You will be able to set up a projection of your CPF to retirement and choose sensible scenarios.
Kelvin now has a contribution worksheet, a housing model, a top-up plan and a hurdle rate sheet. Each answers one question. None of them answers the question he keeps coming back to: if things go roughly as planned, where will my CPF be at 55 and at my payout age, and what would knock it off course? That needs a projection, and a projection is only as good as the scenarios you feed it.
This lesson sets up the projection and chooses the scenarios. Lesson 8.4, Build your CPF projection and action list, builds it.
Four things move your CPF balances over a working life, and every projection needs a line for each.
Contributions come first: your salary, the contribution and allocation rates for each age band, and the wage ceiling. Your worksheet from lesson 1.4 already does this for one year. A projection repeats it for every year, and shifts the allocation as you move into older age bands.
Interest is the second: the rate for each account, applied each year to the balance. Extra interest matters while your balances are small and fades in importance as they grow.
Housing is the third: CPF used at purchase and every year of instalments, from your model in lesson 2.5. This is usually the largest outflow, and it can swing the result more than anything else.
Top-ups and transfers are the fourth: whatever your plan from lesson 3.5 adds each year, and any OA-to-SA transfer.
MediSave belongs in the projection too. Model it with its cap, and send anything above the Basic Healthcare Sum to the SA, as lesson 1.3 explained.
A projection over twenty or thirty years runs into inflation. Salaries rise, the retirement sums rise, and a figure like S$300,000 means less in 2050 than it does today. You can handle that in one of two ways.
You can project in future dollars: grow your salary each year by an assumed rate, grow the retirement sums by another, and use the CPF interest rates as they are. That is accurate but has more moving parts.
Or you can project at today's prices: keep your salary and the retirement sums at today's figures, and subtract an assumed inflation rate from each interest rate. If the SA rate were 5% and you assumed 2.5% inflation, you would grow the SA at 2.5%. Every result then reads as today's money, which is easier to compare with today's retirement sums and today's spending.
Most people find today's dollars easier. Whichever you choose, use it for everything. Mixing the two, for example growing the retirement sums but not your salary, gives a wrong answer that looks right.
One projection gives one answer, which is almost certainly wrong. Three scenarios give you a range and show you which assumptions matter.
The base case is your current plan: your expected salary, your housing plan as it stands, and no top-ups beyond what you have already committed to.
The second case adds top-ups: your planned cash top-ups or transfers from lesson 3.5, so you can see what they actually change.
The third case is the one that hurts: 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, this is usually how. Low interest rates are rarely the cause.
Kelvin's three, written before he built anything:
Base: salary of S$5,800 kept flat at today's prices, his share of the flat at S$30,000 from CPF at purchase plus S$900 a month, no top-ups. Top-ups: the base case plus S$3,000 a year to his own SA from next year, as in his plan. Stress: a dearer flat costing him S$1,300 a month from CPF, and a two-year career break at 38 while their first child is young.
All three use example rates of 3% for the OA and 5% for the SA, MediSave and RA, less an assumed 2.5% inflation. They are not the current CPF rates.
Next to the scenarios, write every assumption: the rates and where they came from, the date you copied them, the inflation rate, how your salary changes, the age you stop work and the age payouts start. Note that CPF rates and rules can change over the years you are projecting. The projection shows what would happen if today's rules held, which is useful but not a promise.
When the projection is built, you compare each scenario with the retirement sums from lesson 6.2 and with the payouts the CPF LIFE estimator gives for each RA balance.
Choose your own three scenarios now, with the assumptions for each, so lesson 8.4 is a matter of building rather than deciding.
Write the three scenarios you will model and the assumptions for each.
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