How to get 4 million by the age of 65 through your CPF?
How to get 4 million by the age of 65 through your CPF?
On Money and Me, Michelle Martins speaks with Loo Cheng Chuan, Founder of 1M65, who has proven that we can build our retirement nest egg to 4 million dollars by 65 using our CPF. We find out how this works.
Michelle Martin: Most of us manage our CPF balance in the Ordinary Account (OA) through our employer contributions at 2.5% interest, but that is nowhere near the 4% rate that the Special Account (SA) and MediSave enjoy. So what do you need to do to build your retirement nest egg up to 4 million dollars?
Loo Cheng Chuan: In 2015, I started the movement called 1M65, a million by 65 years old. I've always felt that the CPF gives very high interest rates, especially the Special Account (SA) and MediSave accounts. CPF SA has a 4% interest rate, and you can go as high as 5-6%. If you let that [money] compound over a long period of time, you can actually earn a lot of [interest]. I know that many people are upset with the government because they’ve set many restrictions on the SA, but the truth is that it helps you to make a million dollars.
When I was 30, my wife and I filled up our SA and MediSave accounts to the maximum limit of $130,000 at that time and after we did the calculations, we [found out that] we will have 1 million dollars combined by the time we retire. What surprised me was that this formula simply showed that even if we do not work for the rest of our lives, we will still have a million dollars waiting for us upon retirement. This means, if I continue to work to the age of 65 at 30 years old, I will have much more than 1 million dollars [in my CPF]. When I crossed 45 years old, our combined CPF has exceeded 1 million dollars so [I know] that 1M65 is no longer a target, it is real.
MM: Most people are unhappy because they want to get their hands on their money in the CPF and spend it, but is the essence of your programme really about transferring money from your OA to SA for the highest interest rates?
LCC: Let me give an analogy. Many of our forefathers, including our grandparents or even our parents, made a lot of money from their properties by simply buying and leaving it there. They don't look at its price or buy and sell their properties every day. They let the power of compounding do its job and as a result, the price of the properties doubled or tripled 10 to 30 years later.
This is the same for most investments, including the CPF. You have to let the power of compounding take its course and accumulate over time. While you want to touch [the money in] your CPF, the act of touching will be analogous to buying and selling your property [on multiple occasions]. If you were to withdraw and deposit the money in your CPF [on multiple occasions], you are not letting that power of compounding take place. Therefore, the lock-up of the CPF plays to our favour so, I'm a big supporter of a prolonged lock-up of the CPF until the time you retire.
You may not like the government or the CPF, but you have no reason not to like their money. If the CPF makes you so much money, why not enjoy it?
MM: This is the best of passive investing, isn't it?
LCC: For me it is, because the risk is nearly zero. Taking political and policy risks aside, this is the most riskless 4% interest [I’ve seen] in my life.
MM: Although there are no sales charges, setup fees or transaction fees, there are opportunity costs. When you move money from your OA to your SA, you can't move it back and people use their OA to pay their mortgage.
LCC: I would suggest buying a humble house just to meet your needs. You should still have some remaining money in your Ordinary Account (OA) after paying for mortgages for most HDB BTOs. Actively accumulate your SA and MediSave accounts with this remaining money. Over time, you'll find that you’ve hit the maximum [limit] in your SA, that’s when your OA will start to accumulate.
MM: So what are the targets I should set for myself if I want to reach 4M65? How much should I have to have in my SA and MediSave?
LCC: First, I'm reaching out to all the young adults. Time is on your side. Allow yourself to fill up your SA and MediSave accounts as fast as possible. Keep your Full Retirement Sum (FRS) of $181,000 in the SA. Try to actively transfer your funds in OA to SA to fill it up as much as possible. With that amount, it will compound and you will see a phenomenal number when you retire.
Secondly, both you and your partner are encouraged to [continue] working. Some people asked whether it is possible to hit 2M65 alone (half of the target of 4M65 as a couple). I would say no, because of economies of scale. When both you and your partner work, you can do load sharing of expenses for house mortgages and so on. And have the guts to just actively put your OA into S&P 500 without the need to time the market or need to feel if you are putting in the right time, right place, and just let power compounding do its job.
MM: Why did you make that jump to up the limit from 1M65 to 4M65 for your movement?
LCC I've always wanted to know how much I will have when I reach 65. So, I crunched the numbers using my rudimentary excel skills and found that I could shoot beyond 4 million. I got about 10 fans who are good at excel and finance to help me with the excel spreadsheet and most of them came back with higher numbers, way above 4 million dollars. That’s how I discovered and developed the 4M65 strategy. It took the industry by storm because nobody believes that you can make money from CPF of that phenomenal amount.
MM: Is there a limit to how much money I can make off this 4% rate in my SA and MediSave?
LCC: Yes, there are limits but there are ways to work around it. The limit is imposed by the FRS cap of $181,000. However, your salary and bonus can go beyond this amount. On top of that, the interest you get from your FRS will stay within the FRS. Therefore, it is possible for you to exceed $181,000 if you continue to work or put in money.
Here is an exclusive CPF hack for MONEY FM 89.3 listeners:
There's an annual limit of $37,740 you can contribute to [your CPF] but that's tagged to your salary per job. Which means that you can exceed the limit if you have 2 jobs. Most people don't have 2 jobs. But if you can find yourself to work in 2 jobs, theoretically, you can double that limit.
This is an interesting hack I’ve found by accident and I don't think CPF thinks of it as a loophole, [but rather], it is something they encourage everyone to do.
For more, tune in to Your Money with Michelle Martin on weekdays from 9AM to 12NOON.
This interview was broadcasted on MONEY FM 89.3 on 14 July 2020.
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