Through my entire career, I have had the occasion to warn people about relying too heavily on CPF. CPF Life began to gain popularity amongst personal finance pundits with the introduction of CPF-SA Shielding. This was a concept that largely ran around on Personal Finance blogs like Seedly. It was essentially an effort to protect your Special Account from being taken up by your RA account - since the Special Account provided 4% and the Ordinary Account provided 2.5%, it was a logical choice to try to get 4% while still getting all the benefits of your RA account. The writing was really on the wall once Lorna Tan - the Then-Invest-Editor of Straits Times - made it mainstream by publishing the methodology in the newspaper. It was really only a matter of time before this loophole, much like legal ABSD loopholes, was somewhat closed. This was a good opportunity - however bittersweet - to have my students review my clients who I had helped with CPF Shielding the last few years. My very last shielding was for a family friend who had turned 55.
Let's look at how much money he assumed to have, versus how much he lost.
Considerations in This Analysis and Context
What makes this case study a bit more tragic is that my client (Let's call him Client A) in question was not particularly rich. He was just an admirably hardworking fellow who I respected. Born in 1966, Client A got married in his late 20s and raised 2 children. He had a exceptional career until his early 30s where he eventually slowed down, working in lower to middle management while doing a tremendous amount of volunteer work and raising his children on weekends. His wife stopped working after their second child, leaving it up to him to provide for the entire unit by himself. He purchased property like most people
Now, it's really extremely hard to keep up with all the CPF changes that occurred during his lifetime, but after moving 3 times in over 30 years of work, his CPF-OA had slightly under $300,000 and his SA account had a little over $380,000. Let's round them to those numbers for simplicity.
In 2022, the Full Retirement Sum was $192,000 and the Enhanced Retirement Sum was $288,000. We'll use the Enhanced Retirement Sum to illustrate the magnitude of his loss (though he actually opted to just consider FRS in real life). It's also admittedly a bit complicated to calculate his present situation as I haven't looked at his CPF since then, so we can just forward his 2022 situation to now.
Let's look at the expected outcomes before and after Shielding:
Outcome A: Before Shielding
OA (2.5%): $300, 000 SA (4%): $92,000 RA: $288,000
Outcome B: After Shielding OA (2.5%): $52,000 SA (4%): $340,000 RA: $288,000
Now we consider Outcome C: 2024 Changes OA (2.5%): $392,000 RA: $288,000 The reason I state this is because the government has made it clear that topping up beyond the Full Retirement Sum is entirely optional. Realistically speaking, you would likely try to top up to your Enhanced Retirement Sum as the interest and payout is significantly higher.
Additionally, My client was not a retiree and is still working until today. He would have contributed roughly the following if he worked before retiring at the end of 65, not to mention any Medisave overflow.
All of that now goes towards his Ordinary Account. It would have looked like this:
Old Contributions to OA per year: $14,610 (56 to 60), $6010 (61 to 65)
Old Contributions to SA per year: $10,340 ((56 to 60), $13,720 (61 to 65)
New Contribution to CPF (2024) per year: $24,950 (56 to 60), $19,730 (61 to 65)
Age 65:
OA: $89,060 + $32,380 = $121,440 SA: $70,860 + $77,280 = $148,140 New 2024: $152,090 + $104,360 = $256,450
Age 81: OA: $180,280 SA: $277,460 New 2024: $380,700
Calculating the 'Losses' Incurred from This Change in Government Policy
From just the above summary of the Three Outcomes, A, B, and C - a primary school student could deduce just from the labels alone that Outcome C is the worst, assuming you refuse to top up the rest to the RA account.
I'm a little interested in whether outcome C is better than outcome A, but perhaps we will save that for another article.
Now assuming my client lives till Age 81 as an average Male in Singapore on the Standard Plan for Enhanced Retirement Sum (no bequest, since the RA account would be empty by that time upon death) we can calculate the following after including the additional interest: Outcome B:
Total CPF: OA: $48,920 (3.5%) + $532,080 (2.5%) + $180,280 = $761,280 SA: $140,230 (5%) + $831,740 (4%) + $277,460 = $1,249,430 RA: $2280 x 16 x 12 = $437,760
Total: $2,448,470
Outcome C:
OA: $392,000 (2.5% and bonus 1%) = $48,920 + $706,910 + $380,700 = $1,136,530
RA: $2280 x 16 x 12 = $437,760
Total: $1136,530 + $437,760 = $1,574,290
Difference in Outcome: $2,448,470 - $1,574,290 = $874,180
READ ALSO: Are 'Private Annuity' Plans Superior to CPF? – A Gift for FI-35 and a Lesson for Others (moneymaverickofficial.com)
Conclusion:
So that's how my CPF shielded retiree still loses out in the end. Please be mindful of the limitations of this analysis - although frankly, most of them just result in this change creating even bigger 'losses' for people who already shielded. For example, I didn't account for Medisave overflow into the SA which was very common praise for it structurally, especially from the 1M65 Community. I also assumed one wouldn't live longer than 81, which is quite unrealistic as Singapore has seen progressively longer lifespans, especially for women.
It's likely that overflowing into OA instead will create an even bigger disparity of the 1.5% 'loss' incurred, potentially tens of thousands more across a 10-year working period after 55. Of course, you could argue that one could retire before 65, or be making less than the contributed total of $37,740 at that age as well, reducing your 'losses' since you wouldn't be contributing as well.
Ultimately CPF has undergone a ridiculous number of changes since 1955. From its naming to its structure, to risk pooling, to becoming CPF Life in the early 2010s. Interest paid out has gone up and down, the rate of which it's pegged to has changed (how they calculate how much interest is paid out), the assumed rate of inflation and thus the subsequent Basic Retirement Sum changed recently (to 3.5% till 2027) - and it all lands up here, where CPF-SA is taken away from retirees after 55. To be honest, I anticipated this, but I thought it would happen in 20 or 30 years. I assumed that my parents' generation would still enjoy the benefits of shielding. As a Financial Consultant, back in the day I helped countless clients (I certainly lost count after double digits) initiate their shielding, only for it to be for naught it seems).
If you would like me to write another article on a different permutation, do let me know. I am interested in the following:
How much this gap closes or widens after topping up ERS to the max
How much the Medisave overflow would affect you (after accounting for regular rise in BHS) if you were to keep working till 65 with a full Medisave account. This seems to be the case for many 1M65 pundits. I'm not sure something productive can be accomplished by calculating their losses there, but we'll see.
Was NOT shielding and having CPF-SA better for my client than not having CPF-SA but topping up to the new ERS? Lastly, please bear in mind the following: 1) I still Heart CPF: Having been an established Investment Consultant for the last few years and with some success in Financial Consultancy from my extensive research and analysis, I am still a supporter of CPF despite the many changes made over the years. This is because people wildly underestimate financial psychology. Without CPF, this country would be in a far worse state. Programs like this need to be adaptable to save us from ourselves without too much over imposition (I think a forced savings of 20% is far from tyrannical) 2) LAYMAN CALCULATOR: This analysis may lack other things or may have incorrect calculations. I used the supporting tools provided by CPF and compound interest calculators to the best of my ability, but there is always room for error. 3) WHAT'S NEXT? It falls on financial professionals to make up this difference caused by the change in policy. If you are looking for options in your retirement, I teach these to my FC students weekly and would be happy to have a conversation with you as well. READ ALSO: How I got an 9% dividend every year - and why I gave it up (moneymaverickofficial.com) Money Maverick