As a follow up to the previous article Comments on 5 Myths Busted as well as Ways to Get Exempted From the CPF Minimum Sum, Dr Wealth ran an analysis on the likelihood of younger generations of Singaporeans meeting the ever increasing CPF Minimum Sum.
One of the primary fear is that by the age of 55, Singaporeans will not have enough money to meet CPF Minimum Sum, so they will not be able to withdraw any money from their CPF accounts.
While the CPF Minimum Sum is $155,000 currently, at an inflation rate of 3%, by the time a 25 year old reaches 55, the CPF Minimum Sum would be a whopping $376,000! Now, can a Singaporean achieve this Minimum Sum amount in his CPF?
To model this scenario, we made some basic assumptions.
Base Scenario Assumptions
- Age – 25 years old
- Beginning Salary Based on 2013 Median New University Graduate – $3,050 as well as Median New Diploma Graduate at $2,250
- Salary Growth of 2% annually
- CPF OA Rate – 2.5%, CPF SA, Medisave – 4.0%
- Assuming no use of CPF OA/SA and Medisave for any other purpose
- Medisave Ceiling Grows At 3.0% per year, once the Medisave account exceeds the ceiling, the contribution goes toward the CPF SA
- Uses all cash to meet the Minimum Sum
- CPF contribution rates remain the same from 2014
CPF Account Simulation – 25 Year Old University Graduate
From the chart, based on CPF SA alone, the individual is able to accumulate approximately $322,000 which is $56k short of the $376,000. However, the CPF OA has almost $451,000 in the account, so even if the individual uses portion of the OA to pay for housing, achieving the Minimum Sum should not be a problem.
CPF Account Simulation – 25 Year Old Polytechnic Graduate
From the chart above, CPF SA alone is approximately $210,000 at the age of 55. So the CPF OA which is $332,000 will be required as well for the Minimum Sum. Depending on how the user uses the CPF OA, for example to buy a house, would there be a short fall?
To future test this case, we have to make more assumptions in Scenario 2.
Scenario 2 Assumptions
- Purchases a HDB at $400,000 at age of 30
- Takes an 80% HDB Loan at 2.6% rate
- Takes a 25 Year Loan
- Shares the installment equally with spouse
CPF Account Simulation – 25 Year Old Polytechnic Graduate Buys HDB
From the chart above, CPF SA stays the same but OA drops dramatically to about $7k, leaving a total of about $245k combined. However, since the individual has a HDB house, the property can be pledged to reduce the Minimum Sum by half to $188k. So the individual can still take out about $57k.
In conclusion, we can see the Minimum Sum should be achievable for both Degree and Diploma holders based on the median income. So that should help to put the minds of those who worry about it at ease. At the end of the day, we would like to stress that relying on the CPF Minimum Sum for the CPF Life Annuity is unlikely to provide sufficient income for the retirement most people would like.
how about for non degree and non diploma holders?
If you look at the trend the Minimum Sum is climbing, the "inflation rate" is actually not 3% but close to 6% so the target M.S of 376K is too low.
Hi Raymond Chiam, we did take a look at the trend of the Minimum Sum over the years and yes the rate of increase seems to be high. However, that's because they are targeting for the Minimum Sum to reach $120,000 in 2003 dollars, so a large part of the increase is actually not inflation, but to bring the total sum (excluding inflation) from $80,000 initially to $120,000.
Once it reaches $120,000 in 2003 dollars, rate of increase should follow inflation. Using that as a guideline, inflating $120,000 in 2003 at 3% actually gives us a slightly lower figure of $369k.
Hi Mariner, using ITE grad starting income of $1700, we get CPF OA at $251k and CPF SA at $133k, bring the total to $384k. So it is almost just nice to reach the Min Sum. Any lower income however, it will be unlikely to reach the Min Sum based on standard
CPF contribution alone.
Calvin PassiveIncome thank you! Keep up the good work on DrWealth. I had been following your old blog CalvinpassiveIncome since 2012 I think.
When you compound the salary at 2%, did you take into account there is a cap for CPF contributions?
Mariner Maine thanks!
Hi Martin, thanks for the reminder. I did a quick check, the cap it does not affect the diploma grad at all. For the uni grad, the $5k cap only kicks in at about 50 years old, so the SA is $319k, while the OA is $448k so it is only a minor difference in this case. The cpf caps will have a much larger effect on somebody with a higher salary.
Calvin PassiveIncome Is inflation just 3%? If transport and housing are taken into consideration, I doubt inflation will be merely 3%.
Raymond Chiam, this is core inflation, so no it does not take into account housing and private transport. The core inflation focuses on basic needs which is generally between 2+% to 3%.
Calvin PassiveIncome exactly my point. Was it communicated that the M.S will only grow by core inflation rate from 2015 onward? If not, then an inflation of 5 to 6% is likely going to be the trend moving forward.
Raymond Chiam, in my opinion at least housing will be excluded. That's because you can use the property for half the Minimum Sum, so the focus is mainly on living expenses. But yeah if CPF can communicate on this aspect then it could be helpful.
To be honest, I am OK with whatever increment in the CPF Minimum Sum. The reason is that I am OK not to withdraw anything from my CPF when I turn 55 and wait until 65 (current Draw Down Age) to start receive the monthly payout from CPF Life. The payout will be smaller if I do not meet the Minimum Sum.
However, what worries me is the CPF Draw Down Age (DDA). It has been raised from 60 to 65 in the past ten years. Based on this rate, a 35 yo this year can only receive monthly payout from CPF Life when he reaches 75. It is 80 for a 25 yo this year.
It seems that CPF is more for estate planning rather than retirement planning.
Hi Weil Ler, yes I think your concerns about drawn down age is valid. There is definitely a trend of increasing draw down age. However, I don’t think it will be an arbitrary raising of draw down age. It has to come from a corresponding increase in lifespan as well as ability to work to a later age. Unlike other countries, the CPF system does not run the risk of becoming underfunded and thus will work with the change in demographics rather than get forced to raise draw down age because they cannot afford it.