It's never too early to start planning for retirement—even if it is your baby's retirement.
Just ask financial blogger James Hong (or better known to his readers as JK Holdings), who turned daddy in 2012.
James works as a senior principal engineer at a medical company, but to his family, the 37-year-old is their most trusted retirement planner. When James started planning for his own retirement, it meant research into areas such as real estate, investments, insurance plans and equities. As his interest in monetary matters grew, James began writing his financial blog in 2009 as a means to share insight he has gained, which he hopes will benefit others.
Planning for His Baby's (Eventual) Retirement
Becoming father to baby Micah meant another future to plan for.
James Hong, 37, and his son, Micah, 4
So when James received a letter from CPF to inform him of a CPF Medisave Account (MA) that was started for Micah when he was just a baby, it was only natural that the daddy blogger started crunching the numbers for Micah's CPF accounts.
Baby Micah was born just eight days after it was announced that Singapore Citizen newborns would each receive a S$3,000 Medisave Grant, along with a MA created in their name. (The Medisave Grant has since been revised to S$4,000 for babies born on or after 1 January 2015.^)
Compound Interest on Medisave Grant
Instead of using this sum for baby expenses as many young parents would, James chose to retain the money and accumulate interest with it. To James, this S$3,000 will grow by 4%, compounded, each year. Meaning in 55 years, the S$3,000 will have grown to S$26,000!
Note that the above sum is based on the assumptions that James does not factor in the Extra Interest of 1% per annum on the first $60,000 in the combined balances of CPF accounts, and that Micah doesn't contribute a single cent to his CPF even when he starts working, which is unlikely. As such the final sum is potentially much higher! Do also note that the Basic Healthcare Sum (BHS) for 2017 is $52,000. The BHS is the maximum amount a member can have in his MA.
Once Micah starts working at age 24, both his employer and he will be contributing to his CPF savings, which will then grow even faster.
Taking Advantage of Compound Interest to Help Your Child Retire
Inspired by what he calls "the power of compound interest", James took one step further to save for Micah's retirement, even though his son is only 4 years old.
"I wanted to further enhance [Micah's CPF savings], so [my wife and I thought], 'why don't we [deposit] the red packets [Micah receives] from his grandparents; why not just contribute S$2,000 [yearly] for another 20 years?'"
By contributing S$2,000 to Micah's Special Account (SA) yearly via the Retirement Sum Topping-Up Scheme, James estimated that Micah's Special Account will grow to S$66,500 when he enters the workforce at age 24. This principal sum will continue to be compounded every year into a respectable sum by the time he turns 55!
For easy calculation, the figures calculated above are based on the assumption that James tops up Micah's SA in January every year, with the interest rate remaining at 4%, calculated per annum.
On top of this, an Extra Interest of 1% per annum is earned on the first S$60,000 in CPF accounts, and, for Singaporeans aged 55 and above, an Additional Extra Interest of 1% per annum on the first S$30,000.
Effectively, when Micah turns 55, he will earn 6% interest per year on the first S$30,000 in his CPF account, allowing him to grow his retirement savings more quickly.
This, he hopes, will help Micah attain the Full Retirement Sum (FRS) by the time his son turns 55.
As part of the CPF Lifelong Income For the Elderly (CPF LIFE) Scheme, Singapore citizens receive a monthly payout of between S$1,280 and S$1,380 every month from age 65 for life so long as they reach the FRS requirement by age 55. Depending on the year you turn 55, the FRS is different:
|55th birthday on or after||Full Retirement Sum|
|1 July 2003||$80,000|
|1 July 2004||$84,500|
|1 July 2005||$90,000|
|1 July 2006||$94,600|
|1 July 2007||$99,600|
|1 July 2008||$106,000|
|1 July 2009||$117,000|
|1 July 2010||$123,000|
|1 July 2011||$131,000|
|1 July 2012||$139,000|
|1 July 2013||$148,000|
|1 July 2014||$155,000|
|1 July 2015||$161,000|
|1 January 2016||$161,000|
|1 January 2017||$166,000|
|1 January 2018||$171,000|
|1 January 2019||$176,000|
|1 January 2020||$181,000|
Note: The Full Retirement Sum is twice of the Basic Retirement Sum.
While S$2,000 a year may feel like a significant amount, it averages out to just setting aside S$400 of angbao money, and S$67 per month per parent—much cheaper than the enrichment classes parents willingly fork out for monthly. In James' opinion, "[parents] find it expensive [to raise a child in Singapore] because they send [them] to all kinds of excursions and classes."
Instead of sending Micah for enrichment classes indiscriminately, James targets specific areas of Micah's interest. For example, knowing that Micah—who has just started preschool—is interested in art, James sends him for art classes. But he bears in mind not to overspend on such classes for his son now so that the money can be better used preparing for Micah's future.
Read also: Planning For A Child
Habit of Saving
Inspired by his own parents who started saving on James' behalf more than 20 years ago when they were still living in Malaysia, James wanted to do the same for his child. In 20 years, Micah will grow up and take over his own CPF account, which will have amassed a tidy sum to give him a headstart in building his retirement savings. James hopes that this will also inspire his son to inherit the same virtue of saving.
To maximise savings for Micah, James and his wife intend to pool all their savings for Micah in CPF rather than set up a savings account for him in the bank.
"The bank's interest [rate] is way too low. Even the CDA [Child Development Account] interest rate is only at 2%, which is still low." Hence, James prefers to set aside money for Micah in his CPF, where it will better serve its purpose growing interest at double of most banks' rates, even without factoring in Extra Interest.
Start Early, Retire Easy
Similarly, James recognised very early on that his SA yields a higher interest rate of up to 5%* as opposed to the maximum of 3.5%* for his Ordinary Account (OA). As such, he transferred his remaining OA savings to his SA once his HDB apartment was fully paid for. On top of that, James made an additional S$7,000 top-up to his SA to take full advantage of the higher interest rate in preparation for retirement.
James also opened and regularly contributes to a Supplementary Retirement Scheme (SRS) account. SRS contributions are eligible for tax deferral, meaning James only has to pay income tax on his SRS contributions when he retires—saving up to 50% in tax—since his income is likely to fall within a lower tax bracket once he stops working.
"I believe with proper planning," James says, "we can have an easy retirement in Singapore."
The self-employed Singaporean's guide to planning for retirement
What if I don't wish to rely on my children when I retire
By building up his son and his own retirement savings early, James capitalises on the attractive interest rate offered by CPF over a longer period of time. This way, their savings have longer to snowball than if Micah is to start saving only when he starts working, or if James is to start planning for his retirement only after Micah grows up.
Start early by finding out more about CPF LIFE and the Retirement Sum Top-Up Scheme, and how you can start contributing to your child's future.
* The above interest rates include an Extra interest of 1% on the first $60,000 of a member's combined balances (with up to $20,000 from the OA).
^ Information is accurate as of 13 February 2017.