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Build a bigger retirement fund with CPF-SA.

Sunday, November 11, 2012

In recent days, I had an engaging exchange of ideas with a reader, Endrene. Both of us agree that young working adults could use their CPF-SAs to grow their retirement funds, risk free, at a faster clip.  Both our experience show that this is a valid and relatively fuss free approach to long term wealth accumulation.

If you think that the additional 1.5% per annum paid on the CPF-SA does not amount to much, I would encourage you to read a blog post of mine written more than two years ago. In the last few paragraphs, I explained how transferring funds from CPF-OA to CPF-SA could significantly boost returns. See: Do you want to be richer?

In a recent blog post, Endrene shared with us her experience in transferring funds from her CPF-OA to CPF-SA. She also highlighted how the additional 1% interest paid annually on the combined first $60K in our CPF accounts now is another strong incentive for us to use our CPF accounts to grow our retirement funds. If you are interested to know more, go to the comments section of the blog post to read what we wrote: Want to be wealthier without higher risk?

For risk free, long term savings with significantly higher returns, the best option for average Singaporeans is still the CPF-SA. Of this, I have no doubt.

Other related posts:
1. SRS, CPF-OA and CPF-SA.
2. SRS: A brief analysis.

18 comments:

AK71 said...

Tomorrow, I will be going away for slightly more than a week. So, there won't be new postings and I could take a longer time to reply to comments.

meesiam said...

AK
I did my transfer since end of last year when i knew my second property is beyond reach due to regulations...
CPF says: investment property OA+SA > 50% of prevailing minimum sum....
MAS says: LTV drop to 60% for those with loan....
Since i am caught, just transfer to SA, besides higher interest. i have a few more benefits:
1. free myself from carrying hefty loan
2. keep my cash from bank since i can't use their money for leveraging, so not going to let them earn mine either
3. plus buy a residential investment won't earn me 4%
4. if stock market crash or even adjustment, my war chest is ready all time

AK71 said...

Hi meesiam,

If I remember correctly, you are in your mid-30s? If you have quite a bit of money in your OA, transferring some to your SA makes good sense. ;)

From your points number 2 and 4, however, I get the impression that you transferred cash in your bank accounts to your CPF OA. Am I right?

This is another tact to make our savings work harder, of course, and is suitable for anyone who has lots of cash in savings accounts and would not be requiring the money until age 55 (when we are allowed to withdraw our CPF savings). A capital idea. :)

EY said...

Hi AK,

Whoaaaahhh, didn't expect to get 30sec of fame on your blog! Oh no, I'm gonna lose my privacy!! Hahaha.

Looks like you gonna have a busy week ahead. Enjoy your Deepavali in a foreign land!

Next week, we'll have some clarity on Greek's debt financing and hopefully one hurdle will be out of our way while US tackles the looming fiscal cliff. Personally, I'm quite torn. On one hand I wish the reset button to be pressed, on the other, I want the market to remain buoyant until end of next year for me to lock in the projected yield from my investment property that will only obtain TOP then. Well, but hopes are only hopes. Gotta accept that the market's not ours to see. Que sera sera, whatever will bail, will bail! :P

Ok, shouldn't be hoarding your virtual space too much. I'm still trying to catch up on some of your old blog posts to glean greater insights into your portfolio strategy. I haven't mastered speed reading and so it'll really take a pretty long while for me to finish reading your posts, I believe. And not to mention my many other distractions. For one, the November issue of Her World is spying me at a corner, protesting and demanding that my immediate attention be given! Okay, fine, I shall yield. :D

So that's all for now. Have a safe and fruitful trip!

Cheers,
Endrene

AK71 said...

Hi Endrene,

Haha... I have a habit of talking to myself and that helps to keep me blogging but it is the constant interaction with readers that makes blogging really interesting.

My blog gets good quality comments all the time but sometimes they are very good. As I found out that many people do not read comments, I should blog about these to draw attention to them. Good ideas, must share. :)

In the early days, I would simply copy and paste these comments in new blog posts. That sent my page rank from 3 to 0. Apparently, Google frowns upon such a practice. I took down those blog posts and my page rank has been restored. Blogging about comments and putting a hyperlink to an old blog post is acceptable.

Aiyoh, I digress. Sorry, old man lah.

Yes, I will be celebrating Deepavali in the USA. I wonder if they have Hindu temples there for me to feed milk to Lord Ganesha...

I will have little time to look at the stock market while travelling. In fact, I make it a point not to look at the market. What will be, will be... er...yes, bail as well. ;)

Personally, I am still invested in the stock market as well as the property market. However, I have managed my exposure in such a way that I will be able to benefit in both a bull and a bear market. The idea is to stay partially invested.

Thanks for your well wishes. Good luck to us all. :)

Kim said...

Hi AK
I have been pondering whether to use my CPFOA to make a lump sum payment to HDB or transfer it to CPFSA, after reading Endrene's comment on your post. Sound like it is more logical to do the latter.
Or would it be better to use cash to top up CPF account and not SRS.....hmmm....thinking thinking....
Also like to thanks both you and Endrene for sharing, this will set us thinking more:)

AK71 said...

