Should You Aim to be a CPF Millionaire?

Between July to August 2021, there has been quite a bit of a buzz among Singaporeans as several articles came out about how some people achieved millionaire status by utilising CPF. A Straits Times[1] cover on a 65-year old who managed to save SGD1.6 million became a talking point for young people about whether they should aspire to become CPF millionaires. Regardless of your own personal feelings about being forced to save under this government policy, it is undeniable that CPF has become a rewarding tool for those who know how to use it and act on the “eighth wonder of the world” – compound interest. The question that remains on many young people’s minds are – how relevant is it for them now and would this strategy still work, especially since those aged 20-40 year old have about between forty to twenty years before retirement?

In order to answer, this question, a good understanding of what CPF is, its strengths and weaknesses must first be understood. In short (tldr😉), if you want to become a millionaire, CPF is a powerful tool, but it needs to be complemented to ensure the most optimal outcome for your own goals.

What is CPF, ah?

While most of us sort of understand CPF as a “forced savings” system and some of us bemoan it for reducing the amount we see in our take-home salary (bye bye $1000, see you in 50 years), not all of us may know the full functions of CPF. The CPF website actually provides you with quite a brief overview of what it is, how it functions, etc. To put it in simple terms, you can see CPF as a piggybank account where both you and your employer contribute, in order for you to be able to retire comfortably (and not rely on ah kong okay!). In order to have a good quality of life, you will need cash to fund your daily living and expenses for medical treatment. As such, there are a total of 4 accounts under CPF to ensure all these core areas are covered.

Ordinary Account: Helps to fund for major expenses, like housing and education

Medisave Account: For medical expenses

Special Account: Savings for old age

Retirement Account: Created when you turn 55 years of age.

What is CPF good for?

The 3 main strengths of CPF are as follows:

1. Savings and interests are guaranteed by the Singapore government.

Apart from the fact that CPF forces you to save (which really, is a favour that the government does for us), the savings and interest rates are all guaranteed by the Singapore government. You do not have to fear that your money might disappear (unlike if you put it in some company, or even a bank). Furthermore, the interest rates are highly attractive. The Ordinary Account has a yield of 2.5%, and SA interest rates are 4%. In fact, if you meet certain conditions, you might even earn up to 6% interest rates on your monies in the CPF. Just for equal comparison, a regular savings account would only give you 0.05% interest rate, and even if you credit your salary into a local bank, for example, the DBS Multiplier Account allows you to “earn up to 3%” (subject to meeting different conditions). The interest rates are unparalleled, especially in these uncertain times.

2. Additional contributions (e.g Retirement Sum Top Up Scheme) may allow for tax savings on top of enjoying CPF interest rates.

Secondly, if you top up your savings in your CPF account (or your parents’ CPF accounts), you are also eligible for tax rebate. This is a favourite feature for Singaporeans, especially when it comes close to tax season. You get the best of both worlds – either putting money into your account (or giving your parents allowance via CPF) and reducing the amount of tax you have to pay.

3. CPF LIFE: annuity scheme to provide lifetime income

Last but not least, many in the Merdeka and Pioneer Generation are now reaping the benefits of this policy. They do not have to fear about having little to live on, as they are able to now draw out from their CPF to fund their monthly expenses. Those who have maximised the CPF scheme are able to enjoy their retirement years without having a nagging fear that they don’t have enough to survive on until their last breath.

What are some constraints related to CPF?

As many of you know, few Singaporeans would rely completely on CPF to save for their retirement due to the following reasons:

1. You can’t take the money out before 55 years old, and even after that, you can only take some money out.

This is something that worries most Singaporeans. There could be times in our life that require us to draw out a large sum of money, whether it is for investing in our education (or our children’s), to fund unexpected medical expenses and illness, or even to go on a trip. Some of these areas could be planned for, but sometimes, life just happens. The lack of control in deciding when we can withdraw the money saved is an important consideration for those who are deciding to save with CPF.

2. As it is a government scheme, it is subject to changes and rules set by prevailing guidelines.

Next, as CPF is fully by the government, we don’t have a say on the rules and guidelines. The goalposts can always change. Early on, CPF savings could be fully withdrawn upon retirement. Through multiple evolutions over the years, younger generations are on the latest iteration, CPF LIFE annuity scheme. What did this change mean for Singaporeans who were affected by the introduction of the new scheme? Initially, Singaporeans were allowed access to their entire retirement savings, but the government decided that access is now better limited to monthly payments, in order to stretch retirement savings over a longer period. This could have affected Singaporeans who had a certain bucket list to fulfil. Most importantly, it is key to keep in mind that CPF is a social policy. This means that as the needs of the population changes, CPF will also change. The purpose of CPF is to ensure that the basic retirement needs are met by the majority of the population – it really isn’t a scheme to ensure that you get rich, or can fulfil your life’s goals.

So, what do all these things mean? Should you aim to be a CPF millionaire?

If you are in your twenties to fourties, you have at least twenty years ahead in your horizon. It is important to note that the CPF system is an excellent one and there are real benefits that you can reap from the system. However, it is also important to keep in mind that there might be changes which will affect your retirement plan. How should you proceed with this in mind?

1. Visualize your retirement

Understand what you want to continue enjoying in your retirement years, and what that means in terms of the amount of money you need.

2. Keep track of your CPF funds

Understand how much you have in your CPF currently, and you can also do a projection of how much you might have when you reach retirement age.

3. Plan with CPF in mind

With these two, create a solid plan that complements what you have (and will have) in your CPF to achieve your retirement financial goals. As always, it is wiser not to put all your eggs in one basket!

Whether or not you want to achieve millionaire status, we recommend based on your age and horizon to evaluate whether you should achieve this via CPF or with a variety of tools.

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[1] Tan Ooi Boon, (2021, Jul 25). How retiree in Singapore saved over $1.6m in her CPF, Straits Times, Business Section, Invest, https://www.straitstimes.com/business/invest/how-retiree-saved-over-16m-in-her-cpf

Disclaimer: The views above are that of Your Financial Strategists. You are advised to do your own due diligence. We will not be held responsible or liable for any errors, omissions or inaccuracies. These articles have not been reviewed by the Monetary Authority of Singapore.