I read from the CPF’s AREYOUREADY facebook about a man named Loo Cheng Chuan who believes he can accumulate $1m in his CPF. Is this really possible? The article did not provide any mathematics. I decided to do the math to find out.

Before I show you the calculation, it is necessary to understand some CPF jargons and limits. The following definitions were copied from CPF website:

### CPF Annual Limit

The maximum amount of CPF contributions that can be credited to an individual’s account in a year. It consists of both the mandatory contributions (employer’s and employee’s share) and voluntary contributions. Currently it is $31,450 a year. [With effect from 2016, it will be $37,740.]

### CPF Ordinary Wage Ceiling

Ordinary Wages (OW) are wages due/granted wholly and exclusively for your employment in a month and are payable before the due date for payment of CPF contributions for that month. This would be your monthly salary, which may include items such as transport allowances and overtime payment.

The maximum amount of CPF contribution payable on OW is the OW Ceiling, which is currently $5,000. [In 2016, it shall be $6000]. For example, if you earn a monthly wage of $5,500, only $5,000 would attract CPF contributions; the remaining $500 would not.

### Additional Wage Ceiling

Additional Wages (AW) are wages which are not granted wholly and exclusively for your employment in the month. These payments are usually made at intervals of more than a month. For example, your annual bonus, leave pay and incentives are considered AW.

The AW Ceiling is the maximum amount of AW that attracts CPF for the year, and can be computed using the following: $85,000 - Total OW subject to CPF for the year. [With effect from 2016, it the formula will be: $102,000 - Total OW subject to CPF for the year.]

### Let’s do the maths

I will use 2015 figures for simplicity.

I assume you are 25 years old who just started a job paying $2500 (Ordinary Wage) a month. You have a bonus of 1 month (Additional Wage). Thus, the total CPF Contribution for the first year is 2500 x 13 x 37% = $12,025 because the total contribution rate is 37%. The contribution rate to CPF-OA is 23% and the CPF-SA is 6%.

After one year, your SA and OA balance would be $2,028 and $7,662 respectively. This assumes 4% and 2.5% interest respectively and beginning mode and annual period for simplicity in the calculation.

You then transfer ALL your OA balance to SA up to the prevailing Full Retirement Sum ($161,000 wef from 1 July 2015).

On the second year, do exactly the same by transferring ALL the OA to SA. I also assume salary would have increased by 5% every year.

At the beginning of age 36, the CPF-SA would have just exceeded the Full Retirement Sum. So transferring OA to SA is no longer possible. From this point onwards, the OA starts to accumulate balances.

At the age of 45, the CPF total contribution would have exceeded the Annual Limit. Thus, there is no more increase in total contribution despite the increase in salary.

At the end of age 57, the SA and OA balances will be $603,151 and $430,130 respectively. The total amount is a whopping $1,033,282!

In reality, the Full Retirement Sum will increase with inflation. This means it is still possible to transfer the OA to SA when the limits increase. Moreover, I did not take into consideration of the contribution to Medisave. Once the Medisave balance reaches the Medisave Contribution Ceiling, subsequent Medisave contribution would be rechannel to the Special Account. If the Special Account has already exceeded the Full Retirement Sum, the Medisave will be rechanneled to the Ordinary Account.

The above calculation assumes the CPF Member does not opt for CPF Life at age 55. In fact, with effect from 1 January 2016, the CPF Member does not need to select his CPF Life plan until the payout age. See the following posts for more details: Why you should NOT select your CPF Life plan at 55.

So it looks like it is possible to make $1 million from your CPF. Actually it is nothing magical about it. It is just power of compounding at work.

For the spreadsheet, you can click on this link HERE.

### Risk of Using this Method

The following are the risks involved:

First, this method assumes all money in the ordinary account is used exclusively for wealth accumulation. This means you cannot use the ordinary account for purchase of a property. You cannot use the ordinary account to service the housing loan.

Assuming a BTO flat of $400,000, the first 10% downpayment of $40,000 would have to be paid using cash. The remaining 90% has to be funded by borrowing. The monthly mortgage installment would be $1,633 at 2.6% for 25 years payable in cash. Assuming a MSR of 35%, it means the household income should be at least $4,666. Of course, if both husband and wife are income earners, this should not be an issue.

Second, it is assumed all CPF rules remain static.

