With the Central Provident Fund (CPF) scheme in place to help aid Singaporeans with their retirement, we ask ourselves if the average Singaporean couple would be able to accumulate a million dollars worth of net assets (less loans and borrowings) at the age of 55?
Let us find out whether the average couple would be able to do this seemingly impossible task. All assumptions made are based on data we obtained from publicly available sources such as the Department of Statistics Singapore and the Housing Development Board.
1) Couple starts working at 25 years old and marries at 30 years old
2) The couple each earns the Singaporean’s median salary of $3222 per month
3) Zero inflation, compensated with the assumption of zero wage increment and no bonus
4) Purchase a 4-room BTO in a non-mature estate for $238,000 (without grants)
5) Pays the monthly home mortgage using only CPF Ordinary Account
6) Ignore the extra 1% interest that CPF provides for the first $60,000
The combined assets under the couple’s name at age 55 are as follows
a) HDB: $238,000 fully paid for (we assume no price appreciation)
b) CPF Full Retirement Sum: $322,000 ($161,000 x 2)
c) Medisave Account: $97,000 ($48,500 x 2) – at the cap allowed in the account
d) Cash from CPF: $597,000 approx.
The results show a total net asset of $1,254,000.
This may surprise most people, but it is actually a realistic possibility for the average couple to accumulate more than $1 million in net assets with the help of CPF.
In fact, our estimates are conservative because we are not taking into account the fact that the first $60,000 in your CPF account ($20,000 in Ordinary Account (OA) and $40,000 in Special Account (SA)) will earn an additional 1% interest. We are also assuming that the value of the flat that the couple bought would not appreciate in value.
How is it possible to obtain total net assets of $1,254,000 at age 55 for the couple? It all boils down to the simple logic of compounded interest and constant contributions towards the CPF.
The Power Of Compounding Interest
For every thousand dollars that is in the OA or SA account for, we will earn an additional $854 and $1,666 in 25 years time respectively. This is the result of the power of the compounding effect.
Table 1: OA and SA (MA) Average Interest Rates Over 25 Years
|Year||OA Compounded Interest||OA Average Interest per Year||SA (MA) Compounded Interest||SA (MA) Average Interest per Year|
Note: (1) Compounded interest formula = ((1+0.025)^year )-1. (2) Average annual interest formula = (Compounded interest)/year. (3) MA = Medisave Account.
Source: Central Provident Fund and DollarsAndSense
Consistent contributions to CPF build up total assets towards age 55
At 30 years old, the couple would have accumulated a total of $94,600 ($47,300 x 2) in their OA. This amount can be used for the down payment of their HDB flat. The couple would borrow $143,400 from HDB at an annual interest rate of 2.6%. According to PropertyGuru’s Mortgage Repayment Calculator the monthly amount payable is $650.
The amount left in their combined SA and MA are $26,600 and $34,200 respectively, at age 30.
A couple would have to pay about $650 monthly for 25 years until age 55 to clear their home loan.
This means that the couple has to pay $325 ($650/2) each from their CPF OA accounts. This should be very comfortable for someone who is earning $3,222 per month, as they would have a monthly contribution of $1,190 (inclusive of employer’s contribution) into their CPF account each month.
At age 55, the couple’s aggregate OA, SA and MA would have accumulated a total of $597,000, $478,000 and $97,000 respectively.
A couple with at least a million dollars in net assets is definitely possible
CPF adjusts the contribution rates to emphasize more on the SA and MA as a person gets older so that they will be able to contribute more to these accounts to earn a higher return.
All these details help contribute to a couple’s dignified retirement after age 55. Based on the model, we stand firm that an average couple that chooses to purchase a lower priced property would be able to attain a combined net asset that exceeds $1 million at age 55.
Table 2: Combined Accounts Of An Average Couple In Singapore
|Value of Home||$238,000|
|Combined Cash Withdrawls||$597,000|
|Combined Minimum Sum in CPF||$322,000|
(assuming no withdrawal)
Some might argue that we have not include in other expenses such as the cost of raising children, or that there might be other unexpected expenses not accounted for.
However, the CPF monies cannot be used to raise children and pay for unexpected expenses anyway. All these extra expenses incurred in life do not affect money in our CPF account.
With the help of CPF, an average earning couple can attain net assets of over $1 million at age 55, even without saving any extra money on their own.
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