Budget 2024: Can 1M65 still be done?

You may have heard of the 1M65 strategy. If you want to read up on it, you can look at this article here: https://blog.seedly.sg/1m65-1-million-by-65-cpf/or the FAQ page here: https://loo.money/faq/

However, Budget 2024 has announced a change that led to a lot of discussion about this strategy: The closure of the Special Account (SA) for people who are 55 years and older. Before we get too eager to make a decision, we should understand the facts so that we know what has happened, and what it means for this well-shared strategy.

What was announced at Budget 2024?

Starting from early 2025 (date to be confirmed as of 17 Feb 2024), all CPF members who are aged 55 and above by then will see their SA closed. The money from this account will flow out to the accounts in this order.

1. Money will go to your Retirement Account (RA) first to fill it up to the cohort’s Full Retirement Sum (FRS)

2. Whatever that is left after 1 is done will go to the Ordinary Account (OA).

To clear things up:

1. This change only covers those who are at least age 55 in 2025 (i.e. next year). If you are younger than this, you will still have your SA.

2. The money is still owed to you. You will at least get it through monthly income.

How does this change the 1M65 strategy?

For the most part, not much. The accumulation strategy remains vital. The change only comes in later.

But let’s recap the relevant steps first:

1. You are a couple (aged 30 years old) with 130,000 in CPF, and this whole amount is put inside the Special Account and Medisave Accounts. (Both of which attract 4% interest at this time.) You can do this by transferring your Ordinary Account Savings to your Special Account savings, or by topping up.

2. Any withdrawals made are quickly reimbursed.

3. At Age 55, RA is created, and money from SA and OA is transferred to the new RA. The SA accounts previously would have remained open and the money would have continued to compound at 4%.

It is optional to pledge a property (if you have one) at this point, but doing so would mean that more of your money would stay in the SA.

It is also possible to think about the manoeuvre of SA shielding. (i.e. Putting SA monies into a relatively safe instrument before the transfer happens and then putting money back into SA after the transfer is over.) However, let’s assume this move is not needed.

If all goes smoothly, It will look like this below:

However, the closure of SA at 55 could mean one of two things:

a. More transfer of monies to RA at 55 to enjoy the 4% interest and then receive most of the rewards of 1 million via CPF Life payouts later (this is oversimplified and correct as of now, but bear with me here) or:

b. Some of that money could now be earning 2.5% interest post-55. Now this is a point about the future, and many things could change, but I decided to simulate what would happen if all of said money were now subjected to this lower interest rate:

In short, you will get about $887,000. It is still decent, but you may want $1 million instead.

Can 1M65 still be done?

In short, yes, but you may want to think about at least one of these three options here:

a. Adding more money at the start.

b. Starting earlier.

c. Increasing contributions over time.

d. Looking at other options in the CPF system.

All of this assumes that the interest rate does not change.

Adding more money.

You could add $17,500 more per person to get similar results shown below:

Starting earlier.

A slightly more difficult option is to consider starting earlier. What I found is that you will need to start 3 years earlier to achieve similar compounding, based on the calculations below:

Increasing contributions over time.

Most people will find that this would be your best bet. Answering how much to contribute over time very much depends on your income, lifestyle, and existing CPF balances. You may find it easier to calculate this if you use the CPF Planner: https://www.cpf.gov.sg/member/tools-and-services/planners/cpf-planner-retirement-income

Other options?

If you are exploring using the SA interest to bring you to $1 million, this is likely your last resort. CPF money is considered capital-guaranteed and the interest granted to you is free of charge. But if you feel that you have the proper risk appetite, investing psychology, and approach, you can consider this.

Is there anything else I should know?

There are two points you should know:

Firstly, this event can be considered the “policy risk” many have been talking about. Surprisingly, what is less discussed is how to define it, and how to respond to it.

You need to remember that contributing money to CPF is originally with the idea of saving for an age 65 retirement (as this point in time). This age has been known to change (often, it is life expectancy that is quoted here), as are the underlying rules handling the system. While CPF’s scope has since been widened to cover housing and medical care (topics for another day), ensuring that they can continue to give you an income for basic needs is what they intended to do from the start.

Policy risk therefore only becomes real if you see CPF as serving any other purpose. If you have other purposes that you may want to meet, you may want to explore other investments that can better serve those purposes, and prioritize what is most important to you.

Secondly, you should know that 1M65 is just a projection. It relies on having a large lump sum early on and a stable compounding rate for it to work. Even in my analysis above, I kept these assumptions in place. This can work both for and against you.

It may appear easy to see that it works against you if you cannot meet any of the earlier requirements, but don’t be. Most people earn a lot more in their 30s and 40s, their income growth sometimes outpacing the interest rate SA gets. Now I am aware that this is the period where many major life decisions come into play (House, Marriage, Children, and so on) but if you plan right, you can more than make up the difference in your SA. Just remember that contributing earlier can allow you to compound better.

How can we deal with this moving forward from here?

You have to remember that personal finance is a journey above all. You may not have it all covered early on, but what matters most is to work out the best strategy for yourselves at the time you encounter them. You own due diligence and your efforts remain your best asset in handling personal finance, and it is the one thing that will only grow in value as other things change in value in personal finance.

Disclaimer: The views in the article belong solely to the author, and should not be treated as financial advice. Please consult a licenced professional advisor for proper financial advice.