In MONEY FM 89.3’s recent webinar series Money Matters: Becoming a Multi-Millionaire the Singapore Way, Michelle Martin was joined by Loo Cheng Chuan, Founder of 1M65/4M65 Movement. One of the ideas introduced during this session generated a lot of interest on social media and online, and that was “Making Baby Millionaires (MBM)”. To address the disbelief, controversy and naysayers for this strategy, Loo shared with us more details on this topic in the following article.

How much do we need to make a baby a millionaire?

$64,350, to be exact, needs to be contributed to a baby’s CPF Special Account (SA) at birth to make them millionaires.

Many Singaporean parents do not know that every Singaporean baby has a CPF account created for them at birth. The baby’s CPF account is set up as soon as the government credits the baby bonus into their baby bonus account. This applies for Permanent Residents (PR) and their children as well. The CPF Board will set up a CPF account for the children of PRs once their parents top up their CPF account.

As parents, you should take advantage of this privilege to top up your baby’s CPF SA. Regardless of age, the first S$60,000 in your child’s CPF SA would generate a whopping 5% return! If you let the power of compounding take its course and leave the SA balance untouched, the S$64,350 will compound to an astronomical S$1 million when your child retires 65 years later.

A depiction of a baby’s CPF SA growth path:

However, the probability of parents or grandparents being able to do a one-time contribution of S$64,350 at the child’s birth is quite low. Instead, it may be more reasonable to assume a gradual annual top-up for the child.

Here are a few combinations of initial amount and annual top-ups to make a child a millionaire:

The earlier we top up the child’s SA and the larger the quantum, the fewer the years required to make them millionaires upon retirement at 65 years old.

That’s the power of compounding - the earlier we start compounding, the more it grows.

Parents and grandparents should jointly consider the MBM strategy

For young parents, topping up a sizable sum into their child’s SA could be rather difficult as their savings and income would be humble during the early stages of their career. Nevertheless, one should not downplay any amount of contribution, be it $600, $6000, or $64,350. Frequent, bite-sized top-ups would all help the child reach a sizable retirement fund.

Traditionally, we think that it is the parents’ responsibilities to help their children financially. Surprisingly, many grandparents also thought of MBM as a great strategy for them to pass on their inheritance to their grandchildren. Asian grandparents also typically have more savings than young parents, accumulated through their years of savings.

With the MBM strategy, the grandparents do not need to give too much to their grandchildren and yet their grandchildren’s CPF SA balances will grow powerfully over 65 years. More importantly, their legacy will stay with their grandchildren for life as they see their CPF SA compounding over their lifetime. Unlike giving sizeable cash inheritance, the MBM strategy does not take away the incentive for the child to work hard for their living since the child cannot touch and squander away their CPF SA monies easily.

Key assumptions and risks of MBM

The biggest risks of MBM are policy or political changes and its illiquidity. 65 years is a long time to assume that policies or Government will not change adversely against the MBM. Historically, CPF policies and interest rates do change and notably, withdrawals are becoming increasingly difficult over the decades due to the increasing Full Retirement Sum (FRS).

Yet, no investment in the world is without any forms of risks. When we evaluate the risks of the MBM strategy, it should be against other plausible long-term strategies, such as buying stocks, properties or simply putting money in the bank. Most stocks and properties are out of legal reach of children and they carry much higher investment risks than the CPF. Meanwhile, inflation will erode the value of our bank deposits (and its low savings interest rate) over time.

The MBM strategy also assumes that the child does not meet unforeseen events like early death. Additionally, when the child grows up, it would be fair to assume that he or she will work and earn a salary, hopefully in Singapore. This would continue to contribute further to their CPF account and compound even more. By the time they retire at 65, it would be a very sizable sum of savings for retirement, far more than S$1 million.

Children should be taught to top up their CPF SA from young

Whether we make our children millionaires through CPF, a child should also be taught from young to top up their personal CPF SA. Regardless of how insignificant the amount, they should apportion some of their annual “angpow” money or savings from their allowances to their own CPF SA. Inculcating these habits will teach them the need to prepare for their retirement way early, and the importance of harnessing the power of compounding.

Financial literacy is best learnt when young and by cultivating the right financial habits.

Watch the full webinar of Money Matters: Becoming a Multi-Millionaire the Singapore Way here:

The content in this article was provided by courtesy of Loo Cheng Chuan.

Download and review the MBM spreadsheet, which details the computation of MBM strategy in 1M65 Telegram Group and Discord Group.

Loo Cheng Chuan, is the Founder of the 1M65 Movement. He developed the 1M65 ($1 Million By 65 Years Old) CPF investment strategy that is helping many Singaporean couples to become millionaires at retirement. He was one of the few non-civil servants to be awarded the Public Sector Transformation award in 2018 for his 1M65 efforts. He runs a 1M65 Telegram Group where he regularly coaches passionate 1M65 enthusiasts on good personal finance virtues.

Listen to more podcasts with Loo Cheng Chuan on MONEY FM 89.3 here.

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