I must admit that I like certain aspects of our provident fund and I enjoy “hacking” it; what I really mean leveraging on its benefits. The movement to do cash top up and let power of compounding your child’s SA from young is gaining popularity in recent times. Some parents are doing it as a form of forced savings, some others hopped in to follow the crowd. However, I thought it was important to know why you are doing what you are doing.
Some of the common questions parents often ask me is
- Why am I topping up my child’s CPF account?
- Am I robbing her chance of tax relief at higher tax bracket in future?
- How much should I top up my child’s CPF?
- Why not invest her monies in other investment instruments?
I have to qualify that CPF is only one of several savings-cum-investment strategies we have for her. She has her own Portfolio (Child’s): a Regular Savings Plan (RSP) in joint-name with myself, ad-hoc equities investment under my charge, endowment plan and even Peer-to-Business lending. Each of these have their own associated risks, but at a young age and a long time-frame ahead of her, she is able to diversify and also take on higher risks investment instruments. She is consistently vested, and while she has her own warchest, she spends time in the market and not timing the market.
Mr Loo Cheng Chuan, Founder of 1M65 movement, put it across very simply for the CPF: You may hate the system, you may dislike the government, but you must learn to love their money. I quote what I have written in my guide for CPF 101.
Extra 1% Interest is currently paid on the first combined $60,000 balances (with up to $20,000 from OA). The order of extra interest earned is RA (including CPF LIFE premiums), OA, SA then MA. Extra interest earned on the OA will go into the SA or RA to enhance retirement savings.
All Singapore Citizen babies born on or after 1 January 2015 are eligible for the enhanced MediSave Grant for Newborns (MGN) of $4,000. Which means that, all SG babies start off with zero dollars in their OA and SA but $4,000 in their MA. What this essentially mean is that the first $60,000 for SA and MA could potentially earn 5% interest per annum!
Assume a child’s parents does a cash top to her SA from the day she was born, such that combined SA and MA is $60,000. 5% of $60,000 is effectively $3,000 yearly. The interests earned over the course of 55 years could potentially earn up to $165,000. In reality it would be lesser, as she most probably have a balance in her OA account whereby up to $20,000 would earn only 3.5%.
But we get the idea. One of the essence in creating wealth is interest on interest. The magic and effect of compounding interest is really felt when an individual starts early. At 5% for the first $60,000 in SA and MA, parents can potentially ramp up their children’s forced savings 55 years down the road just by making small but consistent contributions today. The hack really is to leverage on this extra 1% interest by allowing them to reach this $60,000 as soon as possible.
I have to take a step back and agree that only some parents would have both the ability and willingness to dump $60,000 at the start to be locked up for 55 years, myself excluding. However, being parents and role models to our children, I am of the view that we should sift out, learn, pass on and leverage the investment knowledge onto the next generation. A more logical approach is to make small, consistent contributions over the years. It should be steps that are comfortable, not amounts that you would be stressed over with or lose sleep on having food for end of the month.
My contributions to my child’s CPF account is a modest amount — probably means I just have to cut back on one or two expensive family meals each month. But I recognise the long-term benefits of what this 5% means as she grows up and at the same time ramping up the monthly contributions from $100 to $200.
With regards to robbing the chances of saving on tax when she grows up, this is my perspective. I do not see it an issue to reach Full Retirement Sum (FRS) as early in life as possible. Once she forms her financial safety net at a young age, the interests on SA will continue to grow even after FRS is reached from contribution. She would have lesser worries on having not enough monies at retirement age, but could then invest her surplus OA monies and take on higher risks.
There are many ways to save on tax. SRS alone would constitute at least $15,300 in today’s context. In fact, earning more money is a happy problem. However, the more important thing is to create that comfortable foundation whereby you can continue to build up wealth on.