Do you want to retire with S$1million in your retirement plan? Well, it has been proven to be very possible to save up such amount even before you reach 65. While it seems to sound too good to be true, here are the steps for you to earn it.
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Each Singaporean are required to contribute in their CPF which is actually composed of three parts. The Ordinary Account (OA) has 2.5% interest rate. Take note that this account is usually used for housing and student loans. The Special Account (SA) has 4% interest rate and is used retirement while Medisave Account (MA) with 4% interest rate is for healthcare
An additional 1% interest rate will be added to each of your COF account upon reaching your first $60,000 of totaled CPF contributions with at least $ 20,000 in OA. This means that your interest rate for OA will be 3.5% from the previous 2.5% interest rate. The interest rate of your Special Account and Medisave Account will be 5% each.
To be able to reach your S$1million in your CPF, you must know the certain conditions which makes if possible. First, after you have reached your first S$60,000, you have to move your OA to your SA. Since your OA now has the compounding effect of the 5% per annum from SA, your contribution can grow faster.
Next, aim to reach the Medisave Contribution Ceiling which is $49,800. Upon reaching the ceiling amount of MA, the excess contribution will be transferred to your OA which now has higher interest rate. It will surely take years to reach S$1million in the CPF, however the period of time it takes will greatly depend of your salary since CPR contribution is the 20% of your salary and the employers will contribute an additional amount of 16% of your salary. There is no shortcut towards the prized S$1million dollars, so why are you going to save up on it? There are a couple benefit you get in CPF Special Account.
Benefits of Saving in Your Special Account
Safe away from Creditors
We are not new with loans and debts. Most Singaporeans use loans and credit cards for their various needs from paying up for education fees to building up a new business, however not all can successfully repay their loans, especially those who got cash from loan sharks. In the end, they might have to file bankruptcy. Creditors can then seize any existing assets and savings. CPF is an exception as no creditors can get a hold of it.
Reliable Absolute Return
Since most of the Singaporeans want to save up for their retirement, they invest on various products such as exchange traded funds and mutual funds, however, the returns they get from these financial products is not constant as it fluctuates according to the index it uses. These are riskier approach since no one can predict the future strength of the economy.
On the other hand, the CPF returns will remain absolute despite the economic depression Singapore might encounter. Also, your CPF is actually guaranteed by the Singapore government itself.
For you to say that your investment is actually making returns, it must outpace the inflation which is 3%. Since SA has a maximum interest rate or 5%, it outpaces the inflation by 2%.
Drawbacks of Saving in Your Special Account
CPF conditions may change overtime
The plan of reaching S$1Million before you retire depends on the rate of the CPF. There is no assurance the CPF conditions will never change. The government may revise it in 10 years or so as if deemed needed.
You can’t purchase a big apartment
Most Singaporeans use HDB Concessionary Loans to purchase a home. With this, you must only pay at least 10% of the cost of the flat to purchase it. If you are buying a flat costing S$350,000, then you can get a housing loan and pay 20% as a down payment. The down payment will be S$70,000. You could get this amount from your OA or from your own personal savings. Since you have transferred your OA to SA, you can’t use OA for any loans anymore.
You need an educational loan from financial institutions
You can use your OA as an educational loan for yourself or your relative, however, since you do not have it anymore, you will need to resort to other financial institutions such as banks and moneylenders who might have higher interest rates.
If you need affordable loans to pay for your school fees, you can get it from Cash Mart. Cash Mart offers reliable loans with competitive interest rates and repayment scheme fit for you.
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