Compounding is the 8th Wonder of the World
Good morning! I think most people would be curious how a 67-year-old retiree (Janet) can accumulate more than $1.2m in her CPF Ordinary Account, and if this is not impressive enough, she has another $400,000 in her Retirement Account and over $50,000 in her MediSave Account. She wanted to inspire younger Singaporeans to similarly plan for the same outcome and her story was used as a case study of how she achieved it, featured in yesterday’s Sunday Times Invest section, “How retiree saved over $1.6m in her CPF”, so let’s use this for our topic of learning in today’s 55th week of our #SundayTimesRecap series. Here are four tips to help us accumulate high savings using CPF:
1. Retain some money in CPF. The use of CPF for home mortgage payments is the main obstacle preventing you from having high savings. As best as possible, start your first home purchase by not using every dollar in your OA. For example, you can retain $50,000 in your OA, and assuming your monthly repayment is $2,000, then the balance ensures that you can still pay for your loan for two years even if you have no income for that period. In addition, this $50,000 will be earning an annual interest $1,250 (at 2.5% per annum) which you will have missed out if you use up all your OA funds.
2. Use more cash gradually. As you progress in your career, set a goal to reduce the need to use CPF to pay your monthly mortgage payments. Work towards lowering this monthly amount once a year or a few times a year, so that you can reach a stage when you can pay your monthly mortgage entirely with cash.
3. Cut loan tenure. If you have to start out with a home loan tenure of 30 years, set a goal to make a lump sum loan repayment every year or every other year depending on your financial situation. The aim is to slowly cut the tenure to 25, 20, 15 or even 10 years.
4. Refund home loan to CPF. Once you have paid off your mortgage, congrats! Celebrate first and then work towards giving your OA a boost by refunding the money you withdrew for your home loan. You can login via Singpass to your CPF account, check under “My Requests” -> “Property” -> “Make a Housing Refund using Cash” – You should see the amount that you have withdrawn for your loan plus the accrued interest on the sum withdrawn.
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The good news is that you do not need to rush to do the above, start by setting a goal then work towards it. Over time, if you can slowly refund the principal sum and accrued interest back to your OA, you not only regain interest that was “missed”, you can have a high level of savings in your CPF again, as if you have never used a dollar to pay for your home loan.
The power of compounding always works in your favour over time, and it is no wonder Janet acknowledges it as the 8th wonder of the world (pun intended), particularly in the case of CPF. She recommends starting at the age of 25 and then save and grow the money there for the next 40 years. This is the open secret to how people can accumulate about $700,000 in their OA by their early 50s when they start contributing to their CPF at a young age. If you can achieve this, then you stand a chance to have $1 million or more in your OA when you are in your 60s. The good news is, even if you miss the mark, you are still better off with a decent amount of savings for old age.
By the way, I have been using an excel tool to help many of my clients project their CPF balances, factoring the cost of monthly mortgage, the current salary, among other financial factors, to see how they can reach their target savings by age 55 and beyond, so that they can be clear on the financial goals they can set for themselves. Some of you, whether you are buying a home or planning for retirement, may have benefitted from this exercise during our discussion time together. If you wish to generate a CPF cashflow report for yourself, or recommend someone to do so, you can head over to this link: https://bit.ly/cpfcashflow
Once I have your report ready, we can then schedule a time for discussion. Wishing you best of health this season, stay safe and catch up soon!
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