Is Our CPF System Really That Bad?
23/05/2016 at 10:15 pm #96
Our CPF system has come under fire of late from Singaporeans of all walks of life. But is it really that bad? DollarsAndSense.sg provides an example of why we think the system is still relevant and sound.
25-year old individual.
Monthly salary of S$ 3,000 for 30 years.
NO increase in salary and NO bonus.
Purchase a 5-room HDB worth S$358,000.
Services the monthly mortgage with 50% cash and 50% from CPF.
Has a spouse who is of the same age, and draws the same monthly salary with NO increase in salary and likewise, NO bonus.
Ordinary Account (OA) average interest rate of 3.66%, once effect of compounding is taken into consideration over a 30-year period.
Special Account (SA) and Medisave Account (MA) average interest rate is 7.48% once effect of compounding is taken into consideration over a 30-year period.
Assets under the individual’s name at the age of 55 years old includes
5-room HDB: Fully paid
CPF Minimum Sum: S$ 155,000
Medisave Account: S$ 145,750
Cash from CPF: S$ 173,968
Does that sound outrageous to you? That an individual with salary of $3000 a month can actually afford to withdraw hundreds of thousands in cash from his or her CPF account at the age of 55 years old while setting aside the minimum sum required?
The above assumptions are taken on the extreme end, as we are not accounting for any increase in salary and assuming that there are no bonus payout across 30 years. Furthermore, we have ignored the additional 1% of the first S$60,000 in the OA & SA.
Despite our assumptions, we calculated that the individual would still be able to meet the minimum sum, have enough for his or her Medisave, and still be able to have hundreds of thousands in cash. Another interesting fact, even if the couple does not save a single cent for the next 30 years, their combined Net Worth will be over S$1,000,000.
How is that even possible? This is how the robust system of the CPF works such that even Singaporeans who have little knowledge on finance can still accumulate more than S$1,000,000 in joint assets after 30 years.
a) Average Interest rate of 3.66%
For every thousand dollars that is in the OA and SA, in 30 years time, it will earn you an additional $1097.60 and $2243.24 respectively. This is due to the prowess of the “Compounding Effect”.
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