CPF – Voluntary contribution for self-employed

My daughter is self-employed and has a business in her name. She is not required to contribute to CPF Ordinary Account (OA) and Special Account (SA). Only contribution is required for her Medisave account based on the year’s net trade income of her business.

Most of us are employees and we contribute to CPF monthly (both employee CPF and employer CPF portions). Self-employed is not required to under the Act except for Medisave account. If there is no contribution, then there will be no CPF Life payout for her when she reaches CPF drawdown age (65 years old).

As part of retirement planning, I suggested to her to put in a yearly lumpsum of money to her CPF accounts on a voluntary basis. The aim is to build up a sum of money at age 55 to reach at least $155,000 Minimum Sum amount.

CPF pays 2.5% interest on OA, and 4.0% on Special Account compounded monthly. It also pays an additional 1.0% p.a. for first $60,000 of a member’s combined balances, with up to $20,000 from OA. These interest rates are way better than putting money in the banks. Why not earn this interest income from the CPF Board?

How much yearly voluntary contribution are we looking at?

The parameters are:
Current age = 25 years old.
Total number of years to 55 years old = 30 years.
Future value of savings = $155,000
Interest per year = 3.0% (considering a rate between 2.5% and 4%, and additional 1% extra interest)
Interest compounding = yearly

Yearly lumpsum contribution = $3,260

This $3,260 per year is just $271 per month. If this yearly contribution is kept up till 55 year of age, total amount contributed is $97,800. $57,200 is the total interest received over 30 years. ($155,000 – $97,800)

This is the power of compulsory savings and the compounding impact of interest accumulation.

For people who wanted to know how much to save monthly based on their individual circumstances, use the savings calculator provided in the CPF website.

Copyright © 2014, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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4 Responses to CPF – Voluntary contribution for self-employed

  1. TheLessTraveledPath says:

    How about investing in stocks, like STI for example as compared to putting in CPF?

    • limkimtong says:

      Yes, but stocks and shares carry risks and are volatile. The concept is for people to be disciplined in saving constantly to build retirement nest eggs. If one can do so, that is fine too.

  2. Pingback: Daily SG: 14 Aug 2014 | The Singapore Daily

  3. Roy Lim says:

    She can put $7,000 p.a. to CPF and save tax on her business / income. However I would also recommend SRS contribution of $12,750 p.a. For stock and shares investment, SRS admin charge is less than CPF-IS which include $2 fee per lot traded.

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