Third, this method only works if one has a significant amount in their salary in bonuses. For example, if you are earning $85,000 all in Ordinary Wages (i.e. $7083 in gross monthly salary), your total CPF contribution is 37% * 5000 * 12 = $22,200 because the Ordinary Wage Ceiling is only $5000. On the other hand, if your Ordinary Wage is $60,000 (i.e. $5000 per month in gross salary) and you have 5 months bonus (Additional Wage), your total CPF contribution is 37%*85000 = $31,450. There is a way to get around this if your Ordinary Wage has already exceeded the Ordinary Wage ceiling while your Additional Wage is very low. You can do a Voluntary Contribution equal to $31,450 –Mandatory CPF Contribution. Note that there is no tax relief for Voluntary Contribution.

### Power of Compounding

As you can see that the power of compounding is the only reason why it is possible to accumulate $1m in the CPF. How about other asset classes such as stocks, bonds, properties and commodities? What about the risk associated with these asset classes?

I have an eBook that provides detailed explanation on the various returns and risk of other asset classes.

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sc says

If the young person contributes 7k every year to SA instead of transferring from OA, and do voluntary contribution of 7k after SA is max, the result will still be 1m even if he uses part of OA to pay off housing loan.

dng says

i do not understand how you come up with 9690 in oa after a year if your pay is 2.5k per month. Even with 4% interest the oa only end up $7786. Can enlighten me how you calculate?

Wilfred Ling says

Thanks for pointing it out. Have made the correction.

EM says

I believe that once the $161k limit in SA is reached, the interest earned from SA will flow to the OA. No luxury of compounded interest beyond $161k.

Jimmy says

Nope, SA has no limit

xyz says

SA still has max limit of FRS. Similarly MA still has max limit of BHS (I have disagreed & written in to CPF and MOH minister about this MA limit since 1995 but till today no change).

Any excess contributions or interest generated will flow into OA.

Wilfred Ling says

This afternoon I met a client whose CPFSA has already exceeded the FRS. He is in early forties.

In fact this is not the only case I encountered. As far as I know, the contribution to CPFSA and its interest does not roll over to OA even when the SA upper limit is breach.

xyz says

Oops sorry my bad. You & Jimmy are right. Got mixed up with topping up of SA. For usual CPF contribution & interest generated, the SA portion stays in SA.

SY says

In fact, we can use CPFSA as a source of recurring income to partly fund our retirement after 55. The trick is to accumulate a huge SA account right up to 55 so that the remainder in SA will still be significant after setting aside the FRS in RA. After that, drawdown from SA at a rate of 4% p.a and we have effectively created an annuity plan out of CPFSA which starts paying out from 55.

Wilfred Ling says

Yes you are right. My understanding is CPF allows withdrawal of more than once a year but definitely monthly withdrawal is not permitted. I’ve requested that CPF implement a monthly GIRO so that the excess money above FRS be credited to the bank account but they have no plans for doing that. Instead, they suggested that the excess money be transferred to the CPF-RA under the Enhanced Retirement SUm (ERS) which the limit is raised to $241,500. In this manner, the CPF LIfe income will increase.

Aaron Burr says

When would you advise that this is done? I don’t have any loans using my OA and have no plans to get any. So the money in the OA is just sitting there unutilized. Do you think I should move the money to SA as above?

Wilfred Ling says

I’m not able to advice without understanding your situation. Contact me for a formal consult.

Loo says

Hi. I read this article and thread of comments with great interest. This is because I am the person behind the original CPF article : Loo Cheng Chuan. I am happy that Wilfred validated my case study. I strongly encourage everyone to live frugally when you are young, stay in a humble HDB flat. The power of compounding thru the CPF SA and Medisave will step in and by mid forties and early fifties, the accumulation of wealth will accelerate very quickly.

In fact, because of this safety net that I now established with my CPF, I could take on risky ventures and run my own business, essentially living the life I wanted now that I am in my forties.

Thanks Wilfred.

Loo

[email protected]

https://www.areyouready.sg/Pages/Views_Ready-to-retire-–-at-42-years-old_20150518.aspx

Wilfred Ling says

Hi Mr Loo,

Nice to hear from you.

As an entrepreneur, CPF monies is very important because it is protected from creditor. I am glad you can focus on your business without worrying losing your nest egg.

Wilfred Ling says

Wilfred Ling says

Related article: http://www.straitstimes.com/business/invest/saving-1m-through-cpf