This is a post to follow up on my plan to reach the Enhanced Retirement Sum (ERS) when I turn 55. The way to go about it is simple, I would do cash top-up to my Special Account (SA) every year, and I am aiming for $7k as that is the maximum amount to be eligible for tax relief. This would be on top of my monthly CPF contributions to my SA.
Currently, our SA attracts an annual interest of 4%. The first $40k attracts 5%, but I shall not take that into consideration when calculating my projection. By the way, I quickly topped up my SA to $40k few years back due to the +1%.
I use an online financial calculator to calculate the projections. I shall do a comparison below:
Age: 35 years old
SA current balance: $50,000
SA contribution: $279.86 per month
Top up cash $7,000 till 55 years old
Assuming all things constant, the SA value would be $430,345.06 when the contributor turns 55.
However, if the contributor does not put in the cash top of $7,000 per year, the figures would look like this:
There is a difference of $216,785.
You might argue that it is due to the annual cash top up. But the total sum of the top ups over the 20 years is only $140,000. The difference is the interest earned between the two scenarios is $76,785.
Using the financial calculator, we could also calculate the projected ERS for this 35 year-old. It would run up to $436,175, assuming 3% inflation every so, then the second scenario actually falls short of the ERS, while the first scenario exceeds the amount by $171,118.
This is just using the SA to grow the retirement sum. If contributor also contributes to Ordinary Account (OA), the total retirement sum would be much bigger, possibly hitting a million or more.
So what is the risk? I think you might have guessed it. It is the SA interest rate. It is not permanent. If it goes down, then the final sums would fall. We would then have to go back to the calculator again to do the sums. But if there is any consolation, the current +1% could boost extra funds to our projections. Everything might even up. Plus, we have not counted our OA funds in the picture yet.
What if the rate goes down to 3%? Lets run the figures again.
Assuming CPF contributions and $7000 cash top up per year for 20 years, the figure dropped from $430,345.06 to $376,987.46, a difference of $53,357.6. If we do not top up our SA, then with 3% rate, the figure dropped from 213,560.65 to $183,252.06, a difference of $30,308.59. Consider the projected ERS of $436,175 again, the new figure is almost $253k away!
Hence, if we have doubts about our SA interest rate remaining at 4%, it is even more crucial for us to do the cash top-up. Of course, I could also opt to transfer OA funds to SA, but I am not keen to do that myself as I might want to consider using OA for property in future. I prefer to have that option open.
By topping up my SA, I could save and earn interest for my retirement; on top of that, I pay less tax. Playing around with the variables on the financial calculator is a good exercise.?
However, there is a flaw to this plan.
There is a cap to how much we could top up cash to our CPF special account and the cap is the prevailing FRS. Currently it stands at $161,000. Hence is this method still workable? I would need to to more maths on this and will follow up with another post.?
For more articles like this, go to blog Financial Freedom Gal.
Picture credit: Money vector designed by Dooder - Freepik.com