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Recently, I had the honor of being interviewed by Michelle Martin, MoneyFM 89.3 on “Becoming a Billionaire Singapore Style”.
One of the ideas I came up with “Make Baby Millionaires (MBM)” when reloading your child’s CPF Special Account (SA) generated a lot of interest on social media and online.
To address the disbelief, controversy, and naysayers of this strategy, I thought it would be nice to provide more detail on this topic to allow for better discussion.
How much do we need to make millionaire babies?
To turn babies into millionaires, you first need a large sum of money: $ 64,350 to be exact for each baby at birth, to be contributed to your CPF SA.
Many Singaporean parents are unaware that all Singaporean babies have a CPF account created for them at birth. The baby’s CPF account is set up as soon as the government credits the baby voucher to your baby voucher account.
This also applies to permanent residents (PRs) and their children. The CPF Board will create a CPF account for RP’s children once their parents recharge their CPF account
As parents, you should take advantage of this privilege to recharge your baby’s CPF SA. Regardless of age, the first $ 60,000 in your child’s CPF SA would yield a whopping 5 percent return. If you let the power of compounding run its course and don’t alter the SA balance, the $ 64,350 will compound into an astronomical $ 1 million when your son retires 65 years later.
I have represented the growth path of CPF SA in the following graph:
However, the probability that the parents or grandparents will be able to make a one-time contribution of $ 64,350 at the birth of the child is quite low. Instead, it may be more reasonable to assume a gradual annual recharge for the child.
To illustrate this, I have calculated some combinations of initial amount and annual recharge to make the boy a millionaire.
| Millionaire calculation from birth to 65 years | |||
| Initial amount | Annual recharge | Final recharge age | At age 65 |
| $ 10,000 | $ 5,000 | 18 years | $ 1,057,634 |
| $ 10,000 | $ 10,000 | Eight years | $ 1,056,740 |
| $ 20,000 | $ 5,000 | 13 years | $ 1,016,957 |
| $ 20,000 | $ 10,000 | 6 years | $ 1,069,776 |
| $ 30,000 | $ 5,000 | 10 years | $ 1,027,138 |
| $ 30,000 | $ 10,000 | 5 years | $ 1,018,912 |
As seen in the table, the sooner we recharge the child’s SA and the higher the quantum, the fewer years we will have to recharge the child’s SA to make him a millionaire upon retirement at 65 years of age.
That’s the power of compounding: the earlier we start to compound, the more it grows.
Parents and grandparents should jointly consider the MBM strategy
For young parents, adding a considerable sum to the child’s SA would be very difficult, as their savings and income would be modest during the early stages of their career. However, no contribution amount should be downplayed, be it $ 600 or $ 6000, or $ 64,350. Frequent, bite-sized refills would help the child reach a sizeable retirement fund.
Traditionally, we think it would be the responsibility of parents to help their children financially. Surprisingly, I have come across many grandparents who thought MBM is a great strategy for passing their inheritance to their grandchildren. Asian grandparents tend to have more savings than young parents, accumulated through their saving years.
READ ALSO: How You Can Make Your Child A CPF Millionaire By Contributing $ 400 Every Month Until They Turn 21
With MBM’s strategy, grandparents do not need to give too much to their grandchildren, yet the CPF SA balance of grandchildren will grow powerfully over 65 years. Most importantly, your legacy will remain with your grandchildren for life as they see their CPF SA deepen powerfully throughout their lives.
Unlike giving a substantial cash inheritance, the MBM strategy does not remove the incentive for the child to work hard for a living, as the child cannot easily touch and waste their CPF SA money.
Key assumptions and risks of MBM
The biggest risks of MBMs are political or policy changes and their lack of liquidity. 65 years is a long time to assume that policies or government will not change adversely against MBM.
I do not disagree. Historically, CPF policies and interest rates change and, in particular, withdrawals are becoming increasingly difficult over the decades due to the increase in the total retirement sum.
However, there is no investment in the world without any risk. When we evaluate the risk of the MBM strategy, it should be against other plausible long-term strategies, for example, buying stocks, property or simply putting money in the bank.
Most stocks and properties are outside the legal reach of children and carry a much higher investment risk than the CPF. Meanwhile, inflation will erode the value of our bank deposits (and their low interest rate on savings) over time.
READ ALSO: How to invest using your CPF
The MBM strategy also assumes that the child does not face unforeseen events such as premature death. Also, when the child grows up, it would be fair to assume that he will work and earn a salary, hopefully in Singapore.
This would further contribute to your CPF account and further aggravate it. By the time they retire at age 65, that would be a hefty sum of retirement savings, well over S $ 1 million.
Children should be taught from an early age to complete their CPF SA
Regardless of whether we make our children millionaires through CPF, I believe that children must also be taught from a young age to complete their personal CPF SA. Regardless of how insignificant the amount is, children must distribute part of their annual “angpow” money or savings from their allowances to their own CPF SA.
Instilling these habits will teach them the need to prepare for retirement early and the importance of harnessing the power of compounding. Financial literacy is best learned when you are young and by cultivating the right financial habits.
CPF’s investment strategies, while rewarding, are often controversial
I acknowledge that MBM, like most CPF investment strategies (eg 1M65 / 4M65), is highly controversial, given some of the underlying currents in our society towards CPF policies.
Rather than bemoan about it, I have chosen to leverage the characteristics of these policies into fruitful long-term investment strategies that would not only make me rich, but also my children and one day their children to also become wealthy people. . I urge everyone not to miss out on these powerful investment tools and take advantage of them as soon as possible.
I also posted the MBM spreadsheet, detailing the MBM strategy calculations, on our 1M65 Telegram Group and Discord Group for anyone to download and review. Join us there and get cool CPF cheats from our panel of community experts. You can see the excerpt from MoneyFM 89.3 interview with me on MBM here:
This article was first published in Dollars and meaning.
