entity instead of considering it in conjunction with CPF-SA, which will become your CPF-RA when you hit 55.

(This discussion assumes CPF guaranteed risk-free interest rate is unchanged, you do not do and do not intend to do any investments with CPF including housing, and you are not anywhere near age of 55 yet.)

That brings me to the next bit. As we know, CPF-OA has a base guaranteed risk-free interest rate of 2.5% p.a, and up to 20k of your first 60k in CPF overall can earn extra 1% p.a. Your CPF-SA has a base rate of 4% p.a., and can earn an extra 1% p.a. as part of the first 60k in CPF, which means your CPF-SA is always ahead of the inflation rate.

If we look at the CPF-OA alone, this means the first 20k will beat inflation rate, at 3.5% interest rate. However, past a certain amount of savings in CPF-OA it will start to decrease, and then start to lose out to inflation.

Based on calculation, the tipping point in CPF-OA is 40k (3%). Having a more detailed breakdown into this, you can observe how the average rate of return decreases:

3.50%	2.50%	Avg ROR
20000	0	3.50%
20000	5000	3.30%
20000	10000	3.17%
20000	15000	3.07%
20000	20000	3.00%
20000	25000	2.94%
20000	30000	2.90%
20000	35000	2.86%
20000	40000	2.83%
20000	45000	2.81%
20000	50000	2.79%
20000	55000	2.77%
20000	60000	2.75%

 
What this translate to is if the savings in CPF-OA is to beat inflation, any amount accumulated in your CPF-OA after the first 40k needs to be diverted to instruments with returns of at least 3%. Next, you can start to consider the effect of the other factors specific to you surrounding your CPF-OA savings (e.g. housing loan, your retirement sum).

Just some food for thoughts.

Enjoyed the short read? Have your opinions and thoughts to share? Feel free to share it in the comments section!

Oh, and Happy Lunar New Year to all! Marksman, signing off.