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.
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Base Scenario Assumptions
1. Age – 25 years old
2. Beginning Salary Based on 2013 Median New University Graduate – $3,050 as well as Median New Diploma Graduate at $2,250
3. Salary Growth of 2% annually
4. CPF OA Rate – 2.5%, CPF SA, Medisave – 4.0%
5. Assuming no use of CPF OA/SA and Medisave for any other purpose
6. Medisave Ceiling Grows At 3.0% per year, once the Medisave account exceeds the ceiling, the contribution goes toward the CPF SA
7. Uses all cash to meet the Minimum Sum
8. 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
1. Purchases a HDB at $400,000 at age of 30
2. Takes an 80% HDB Loan at 2.6% rate
3. Takes a 25 Year Loan
4. 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. See Survey Shows Disconnect Between Retirement Goals and Retirement Income