People are naturally attracted by large numbers. I mean if we got a 5% discount off a purchase price, we might not be very impressed but if we got a 20% discount instead, then, it could have a WOW factor.
It is the same thing with wealth. We would be more impressed with wealth in the billions than wealth in the millions. It is only natural. Of course, remember to ask what is the currency it is measured in.
Even if it should be news about some loss of wealth, we would be more likely to share the news of how a widow lost S$1 million in a year than the news of how someone lost his EZ-Link card because he was too distracted while on board a crowded bus.
So, I am not surprised that when I tell young people that the CPF-SA pays 4% to 5%, risk free, they are unimpressed. These are the ones who would complain about how they feel that they will not be able to meet the CPF minimum sum by the time they are 55.
When I tell them that they should consider Minimum Sum Top Ups (up to a maximum of $7,000 a year) to their CPF-SA or that they should transfer their CPF-OA money to their CPF-SA, they think I am crazy, naturally. (AK must be a pro-government dog. Hey, I am a pig, OK?)
It is only when I tell them how much I have in my CPF-SA that they start to ask questions. Something along the line of:
"Wah! How do you manage to have so much in your CPF-SA? You are only in your early 40s!"
Ah, finally, I got them interested. That would be when I show them the numbers "10" and "50".
Unimpressed with 4%? Surely, 50% is more impressive. The funds we have in our CPF-SA will grow 50% every 10 years even if we stop contributions today. That is the power of compounding at 4% per annum.
Compounding grows more powerful with the passage of time.
$100,000 today grows $50,000 and becomes $150,000 ten years later. That $150,000 will grow not $50,000 but $75,000 in another ten years from then. It would become $225,000! So, it continues. Why can't we meet the minimum sum again if we do the right things?
Well, for one thing, for most people, there is too little in their CPF-SA! Imagine the difference between $10,000 and $100,000 compounding at 4% per annum. It is that simple. So, voluntarily pushing more money into the CPF-SA is necessary.
Start doing this as early as possible. The sooner we build up a strong base in our CPF-SA, the easier it is for the magic of compounding to show its power. Time and the government will help us grow our retirement funds in the CPF, all without any risk.
My own experience bears this out as I transferred much of my CPF-OA money into my CPF-SA in the first 4 years of my working life. Then, I let the magic of compounding do the rest.
This is something that anyone, especially those in their 20s, should seriously consider doing. It might mean putting off marriage plans by four years for some but it would be worth it.
For those in their 30s or 40s, it might mean that they have lost 10 or 20 years of compounding magic but 65 is still years away. So, don't envy those in their 20s (too much).
Obviously, for those in their 50s and 60s, this blog post is more of an academic exercise but I hope they will help to share the message with their children and their grandchildren, if they have any. The younger ones are likely to live longer and they should plan early and plan well for their retirement.
It is not impossible to meet the CPF minimum sum.
Once we know how, all that is left to do is to make the system work for us too.
Unless severely disadvantaged in some way, we can and should make the system work for us.
1. Build a bigger retirement fund with CPF-SA.
2. Securing risk free returns early for retirement.
3. We do better managing our savings than the CPF does.
4. Thoughts on financial security for Singaporeans.
5. Do the right things and transform our lives.
Hey, sexy S A! Oppa AK style! ;p