Set up a projection of your CPF to retirement and pick sensible scenarios to run.
Kelvin has built a contribution worksheet, a housing model, a top-up plan and a hurdle rate sheet. He and his partner are planning their first child, and he keeps coming back to one question: if things go roughly as planned, where will his CPF be at 55 and at payout age, and what could knock it off course?
Each of those tools answers one question only, and none of them answers this one. To answer it you need a projection: a year-by-year estimate of your CPF balances to 55 and to payout age under a given set of assumptions. A projection is only as good as the scenarios you feed into it, so you set it up and choose your scenarios first. Lesson 8.4, "Build your CPF projection and action list", is where you build it.
Four drivers move CPF balances over a working life: contributions, interest, housing, and top-ups and transfers. Your projection needs a line for each one.
Contributions depend on your salary, the contribution and allocation rates for each age band, and the wage ceiling. Your lesson 1.4 worksheet already works out one year of contributions. The projection repeats that for every year and shifts the allocation as you move into older age bands. From age 55 the SA is closed, so future contributions go to the OA, RA and MediSave Account instead. Check the CPF Board for the current rates for each age band.
Interest is the rate for each account, applied to the balance each year. Extra interest matters while balances are small and becomes less important as they grow.
Housing is the CPF used at purchase plus every year of instalments, taken from your lesson 2.5 model. It is usually the largest outflow and can swing the result more than anything else.
Top-ups and transfers are whatever your lesson 3.5 plan adds each year, plus any OA-to-SA transfer.
MediSave also belongs in the projection. Model it with the Basic Healthcare Sum as its cap, as explained in lesson 1.3. Any MediSave contributions above the Basic Healthcare Sum go to the SA or RA, or to the OA, depending on your age and whether you have set aside the Full Retirement Sum. Check the CPF Board for the current Basic Healthcare Sum.
Over twenty or thirty years, inflation matters. Salaries rise, retirement sums rise, and a fixed figure buys less later. S$300,000 in 2050 (an invented example) will be worth less than S$300,000 is today. You can handle this in one of two ways.
With future dollars, you grow your salary each year at one assumed rate, grow the retirement sums at another, and use CPF interest rates as they are. This is accurate but has more moving parts.
With today's dollars, also called today's prices, you hold salary and retirement sums at today's figures and subtract an assumed inflation rate from each interest rate. If the SA earns 5% and you assume inflation of 2.5% (a hypothetical example), the SA grows at 5% - 2.5% = 2.5% in your projection. Every result is then stated at today's prices, so it is easier to compare with current retirement sums and your current spending. Most people find today's dollars easier.
Whichever basis you pick, use it for everything. If you mix the two, for example by growing retirement sums but not salary, you get a wrong answer that looks right.
A single projection gives you one answer, and that answer is almost certainly wrong. Three scenarios give you a range and show which assumptions matter.
The base case is your current plan: expected salary, the housing plan as it stands, and no top-ups beyond those already committed. The top-ups case is the base case plus the cash top-ups or transfers you planned in lesson 3.5, so you can see what they actually change. The stress case assumes heavy housing use, such as a bigger home or an upgrade, or a career break with no contributions for a year or two, or both. When a CPF plan breaks, it is usually through heavy housing use or a career break, and rarely because of low interest rates.
Kelvin writes his three scenarios before he builds anything. In his base case, his salary is S$5,800, held flat at today's prices. His share of the flat is S$30,000 from CPF at purchase plus S$900 a month, and he makes no top-ups. His top-ups case is the base case plus S$3,000 a year to his own SA from next year, as in his plan. His stress case has a dearer flat costing him S$1,300 a month from CPF, plus a two-year career break at 38 while their first child is young.
All three of his scenarios use example rates of 3% for the OA and 5% for the SA, MediSave and RA, minus 2.5% assumed inflation. These are not the current CPF rates.
Next to your scenarios, write down:
the interest rates and where you got them the date you copied the rates the inflation rate how your salary changes over time the age you stop working the age your payouts start
Add a note that CPF rates and rules can change over the projection period. The projection shows what would happen if current rules held, which is useful but not a promise.
Once you have built the projection in lesson 8.4, compare each scenario with the retirement sums from lesson 6.2 and with the payouts the CPF LIFE estimator gives for each RA balance.
Now choose your own base, top-ups and stress scenarios and write down the assumptions for each one, so that lesson 8.4 is a matter of building rather than deciding.
Write down the three scenarios you will model and the assumptions behind each one.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).