How Long Does It Take for $80k in CPF to Compound to $200K? Is it still better to transfer from OA to SA?

I just did a transfer from OA to SA for this month, and I'm pleased that my total CPF Savings has exceeded $80k!

Even though this is a combined balance of SA and MA, I view them fairly as both earn the current floor interest rate of 4% per annum, and since I still have a long way to go before I hit the Basic Healthcare Sum (BHS) of $60,000 in MA and Full Retirement Sum (FRS) of $181,000 in SA, the way they appreciate seems to be the same for me.

Now let's say if there is zero contribution to my CPF from this month onwards? How long would it take for me to reach $200K at a compound interest of 4%?

24 years.

And I wouldn't even be 55 years old by then.

Do note that I have yet to factor in the first 60K in the SA that fetches 5%

Now if I were to calculate the first $60,000 in SA based on a compound interest of 5% and the remaining amount in SA and MA at 4%, what would the future value of the money in my CPF amount to over the same duration?

$247,666.57

This means that if I were to stop working from now and do zero contribution over the next 24 years, my principle would have tripled without me lifting my finger at all.

That's the power of compound interest.

I am still planning to keep transferring the money in the OA to SA and do the annual $7000 voluntary contribution till I reached the FRS, before starting to top up the MA for tax relief.

But I almost changed my mind if not for the availability of online calculators because I'm too lazy to do the maths.

This started off when one of my friends pointed out that it may not be a smart move for me to do that because it would sabotage my chance of getting a higher tax relief in the future when I'm in a higher income tax bracket. 

This is based on the assumption that I will be earning more money in 10 years' time, which I very much hope so.

For example, topping up $7000 when my annual salary is $30,000 will only save me $140 worth of tax, but the same top-up will save me $1540 when my annual salary exceeds $320,000. 

At the average annual salary of $67,152 in Singapore, the $7000 will save a tax rate of 7% at $490. 10 years of working at that salary would save you $4900, and it's unlikely that the salary will stay stagnant for such a long time, or will it?

Since we are not able to top up the SA for tax relief or do a transfer from OA to SA once it hits the FRS, would delaying the top-up and transfer be beneficial for us if we are confident to earn more money in the future?

In my case, I am still $115,675.75 away from hitting the FRS this year. If I were to assume a contribution based on the average salary of $67,152, I'm expecting $4029.12 per year to be contributed to the SA and with the $7,000 top-up. This sums up to $11,029.12 add-on to the SA, which means that I can save 10 years of tax relief, i.e. at least $4900 over the course of 10 years.

But what is the opportunity cost if I opt for this route?

Example 1:

At an annual salary of $67,152, the amount contributed to OA will be $15,444.96 per year. Assuming that there is no increment or bonus for the next 10 years, leaving this amount in the OA will result in a total amount of $192,806.64, thereby earning $38,357.04 in interest.

On the other hand, it would fetch $208,296.16 in 10 years if it was transferred to the SA, earning a total of $53,846.56 in interest ($208,296.16 - 10 x $15,444.96)

This means there will be a loss of $53,846.56 - $38,357.04 = $15,489.52 just to save $4900 of tax in 10 years.

That's a net loss of $10,589.52.

Do note that this loss is based on the tax rate at 7%, if your income bracket is $80,000 to $120,000 where the tax rate is 11.5%, you will need to adjust the figures accordingly.

Example 2:

Now let's just take the middle figure in the 11.5% tax bracket and assume an annual salary of $100,000.

How would the figures differ?

For starters, the tax saved will be $805 per year and $8050 when accumulated over 10 years.

Since the monthly salary would have exceeded $6,000 per month, we are looking at an annual contribution of $16,560 into OA, which will amount to $206,726.20 at 2.5% over 10 years, earning a total interest of $41,126.20. 

If we transfer this amount to SA, it will bring the sum to $223,333.98 in 10 years, earning $57,733.98

That's a net loss of $57,733.98 - $41,126.20 - $8050 = $8557.78

Example 3:

While the two example above results in losses, let's look at someone who is at the highest income bracket subjecting to a tax rate of 22%

Tax savings per year: 22% x $7000 = $1540

Tax savings in 10 years: $1540 x 10 = $15,400

Yearly contribution to OA: $16,560

Future value in 10 years at 2.5%: $206,726.20

Interest earned in OA: $41,126.20

Future Value in 10 years at 4%: $223,333.98

Interest earned in SA: $57,733.98

Net loss = $57,733.98 - $41,126.20 - $15,400 = $1207.78

In conclusion, even though the loss is significantly lesser as your income increases, you are still better off with sticking to transferring your money from OA to SA every month to take advantage of the CPF system. 

Please let me know what do you think of the calculations and many thanks for reading.