[Part 1 - Can CPF interest rates be higher? (Part 1)]
Consider a person who had started his employment at the age of 20 in January 1975 and is soon to be age 60 in January 2015. His present situation – retaining his job is difficult and if it is lost finding the next one would be even more difficult. Retirement is not an option according to the law.
We assume that he had started with a monthly salary of about $250 and had absolutely no economic mobility whatsoever. He had only seen nominal salary adjustments for inflation at 4% per annum compounded monthly. Let us further assume that his employer had been paying him his salary and settling his CPF obligations on the first day of every month since January 1975 till today.
I’ve created a spread sheet to help illustrate this calculation – [Link].
The following are set at default values as stated on the spread sheet for the purpose of deriving the numbers of interest. As this estimation was done in the common interests of all Singaporeans, those who are able to provide the relevant data to replace the default data are welcomed to provide the actual numbers, where possible, for a more accurate assessment of the situation.
1) The employee and employer contributions were both 20% of the monthly salary paid to CPF on the first of every month (taken as averages for all its variations over the years).
2) The CPF funds were all invested via the relevant investment channels by the government to yield returns at an average rate of 6 % per annum, compounded monthly on the last day of the month.
3) The employee has CPF savings and its returns accumulated over the years at a rate of 4 % per annum (guesstimated as the weighted average of the different sub-accounts and their variations over the years), compounded monthly on the last day the month.
4) All withdrawals for housing, education and investment (if any) are not reflected as they would have been accounted for as owed by the individual to his CPF.
On the spreadsheet, columns F and H respectively would show the accumulated amounts based on the 6% returns and the 4% returns. Column I shows the difference between those entries as shown in columns F and H in each row.
The percentages, of course, can be changed by readers accordingly to test the various scenarios.
What Next?
Account holders in CPF who may want to have their own estimation of their balances based on the spread sheet model and could do so quite easily.
Just amend the monthly salaries obtained from their employment in column B beside the months as indicated in the leftmost column A. For the months they were unemployed or self-employed the relevant spaces will require an entry of 0. The numbers would then be automatically generated to display the approximate savings and investment returns based on the average rates. Note the numbers displayed in columns F and H at the relevant points in time and judge for yourselves.
The widening disparity in the figures between those shown in the columns F and H, with each passing month, is the difference as shown in column I. These numbers hopefully would persuade for more transparency in the process of the determining the commencement age for the drawing down of one’s own retirement funds.
Non-partisan