CPF Topping Up: A great way to save

My 27-year-old nephew, Yi Da, makes a point of visiting his 107-year-old great aunt, Madam Goh Seok Lian, whenever he is in Hong Kong.

Despite the age gap of 80 years, they get along fabulously. What also lights up my aunt's life during these visits is that my nephew arranges video chats with my 88-year-old father, Mr Goh Tiam Choon - her younger brother.

This contact with family helps to alleviate her loneliness staying alone in a nursing home with few loved ones by her side.

My aunt is doubly blessed in that despite her great age she is as sharp-witted as ever and she still manages to eat and walk unassisted.

As recently as 50 years ago, it was regarded as something of an Olympian feat for someone to live beyond a century.

But breakthroughs in medical science will ensure that many in my nephew's generation will breeze through that milestone with ease.

Still, even as I marvel at my aunt's longevity, I wonder whether my nephew has begun to consider how he would propose to spend the next eight decades if - as is hardly unlikely - he lives to be as old as my aunt.

When I first started working 30 years ago, the retirement age was 55 and the assumption was that when we reached that age, we would have accumulated enough savings in our CPF to stop working and start enjoying our golden years.

Now that I have reached 55, it is obvious that this rosy scenario is not going to pan out. Many of us will live much longer than what we had originally envisioned, and we will need a lot more savings to tide us over during our old age.

Worse, many of my friends in their 50s are still struggling to pay off their mortgages and coping with big bills, such as financing their children through college. That is hardly conducive to another goal at this stage of life: a slower work pace.

My parents are a good example. Now in their late 80s, their savings would have run out long ago if they hadn't relied on me to foot their bills, including medical expenses.

But counting on adult children for support will increasingly become the exception rather than the rule, as the 100-year-plus lifespan becomes more common.

Some of us may even find these extra years of life a chore, rather than a gift.

In recent years, I have witnessed at first hand many instances of people being pushed out of their jobs when they are in their 50s - only to experience difficulties in finding employment again.

Even those of us who are willing to work till we are 75 may find it impossible to do so, as rapid technological changes make our jobs obsolete.

I am sure that if my hard-pressed friends, who are in their 50s, had the chance to live their lives again, they would have planned differently and ensured that they had plenty of cash by the time they hit their 50s.

This would have enabled them to enjoy more choices - choose what sort of work they want to do, as well as the luxury of working because they want to, rather than because they have to.

To achieve this objective, they should ideally have started saving for their retirement as soon as they started working in their 20s.

Waiting till they are in their 30s or early 40s would have limited the options on offer when they reached their 50s - and at their most vulnerable to job-culling exercises.

In that respect, my nephew is one up on most other millennials.

Even though he started working only two years ago, he has already established a CPF Investment Scheme account which he uses to invest in blue chips that offer a higher dividend payout than the interest paid on the CPF ordinary account.

He has also opened a supplementary retirement scheme (SRS) account. Every dollar he puts into this account will enable him to reduce his taxable income by a dollar, subject to a cap of $15,300 a year.

At first blush, what he has done looks quite sensible - taking risks with his CPF savings to try to get a higher return while he is young, and squirrelling away some money into the SRS to complement his CPF.

But I feel that at this point in his life when he has minimal CPF savings and his tax bill is tiny, he should try to max out the benefits offered by CPF on retirement savings.

I am referring to a little-known programme known as the Retirement Sum Topping-Up Scheme, which allows a CPF member to put cash into the CPF Special Account (SA) which pays a higher interest and is meant for retirement.

You can even get tax benefits from contributing up to $7,000 a year to the SA. This is because, like the SRS scheme, every dollar you use to top up your SA will reduce your taxable income by a dollar.

And you can continue doing top-ups on your SA every year as long as the sum there hasn't hit the Full Retirement Sum limit, which currently stands at $161,000.

And saving a sum of $7,000 a year is well within the reach of a young saver like my nephew.

Of course, some will gripe that this means of getting a higher return on our hard-earned money is a tad draconian.

But that is the beauty of enforced savings.

If you start early enough, the effects of compounding will help to enable you to achieve that elusive $1 million nest egg by the time you hit your late 50s.

Then there is the extra 1 percentage point of interest which is paid on the first $60,000 of a CPF member's savings.

That is one benefit not to be sneezed at. For a young saver who tops up his SA regularly, it could mean getting an annual interest payout as high as 5 per cent.

In my 27-year-old nephew's case, every dollar saved in the SA now would snowball to almost $4 by the time he reaches 55 - and he does not even have to take any risks to achieve it.

All he has to do is to wait for compounding to work its magic. It is such a simple way to further grow your retirement nest egg, besides making the regular CPF contributions, that I am surprised the CPF Board hasn't done more to publicise it.

I heard it from the CPF officer who gave me a counselling session only after I turned 55 when I had become too old to take advantage of it.

Ask any investment expert what are the odds of getting a riskless return of 5 per cent year in and year out, and he will tell you that it is nigh on impossible. I can only concur.

The returns from my SRS account which I have invested in blue chips and bonds work out to only 4.2 per cent a year for the past 15 years.

There is another benefit: At 55, some money will be taken from the SA to form the Full Retirement Sum that will be used to purchase our CPF Life annuity at age 65.

The rest of the money continues to sit in the SA , which behaves like a high-yield savings account that a CPF member can withdraw from anytime for his living expenses.

In the past 20-odd years, the only time that I can recall getting a higher interest rate than the 4 per cent offered by the SA was during the 1998 Asian financial crisis when cash-strapped banks offered me a 6 per cent rate for my $50,000 fixed deposit.

Even then, I had to agree not to withdraw the money until the deposit matured one year later.

All this sounds too good to be true. But it takes great discipline to top up the CPF SA , knowing that once the money is put there, it cannot be withdrawn for a long period of time.

One comforting thought, though: This delayed gratification will ensure that you don't end up eating dog food in your golden years.


This article was first published on October 30, 2016.
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