because we probably pay the lowest rate of return amongst national pension schemes in the world, historically, in the last 23 years or so?
How to calculate the $1m?
Quite a number of people have asked me how the figures can be computed and derived.
Difference between 3.6% and 6% from age 21 to 65?
So, here’s an example.
If you start work at say 21 years old with a salary of $1,500 – increasing at 4% per annum until age 65 – at 3.6% interest, you may have accumulated about $1,482,384 in your CPF, at age 65.
Average overall interest rate on CPF accounts?
As there is no disclosure as to what is the average overall interest rate on all the different CPF accounts (Ordinary 2.5%, Special, Medisave and Retirement 4.0%, plus an extra 1% on the first $60,000, extra 1% on the first $30,000 from age 55) – we have assumed the average overall CPF interest rate of 3.6% in the above computation projection.
If the nominal rate of return is say 6% (the historical average real rate of return after adjusting for inflation of national pension schemes in the world is we believe about 4%) – you may have accumulated $2,520,637.
Difference of $1m in 44 years?
So, you may in a sense, be short by $1,038,253 ($2,520,637 minus $1,482,384)
And we have not even factored in the difference in the returns of about 2.4% (6 minus 3.6%) from age 65 onwards until death under the CPF Life scheme which pays 4% on the Retirement Account balance plus an extra 1% interest on the first $60,000, extra 1% on the first $30,000 (with any excess CPF that can be withdrawn but is left in the CPF earning 2.5%).
Assumptions?
Note: We have assumed a 4% increase annually in salary because the historical annualised wage growth less historical inflation in Singapore is estimated to be 2%. Also, we are assuming that the CPF contribution rate ceiling may also increase in nominal terms in the future because of inflation, in line with future salary increases.
Note: Although we have assumed in the above computations that the historical annualised return derived by the government from investing our CPF is 6% – it may be interesting to note that the GIC may have had a more than 8% average nominal annual returns since 1981?
(ST, Nov 17, 2021) “Since inception, it has generated steady returns on our reserves, with annual returns averaging more than 5 per cent above global inflation and this has significantly grown the international purchasing power of our reserves”
As our CPF is managed by GIC – and I understand that historical global inflation is about 3% – does it mean that the nominal return may be about 8+% (5 + 3)?
Are there any other countries in the world that seemingly keeps so much of the returns derived from investing the national pension fund to herself?
