By Marcus Chua
Published on 03 Aug, 2014
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.
Our Assumptions:
 25year old individual.
 Monthly salary of S$ 3,000 for 30 years.
 NO increase in salary and NO bonus.
 Purchase a 5room HDB worth S$358,000.
 Services the monthly mortgage with 50% cash and 50% from CPF.
 Has a spouse who is of the same age, and draws the same monthly salary with NO increase in salary and likewise, NO bonus.
Results:
 Ordinary Account (OA) average interest rate of 3.66%, once effect of compounding is taken into consideration over a 30year period.
 Special Account (SA) and Medisave Account (MA) average interest rate is 7.48% once effect of compounding is taken into consideration over a 30year period.
 Assets under the individual’s name at the age of 55 years old includes
 5room HDB: Fully paid
 CPF Minimum Sum: S$ 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”.
Table 1
Year 
OA Compounded Interest 
OA Average Interest per Year 
SA (MA) Compounded Interest 
SA (MA) Average Interest per Year 
1 
2.50% 
2.50% 
4.00% 
4.00% 
2 
5.06% 
2.53% 
8.16% 
4.08% 
3 
7.69% 
2.56% 
12.49% 
4.16% 
4 
10.38% 
2.60% 
16.99% 
4.25% 
5 
13.14% 
2.63% 
21.67% 
4.33% 
6 
15.97% 
2.66% 
26.53% 
4.42% 
7 
18.87% 
2.70% 
31.59% 
4.51% 
8 
21.84% 
2.73% 
36.86% 
4.61% 
9 
24.89% 
2.77% 
42.33% 
4.70% 
10 
28.01% 
2.80% 
48.02% 
4.80% 
15 
44.83% 
2.99% 
80.09% 
5.34% 
20 
63.86% 
3.19% 
119.11% 
5.96% 
25 
85.39% 
3.42% 
166.58% 
6.66% 
30 
109.76% 
3.66% 
224.34% 
7.48% 
Essentially, you are putting your money in the “Safest Vault” in the world and making returns that even professional asset manager cannot guarantee. This leads us to the next point of, “are we able to meet the minimum sum and still able to draw out hundreds of thousands of dollars in cash?”
b) Meeting the Minimum Sum and still having cash to withdraw?
With a salary of S $ 3,000 a month, the individual will allocate 20% of it, which is worth S$ 600 to the CPF. The remainder 16% extra will come from his/her employer, which amounts to S $ 480, paid to the CPF. The total amount will sum up to $ 1,080, which is 36% of that individual’s gross salary. The amount will then be distributed according to the numbers in “Table 2”.
In “Table 3”, the “Payment per Month” of S$ 381.12 is a result of the “50% cash 50% CPF” mortgage servicing assumption. Using propertyguru.com’s mortgage calculator, with inputs of S$ 358,000 as home total loan and 30 years term of loan. It results in a monthly mortgage payment of S$ 1,235.53. Of which the couple will split evenly and pay S$ 617.77 each. Furthermore, the individual will pay the amount with 50% cash 50% CPF, which amounts to S$ 308.88 deducted from CPF. This results in the monthly net contribution of S$ 381.12 to the CPF.
Table 2 Table 3
Accounts  Weights  Dollar Value  Ordinary Account  
Ordinary Acc 
23% 
$ 690 
Payment per Month 
$381.12 

Special Acc 
6% 
$ 180 
Number of Months 
360 months 

Medisave 
7% 
$ 210 
Int. Rate per Year 
2.5% 

Total 
36% 
$1,080 
Value at 55 Years Old 
S$204,039 
CPF contribution per month Financial Calculation
Table 4 Table 5
Special Account  Medisave  
Payment per Month 
S$ 180 
Payment per Month 
S$ 210 

Number of Months 
360 months 
Number of Months 
360 months 

Int. Rate per Year 
4% 
Int. Rate per Year 
4% 

Value at 55 Years Old 
S$ 124,929 
Value at 55 Years Old 
S$ 145,750 
Financial Calculation Financial Calculation
The individual will have S$ 328,968, OA adding to SA, and S$ 145,750 for his/her medical usage. Amongst the S$ 328,969, S$ 155,000 will be kept, as the minimum sum. A withdrawal of S $ 173,968 in CASH will be allowed thereafter. Excess beyond what is required in the Medisave will also be allowed to be withdrawn as well.
Despite earning S$ 3,000 per month without growth or bonus, the individual is still able to withdraw S$ 174,000 in cash. As mentioned, can the couple have Net Worth of over S$ 1,000,000 at age 55?
c) Millionaire couple? Really?
Table 6
Accounts  
Value of House 
SGD 358,000.00 
Combined Cash Withdrawls 
SGD 347,936.34 
Combined Minimum Sum in CPF 
SGD 310,000.00 
Combined Medisave (assuming no withdrawal) 
SGD 291,500.75 
Total 
SGD 1,307,437.09 
Couple’s Total Net Worth
This is a very conservative estimate because we assume that the value of the home does not appreciate. More likely than not, value of homes in Singapore tend to appreciate in the long run. Even if we assume that the value of the home remains the same, the couple’s total combined net worth is S$ 1.3 million.
The above illustration is a very simplistic view of the CPF system. We agree. For example, we are not assuming any withdrawal from medisave for medical needs. You can also argue that the minimum sum may increase.
However, we have likewise overcompensated with the fact that the individual has NO salary increament, NO bonuses and the value of the house WILL NEVER appreciate. We are also assuming as well that the couple did not transfer funds from their OA to their SA, which in practise would have enabled them to enjoy a higher return of 4%.
We are also assuming that the couples did not make any effort to save or invest. Based on their individual salary of $3000 each, the couple will have income of about $2000 each monthly (or $4000 as a family), after taking into consideration their CPF contributions and monthly cash repayment for mortgages.
Our Take
Your pension fund is fully guaranteed by a sovereign that has the highest credit rating in the globe, along with a minimum rate of return of 2.5% per annum, cash and liquidity of about S$ 174,000 at age 55 and potentially being a millionaire couple.
In Finance 101, we all know that “with risk comes return”. However, the CPF system dissolves this theory entirely as it advocates that “without risk, there are still decent returns”. Do note that our pension fund not only provides an almost fullproof retirement plan for Singaporeans, but it does not put a heavy burden nor potentially bankrupt the Government of Singapore. This robust system is unprecedented and there are no other systems that can be compared to ours.
Well, it all boils down to this golden question, “Is the CPF System really that bad?” after all? Share with us your views on Facebook
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