|Year||Basic Retirement Sum (BRS) (with property pledge)||Full Retirement Sum (FRS)||Enhanced Retirement Sum (ERS)|
Look for the year that you would turn 55 and you would be able to see the projected figures for BRS, FRS, and ERS.
Currently we could use cash to top up SA to reach the prevailing FRS, which is $161k now.
I have a wild thought. What if you have excess cash that you could top up to reach the FRS figure now? How would the figure look like when you turn 55?
Let’s take an example of a 40 year-old Janice, who has some excess cash to top up her SA to the prevailing FRS ($161k). What would the sum look like if she does nothing till 55?
The sum would roll to about $290k. This figure is actually higher than our projected FRS. To fulfill the ERS, Janice would need to top up another $86,297. This amount could be covered by OA balances or cash.
Let’s find out the difference for each year’s increase due to inflation and the interest earned (4%) by the SA balance every year:
|Year||FRS||Difference in FRS||Interest earned|
Note that the interest earned by the SA balance would cover the 3% inflation rate in FRS easily. Hence, there is no need to top up for this case and CPF would not allow Janice to do so anyway.
Did you realise that the interest earned is effectively $128,952 over 15 years, without Janice doing anything besides topping up her SA to $161k? This is the power of compounding!
What if Janice continues to draw a monthly salary for these 15 years? Where would her CPF contributions go for the SA portion? I have emailed CPF to ask about this, and the reply is as below:
“As long as you are employed and contributing to CPF, you are required to contribute to SA at the prevailing contribution rate. Your CPF contributions which are allocated to your SA can still be credited to your SA, even if you have met the current FRS.”
This sounds like good news to me.
Let us go back to the figures again. Let us assume that Janice continues to draw a $4000 salary till age 55, and contributes $279.86 to her SA every month. How would her SA balance look like when she hits 55?
The amount grew to $359,887, which is very close to our projected ERS of $376,249. The person would only have to top up $16,362 in cash or from OA at age 55.
Do you want more good news? The figure should be higher. Why? Below are the reasons:
- First $40k of our SA attracts 5% instead of 4%;
- Janice might get increment in her salary, which means higher contribution to her SA;
- We have not included any bonuses that Janice might receive in the 15 years discussed, which means more contribution to her SA;
- SA contribution ratio increases when we turn 45 and when we turn 50.
However, what is the opportunity cost for topping up SA to prevailing FRS now? It really depends on each person’s situation. Do you intend to use the cash to fulfill a long-cherished dream? Do you have confidence that you could use the sum for investment to consistently earn higher than 4% returns for 10-20 years? If yes, then you might not want to top up to $161k now.
Note that any top up to SA is irrevocable. Hence you must be comfortable locking this amount till 62 or later when we start to withdraw the funds in monthly payouts.
I am going to check how far I am from the prevailing FRS and how long it would take me to hit it. It is definitely an interesting exercise for me.?
Most likely I would try to strike a balance between saving towards FRS and maintaining liquidity. I would continue to top up $7000 every year to beef up the SA and also to reduce my income tax.
I also bear in mind that this retirement tool forms part of my asset portfolio; it kind of gives me a sense of how balanced or aggressive my asset portfolio is, and have a better sense of how much risk I could take for my other assets.
What would work for you??
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