Planning a $1.4m legacy but be aware of this.

Reader:

I have an idea to bounce off you. 

Just chit chat. 

I know you don't give advice.

I am 54 and just became a father. 

I married rather late in life.





As a father, I am thinking about my child's future. I am well aware that by the time he is 21, I would be 75 if I am still alive by then.

Next year, I will be able to withdraw more than $100K from my CPF account as I have already met the minimum sum for my age. 

I am thinking of putting the money into my child's CPF SA instead of leaving it in my OA.





I could top it up to $166K and do a one time top up to his CPF SA and, compounding at 4% a year, he will have a retirement nest egg of more than $1.4 million when he turns 55. 

I won't be here for most of his life and this is something I can do for him.







AK:

You have to remember that your CPF money is meant to help fund your retirement. 

If you have other ways to fund your retirement adequately, then, OK.

Yes, your child won't be able to touch the money until he turns 55. 

If your plan is to help your child be financially secure in his old age, I would say that this is a very generous and thoughtful thing you are doing for him. 





However, remember, the CPF SA interest rate could change over the very long term and 55 years qualifies as very long term. 

After all, the plan is to peg it to long term government bond coupons eventually, if I remember correctly.





When would this happen? 

I have an inkling that this might happen when the 10 year SGS bond rises to a level that is at 4% or a bit higher. 

We will have to accept higher or lower returns on our CPF savings in future from then on.





So, we won't be wrong to expect CPF SA interest rate to fluctuate over the very long term. 

So, don't think of 4% as something that is sacrosanct.

Even so, at 3.5% per annum, $166K will become $1.1 million in 55 years. 




At 3% per annum, it will be about $844K in 55 years. 

That is still quite a bit of money.

Your child won't have to worry as much about retirement funding and can be quite comfortable as a working adult, I imagine. Lucky kid.

A father's love. :)





Related post:
Make CPF part of child's savings.

Want to withdraw $500,000 from CPF at 55?

Reader says...

A quick intro about myself.

I am 34 this year, staying in a bto hdb flat and have existing housing loan of $20k outstanding (serviced by my wife and myself).

Checking with you on my strategy for CPF.

I have around $5k in ordinary account, and $145k in special account.






Already met my min sum for medisave. Am hoping to hit my S.A. min sum when I reach 35yo.

My thinking is that once my min sum (FRS of $166k) for S.A. is met, all employment contribution will flow into my ordinary account(~$2k a mth), and I would be able to hit around $500k when I reach 55 ( $24k x 20yrs - not including contribution from bonuses) and withdraw this amount.

Am I missing out on anything here? Thanks!








AK says...

Once you have hit the FRS, you will still be making mandatory contributions to your SA. 

So, monthly CPF contribution goes to OA and SA but nothing to your MA if it has maxed out.

When you hit 55, the prevailing FRS goes to the newly created RA and you can withdraw whatever is left in your OA and SA, if you like.







If we do the right things, we could withdraw a more meaningful sum of money from our CPF account at age 55 instead of a token $5,000. 

Do you like that? 

I know I do.







Related posts:
1. Changes to the CPF and SRS.
2. My CPF-SA (Jan 2016).