Now that you have graduated and gotten a job that promises to pay you S$3000, only to realise that only S$2400 has been deposited into your bank account.
What happened to the remaining 20%? You might be grumbling for the reduced cash flow which could have bought you the latest Playstation 5.
Fret not, this 20% is deposited into your CPF which stands for Central Provident Fund. It is a social security system that helps Singaporeans set aside savings for retirement (basically forced saving la).
Instead of spending the excess 20%, the government is helping us all to be prepared for our retirement. Not only that, employers contribute another 17%. Instead of earning S$3000, you are technically earning S$3170!
The CPF board pays good interest ranging from 2.5% – 6% depending on the different accounts. How many investments give you such interest rates TOTALLY RISK FREE!
You might be wondering “Woah where got so good one, surely there’s a catch to this” Yeah, there are restrictions on the usage of the CPF fund with a “lock-in” period til age 55 (as of 2021).
CPF can used for purposes like:
- Housing Payments
- Medical Expenses
Although there are options for us to utilise the money in our CPF, do bear in mind that the money is ultimately for our retirement. Every cent used now means lower income to fund our golden years.
Compound interest in the eighth wonder of the world. He who understands it, earns it… He who doesn’t…, pays it”– Albert Einstein
Heard of people complaining of the government eating up 20% of their monthly salary and locking it up until they die? Very often these are the very people who have problems meeting the retirement sum at age 55 and blame everyone but themselves.
Since the CPF is here to assist us to have a nest egg for our retirement, why not let the system help us?
Let The Maths Do The Talking!
Assuming Tom is 25 this year
- Earns S$3000 a month with no 13th month or annual bonus
- 2.5% yearly increment
- Does not use a single cent in CPF
At the end of his 30 years career, at age 55. He would have amass S$967,601. Even if Tom chooses not to work after age 55 and let the money in his CPF compound, he would end up with S$1,384,740 at age 65.
Given that the gross monthly income from work (including CPF contributions from employer) is S$4534 in 2020, many of us is likely to achieve more than 1million in our CPF at age 55.
Although money in the CPF seems like it is untouchable (for now), it still belongs to us and the fruits will bear in the future.
The very nature of humans is to choose instant pleasure over delayed gratification – That is exactly why it is even more so important for the CPF system to help us save.
Young adults should capitalise on youth and prolonged runway to let the magic of compounding do its thing.
Now that you have seen the power of compound interest at work, will you think twice before using the money that is for your retirement?
Thanks for reading.