Compound interest is one of the most important concepts to understand when managing your finances. It can help you earn a higher return on your savings and investments, but it can also work against you when you pay interest on a loan. Singapore Central Provident Fund (CPF) grows the accounts using compound interest and we will discuss how CPF compound over time. 


What is Compound Interest?

Compounding is a process of growing, and we can call it the “snowball effect,” in which you already know how something can build upon itself. Compound interest is interest earned on money that was previously earned as interest. This cycle leads to increasing interest and principal amount at an increasing rate, sometimes known as exponential growth.

For example, if you deposit $100 and earn a 5% annual interest, you will gain $5 next year, and your total amount for next year will be $105. Therefore, the following interest you will earn will be 5% of $105, which is $5.25, and this will mean your balance will interest to $110.25. Even though you do not make any more deposits, your earnings will accelerate due to compounding interest. 

If you are borrowing money, compounding works against you as you will need to pay interest on the money you have borrowed, and if you did not pay the following month, you would owe interest on the amount you borrowed PLUS the interest you accrued. A good example is a credit card, and if you only repay the minimum amount, you will have to pay the following month the balance of the amount you spent plus 25% interest! For instance, your credit bill this month is $450, and if you pay the minimum sum, which is $50, your next month’s bill will include your outstanding amount of $400 PLUS interest of $100 (i.e., 25% of $400). The total bill will immediately snowball to $500 even if you don’t spend anything next month! You are penalized for an extra $100 just because you did not make full repayment of your credit bill.

However, compounding can help you earn higher interest on your savings and investments. The best example will be the Central Provident Fund (CPF).

Singapore Government said that Singaporeans could grow a million dollars in CPF. Is it possible to accumulate a million dollars in your CPF savings due to the power of compound interest?


The Formula for Making Your CPF Accounts Grow

Firstly, we need to understand the basics of CPF Accounts and their contribution rates. 

A CPF member will have three CPF accounts until age 55, and a fourth account is automatically created. 

  1. Ordinary Account (OA): Use for housing, insurance, investment, and education


  2. Special Account (SA): For old age and investment in retirement-related financial products


  3. Medisave Account (MA): For hospitalization expenses and approved medical insurance


  4. Retirement Account (RA): For retirement needs, automatically created on your 55th birthday by merging your OA and SA monies

If you have heard of a Singaporean who accumulated a million dollars in CPF savings, in his 1M65 strategy, he is assuming the interest rate is at 4%, in which you need to transfer your CPF-OA fund to CPF-SA. Because the transfer is irreversible, you will not be able to use the CPF-SA for a home loan. 

Most Singaporeans are using their CPF-OA to finance their property. Using the interest rate of 4% is not that realistic, so we need to assume using another hypothetical scenario:-

  • Average graduate to start at 25 years old, so CPF-OA is built from zero
  • The median salary of Singaporean is $4,534
  • No salary increment, bonuses, or inflation
  • Total contribution for CPF-OA remains at 23%
  • The interest rate for CPF-OA remains at 2.5%
  • Not using CPF for any housing loan

As CPF contribution rates are complex and changed according to age (as per the below table), instead of looking at the retirement age of 65, we will assume the retirement age to be 55 years old as the total contribution remained at 37% (i.e. employee 20%, employer 17%). In this case, we will take the total contribution for CPF-OA as 23% with an interest rate of 2.5%

CPF contributions only apply up to a monthly gross wage of $6,000. Anything more than that is not subject to CPF contribution — either by the employee or the employer.

IMPORTANT: Because of the power of compounding, the Singapore Government has set a limit on CPF annual contributions. If not, the government will be giving away too much money! Hence, the maximum CPF Annual Limit is $37,740.

Bingo! Indeed, a young couple who started work at 25 years old, with a median salary of $4,534, can accumulate a million dollars at 55 years old! This is based on no salary increment and bonus. In reality, there will be pay increments and bonuses in the entire working life. Moreover, the CPF-SA account has a 4% interest compared to CPF-OA, the fund in CPF-SA will compound more, and the account will grow faster. 

This is just simplified mathematics, and you are welcome to download the CPF Retirement Calculator (download excel) to determine your CPF retirement fund.


What Makes Compound Interest Powerful?

Compounding happens when interest is paid repeatedly. The first one or two cycles are not especially impressive, but things start to pick up after you add interest over and over again.

Five factors will influence the rate at which your money compounds. These are:-

Starting amount: The bigger the starting amount or deposit, the more amount of the account grows. However, whether you start with $100 or $1 million, compounding works the same way. The amount of money you start with does not affect compounding. It is best to focus on interest rates and time when planning for your future. What rate will you earn and for how long, as dollars are just a result of your rate and time frame. 

Frequency: The frequency of compounding matters. More frequent compounding periods—daily, for example—have more dramatic results. It hardly sees deposit accounts that compound daily and mostly calculate monthly or annually. CPF interest is computed monthly. It is then credited to your respective accounts and compounded annually. CPF interest earned in the year will be credited to your CPF accounts by 1 January of the following year. CPF balances used for interest computation are affected by the transactions in your account, i.e., monthly CPF contributions and your home loan repayment. 

Time: Compounding is more dramatic over long periods. This is why it is possible to grow a million dollars in your CPF due it is a lifelong saving. 

Interest rate: The interest rate is also an important factor in your account over time. Higher rates mean an account will grow faster. 

Deposits: Withdrawals and deposits can also affect your account balance. Letting your money grow or regularly adding new deposits to your account works best. If you withdraw your earnings, you dampen the effect of compounding. This is why many advised using cash instead of CPF to repay your home loan while you continue to contribute monthly to your CPF accounts. Whether you should use cash or CPF to repay your home loan, you can read more here



CPF is a fixed retirement milestone, and the current CPF Payout Eligibility age is 65 years old. CPF is subjected to government policies as minimum sums, and withdrawal age can change anytime. This is why many people feel they will never see their CPF money. 

Indeed to grow a million dollars in CPF is not a dream for ordinary working-class Singaporeans. CPF is a forced saving; as long as you are employed with a fixed salary, the monthly contribution will automatically transfer to your CPF accounts. Singaporeans can enjoy every dollar they put there with the minimum risk of losing money. 

However, it is difficult not to use your CPF-OA fund to finance your HDB or property. The reason is setting aside other savings require a budget plan and self-discipline. Many do not have enough hard cash to buy a HDB or property if they do not use their CPF-OA funds. 

CPF is the best retirement scheme, but it is long-term. It cannot be liquidated, and rather to depend solely on CPF for retirement; we should build on a retirement portfolio inclusive of short-term investments (<3 years), i.e., stocks and mid-term investments (3 to 10 years) in this case property investment. This is why it is important to understand how leverage works, and using CPF for property may still give you more options

Related Topics: 

Using Your CPF To Pay For Your Property
Part 1: Should You Sell Your HDB Flat
Part 2: Should You Use Cash or CPF to Pay for Your Property
Part 3: Using CPF for Property May Give Your More Options

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