Retirement Planning Singapore: Using your CPF SA Account to retire with $237,138 more!

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“Potentially $250,000 more in your account for retirement! Just by using your CPF to your advantage”

Retirement Planning Singapore - Using your SA Account

Summary

By following the below, you can,

  • Retire with almost $250,000 more. With a steady contribution of a mere $70,000 saved regularly over a 10-year period (about $7k additional contribution a year), you can potentially enhance your retirement with $250,000 (more than 3 times of what is saved) more of savings at point of retirement in your CPF – Retirement Account.
  • Enjoy tax savings of at least $5,000. During the years of additional contribution, enjoy tax savings at the marginal tax rate that you are at of at least 7%. Potentially, your tax savings could be up to $15,000 depending on the income bracket that you are at.
  • Easy way to save. To use this strategy, you will only need to think about contributing monies to your SA account at the end of the year for your initial working career. Thereafter, there is no need for contribution in the latter years as you would have hit the minimum sum already. The aim is to hit the minimum sum as soon as possible.

 

Analysis

Retirement Planning Singapore: Understaing your SA Account
  • Introduction. The Special Account (“SA”) is meant for quote “old age and investment in retirement-related financial products”, this is intended to be the main source for one’s retirement as the Medisave Account is meant for medical expenses while the Ordinary Account may be depleted from expenditure on housing.
  • High Returns of the SA. The good thing about the SA is that the government guarantees a 4% return on all monies in the SA account that represents a substantial return versus risk compared to investing by oneself into the market. This represents a 4% return from an almost risk free investment as compared to a possible higher return in the market but taking on substantially more risk. This is higher than any insurance annuity in the market that usually has guaranteed payouts of usually of only around 1%. This can potentially be very advantageous if used wisely.
  • Slow accumulation in the SA. However, the accumulation of monies in the SA account is slow at the start with only 6% of one’s income being channeled to the SA account. This only slowly increases in the years thereafter to 10.5% before reducing substantially thereafter. Please see here for CPF contribution rates breakdown. As such, build up of monies in the SA account is slow for retirement.
  • Top up. However, what many people don’t know is that we can top-up our SA account voluntarily up to the prevailing minimum sum that is $155,000 currently (as of 2015). This can help to speed up the accumulation of monies in the SA account and can result in a significant difference. Additionally, amounts topped up to one’s account is tax deductible (up to $7,000) and you will enjoy immediate tax savings.
  • Tax Free. The tax benefits of voluntarily topping up one’s account is 2 fold, (a) CPF monies are tax free when you draw them out in the future, (b) Tax relief on your income for the amount that you top-up up to a maximum to $7,000. Please see here for more details on tax deductibility.
  • Enormous Difference. The illustration bellow is the difference between the situation where you do not voluntarily top-up versus the situation where you make the voluntary contribution yearly until reaching the minimum sum.

Comparison of voluntary savings into SA account

*: Based on a $5,000 salary and a 3 month bonus on average over the next 35 years.

^: Assume starting balance to be 0 at age 30.

**: To begin voluntary contribution starting from age 30 until the point where you reach the minimum sum at age 40 11-years later. Note voluntary contribution can be higher than $7k but tax relief is only for contributions up to $7k. $7k considered the “sweet spot”

Note: The above does not take into consideration sums that would need to be set aside at age 55 relating to CPF Life and the additional 1% interest for the first $60,000 funds in CPF accounts

 

Retirement Planning Singapore: SA Account Key Takeaways
  • Compounding effect of money. Based on a normal situation with no voluntary top-ups, the amount achieved by age 65 is $385,000 that is $237,138 less (or 38%) than $622,000 that represents a huge difference based on just 10-years of regular top-ups from age 30 to 40 of aggregate $72,000 (without taking into account tax savings based on 7% tax bracket of $5,000 over the period). This is due to the compounding effects of money that results in this stark difference of $237,000 (more than 3x what was contributed over the 10-year period). This represents a net benefit of about $170,000!
  • Close to Required Retirement Sum. Based on previous article calculation of required monies of $1,000 for expenses per month (based on today’s value of money) after retirement, this results in a number that is quite close to the required $660,000 needed for retirement.
  • Monies from OA Account. Additionally, with monies from OA account, potentially, you may be able to reach the sum of $1.3 million (previous article here) for a more comfortable expenditure of $2,000 per month (based on today’s value of money). If completely unused and based on similar assumptions, the amount in the OA account can potentially accumulate to $776,000. Collectively, this represents a cool $1.4 million enough for a nice retirement.
  • Topping up for Family Members. Topping up the SA account for your spouses or parents will allow them to have a more comfortable retirement similar to what is suggested above for yourself. Tax Relief for yourself is capped to an additional $7k (To qualify for tax relief, your family member/spouse must not have income exceeding $4,000 in the year preceding). Given the fact that the SA Account is in my view enormously beneficial (from a risk reward perspective – riskless 4% returns), topping up your family member’s SA account (who is not working) is win-win situation allowing you to enjoy tax relief and helping them to build up their retirement nest.

 

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