How you can make your child a CPF millionaire by contributing $400 every month until they turn 21

While many may frown upon the CPF scheme in Singapore, it must be said that it does a good job of forcing us to save for the most important expenses in our lives - our home (via the Ordinary Account (OA)), retirement (via the Special Account (SA)) and medical needs (via the MediSave Account (MA)).

The CPF does not just 1) force us to save from our salaries, it 2) also forces our employers to contribute to these important expense buckets in our lives, and CPF itself 3) pays us a very decent risk-free annual interest of 2.5 per cent (OA) to 4.0 per cent (SA and MA), as well as an additional interest of 1.0 per cent on the first $60,000 of our combined CPF balances.

We look at an interesting and highly unconventional concept - of kickstarting our child's CPF millionaire status - by contributing to his or her CPF account from the day they are born to when they turn 21.

SAVING FOR YOUR CHILD'S RETIREMENT

Firstly, it has to be said that having a baby can be expensive in Singapore. While trying to keep up with new and essential expenses today, it may be challenging to even think about forking out an additional sum each month for our child's retirement - which may be close to six to seven decades away.

With that being said, here's how saving $400 a month for our newborn's future can result in them becoming a CPF millionaire for their retirement. Before we go into the calculations, let's go over some assumptions and ground rules to understand how this would work:

#1 We contribute $400 each month to our child's Special Account, for their retirement

#2 We do this for the first 21 years, until our child start working at the earliest (of course, boys may only start 2 to 3 years later due to National Service)

#3 For simplicity sake, we will assume that one contribution of $4,800 is made to our child's SA on the first day of each year

#4 We assume our child does not have any other CPF savings during this time

#5 We assume that our child never earns a single cent in income (and hence do not receive any regular contributions from work) which is of course unrealistic. For the purpose of this illustration, we would just made this assumption.

Here’s how your contributions to your child’s SA will look like after 21 years.

The first thing most of us would deduce from the table is that we would have contributed a total of $100,800 in our child's SA by the time he or she turns 21.

This amount would have compounded to $173,006 because of the annual 4.0 per cent interest earned on their SA balances, and an additional annual interest of 1.0 per cent on the first $60,000.

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This translates into $72,206 worth of interest.

We can also see that by the 10th year, our child's SA would have reached the $60,000 mark, and any additional sums in the account would no longer earn 5.0 per cent per annum (p.a.), but instead, earn only 4.0 per cent p.a.

Lastly, we would also realise this is not even close to the $1 million mark stated in the title of the article.

OUR CONTRIBUTIONS CONTINUE TO COMPOUND, EVEN AFTER WE STOP CONTRIBUTING MORE

Even after we stop our annual contributions of $4,800 at age 21, the funds that we have already topped-up into our child's SA continues to compound for his retirement.

Of course, we also hope that our child is able to secure a good job and earn a good pay to live comfortably and provide for his family. For the sake of this article, we assume our child never takes on employment, or has employment but do not receive any CPF contribution from his job (e.g. work overseas, self-employed).

This also means our final calculation is the minimum our child will have in their CPF, and the actual amount could be much more substantial.

Here’s what happens to his CPF savings to the time he reaches 65.

This time, the first thing we would all notice is that our child is definitely a millionaire by the time they turn 65, with just our initial yearly contribution of $4,800, or total contribution of $100,800, till they turn 21.

The next thing most of us would notice is that over the course of 65 years, our child earned the bulk of their millionaire status from interest returns rather than our actual top-ups.

From an initial total contribution of $100,800, it has compounded to $1,040,937. While 65 years is a long time, this shows the power of compounding over a long time-horizon.

SHOULD WE CONTRIBUTE TO OUR CHILD'S RETIREMENT?

As stated at the beginning of the article, this computation is merely meant to show us how such a contribution can make our child a millionaire by the time they retire.

Some things we need to note if we ever think of embarking on such a plan, which would be considered by most people as extreme.

- We assume the CPF SA interest rates will continue to be 4.0 per cent over a very long time. This may not always be the case.

- The funds that we contribute can never be withdrawn. This means if we ever face liquidity a crisis in our lives, we cannot dip into our child's SA. If our child ever faces a liquidity crisis in their life, he or she also cannot touch their CPF balances until they have reached the withdrawal age, even if they may have close to $1 million.

- The value of $1 million in 65 years' time would also be very different to the value of $1 million today.

Our ability to embark on a strategy of setting aside $400 each month for our child's retirement, would naturally be a secondary concern, after paying for our current bills, prioritising our own retirement and planning for our child's education and other important nearer-term expenses in our lives.

For most people, our child's retirement would likely be the last thing any parent would plan for.

Nevertheless, even if we cannot afford $400 each month or $4,800 each year, we can start off with smaller amounts to bolster our child's future.

These funds can also be put into more liquid investments, so we can actually utilise it in extreme scenarios where we require the money.

This article was first published in Dollars and Sense.