The 4% Shortfall In Your CPF Retirement Fund

Are we really not contributing enough to our CPF?
Let's find out!
What is the recommended percentage of salary should one contribute to their retirement fund?

10% to 15%
This is the traditional wisdom towards how much of your monthly salary to contribute to your retirement egg nest.
If you are like most Singaporeans, your retirement egg nest is probably purely just the money you contributed into your CPF.
Like most Singaporeans, you probably use your whole Ordinary Account (OA) to fund your home purchase, and your MediSave Account (MA) can only be used for medical purposes.
As such, you probably are going to have only your Special Account (SA) to fund your retirement.
Hence your SA equals your retirement egg nest.

CPF Allocation Rates

Source: CPF

If we look at the CPF allocation rates above, we can see that for most of our working years, less than 10% of our monthly salary is contributed to our SA.
For those 35 years old and below, only 6% of our monthly salary is contributed to our SA.
Long story short, this means that we are basically underfunding our retirement egg nest during the early parts of our career; or almost every part of our working lives.

What Can I Do To Make Up The Shortfall?
There are 2 options:

1. Transfer your OA balance to your SA such that the SA's allocation becomes 10% of your salary.
2. Do a top-up to your CPF SA via the Retirement Sum Top Up Scheme (RSTU) such that the SA's allocation becomes 10% of your pay.

Benefits of Option 1: Transfer OA to SA

1. No need to top up cash into SA.
2. Earns a higher interest. OA earns up to 3.5%, but SA earns up to 6%.

Drawbacks of option 1: Transfer OA to SA

1. Less OA to pay for home purchase, education, or other purposes allowed in CPF OA.
2. But you shouldn't spend too much of your money in your home anyway.
   It’s a stupid idea we will touch on in the future.

Benefits of Option 2: Top-up to SA via RSTU

1. The top-up amount is tax-deductible.
2. Earns a higher interest of up to 6%.
   Whatever savings account you put your money in is not going to earn more than the SA's base interest of 4%.

Drawbacks of Option 2: Top-up to SA via RSTU

1. Cash top-up = less cash on hand.

Conclusion
Does it really matter if I save at least 10% of my monthly salary in my CPF SA?
It depends on how much you need and want to spend when you retire.

Male	Default SA Allocation Rates	10% SA Allocation Rate
CPF SA Balance @ 65YO	$123,318.00	$191,880.00

Female	Default SA Allocation Rates	10% SA Allocation Rate
CPF SA Balance @ 65YO	$123,318.00	$191,880.00

The above calculation is done based on the following assumptions:

• DOB: 31 March 1955
• Earns 2019 medium salary of $4,563 (including Employer CPF contribution) from age 25 to 65, with no pay increment over the 40 years.
• Ignores SA interest calculation to reduce complications (aka there's 0% on SA balance).

By saving a couple more percentage of your pay every month in your SA, the end result is you end up with 55.6% more in retirement savings.

That difference would also translate to a higher CPF LIFE monthly payout.

We used the CPF LIFE Calculator to calculate how much the CPF LIFE monthly payout one would receive if he retires today, based on the respective SA balances.

The '10% allocation' would receive almost 50% more in monthly payouts than the 'default allocation'.

Male	Default SA Allocation Rates	10% SA Allocation Rate
CPF SA Balance @ 65YO	$123,318.00	$191,880.00
CPF LIFE Payout @ 65YO (Standard Plan)	$708 - $746	$1,061 - $1,120

Female	Default SA Allocation Rates	10% SA Allocation Rate
CPF SA Balance @ 65YO	$123,318.00	$191,880.00
CPF LIFE Payout @ 65YO (Standard Plan)	$659 - $696	$986 - $1,044

So if you want to receive higher CPF LIFE monthly payouts, work to contribute/allocate 10% of your salary into your CPF SA.

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Recommended Read: What Should I Invest In This Bear Market?

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