Hi Kim,

HDB's concessionary home loan rate is 2.6%. Our CPF-OA earns 2.5%.

If we have as much funds in our OA as what we owe in our home loan, we are effectively paying only 0.1% interest on the home loan. The cost of keeping our funds in the OA is very low.

You could use the funds in your OA to buy stocks in the event the stock market crashes. However, if you were to use up your OA money for a lump sum payment to HDB, the opportunity cost could be quite high in such a case.

If you have more than enough funds in your OA to cover your remaining housing loan, transferring the excess to the SA should be quite rewarding but bear in mind the restrictions on SA funds.

In any case, keeping at least $20k in the OA makes sense as it is paid 2.5%+1.0% interest now. That is 3.5% p.a.!

If our income tax bracket is quite high, contributing to the SRS and investing the funds for higher returns makes plenty of sense.

If we are able to replicate the returns of CPF-OA for our SRS funds (i.e. 2.5% p.a.), it is rewarding enough. :)

meesiam said...

AK,
Good memory. I am in my mid-30s.

I did not transfer cash to OA, but rather my cash is to feed CPF-SA and SRS schemes so as to "delay" my part of nation building.

My personal plan on retirement:
Source of income beyond 65
CPF-RA + SRS
Source of income beyond 45
Investment (passive income)
Rental income (if market allows me to grab 1/2 before 45)
Work for fun not paycheck

Btw, i am in USA-CA, the weather here is rather cool now. Get urself prepared.







SnOOpy168 said...

hs ago, i was checking with cpf board about transferring from OA to SA. This is irreversible & the final amount in SA has certain caps.

some faq for all

CPF members who are below 55 may transfer their Ordinary Account (OA) savings to their Special Account (SA) to build up their retirement savings more quickly.


Q: Is there a minimum sum that needs to be retained in OA before the transfer is allowed.

>> There is no minimum amount required to be retained in your OA.


Q: Is there is minimum or maximum of transfer from OA to SA that is allowed? Is there a maximum amount allowed or in SA account ?

>> You can transfer any amount (minimum is $1 and total savings in SA must not exceed the prevailing CPF Minimum Sum), and as often as you like.

The total savings in your SA (inclusive of the amount withdrawn under the CPF Investment Scheme - Special Account, if any) must not exceed the prevailing CPF Minimum Sum after the transfer. The prevailing Minimum Sum is $139,000 as at 1 July 2012 and is revised every July.

Please note that the transfer from OA to SA is not reversible. As such, it is important to plan the use of your CPF savings carefully before you make the transfer.



If you would like to proceed with the transfer, you can make an immediate transfer online on the CPF website at www.cpf.gov.sg. To make the transfer, just login to my cpf Online Services and follow the steps given below:

>> Click on "My Requests"

>> Select "Building Up My / My Loved One's CPF savings" and click "Proceed".

>> Under "Using CPF", click on "Transfer from my Ordinary Account to my Special Account".

Joncreate said...

Hi AK, thanks for all ur sharing and I really like the postings u have. For using CPF as a retirement fund, I felt thatbwe shouldn't put all our eggs into this one basket only. As.much as e fund is risk-free and that e returns r decent in today's financial environment, the fund is subjected to much control by e govt and e rules e.g. minimum sum, etc keeps on changing. 20 or 30 years down e road is a v long time for retirement and there's a definite risk in which all ur returns would simply be stuck in CPF by the new rules. I prefer flexibility and self control over my finances cause I have heard too much stories abt e inflexibility in utilising e CPF funds. It's an irony actually. All that money isn't really yours to use...

Serendib said...

Hi AK, Ive transferred some CPF-OA funds to SA about 5 years ago, and I also top-up my SA with cash - up to $7000 of which can be deducted from taxable income. However, I think we should be aware (I'm sure you already are) that the 4% yield is no longer guaranteed for the long term. It's meant to be pegged at 1% above the prevailing Sg govt 10 year bond, with a floor of 2.5%. This pegged rate currently translates into only 2.55% (including the +1%). The govt is giving us the 4% rate for another year on a "goodwill" basis. If this special rate is withdrawn and we go down to 2.5% for SA, this is a very poor return and it's also very difficult to invest SA funds elsewhere for higher returns (only investments in some bonds or high-fee "balanced funds" are allowed).
What do you think about this risk?

http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_26September2012.htm

AK71 said...

Hi all,

Pardon the tardy response. I just came back half a day ago after a 30 hours journey. Only woke up an hour ago. Whole body aching. Too old for long trips! Haha.. :(

AK71 said...

Hi meesiam,

From the stuff you have shared, I have no doubt that you are financially savvy and you will have no problem retiring quite comfortably. :)

I cannot say the same for the weather in the USA. Dry and cold, I had to leave a kettle on constant boil in my hotel room to sleep more comfortably. Minneapolis was -5 deg celsius when I arrived! -2 when I left.

Are you staying in L.A. or San Francisco?

AK71 said...

Hi SnOOpy168,

Thanks for sharing what you have found out. Very useful, I am sure. :)

AK71 said...

Hi Joncreate,

For sure, we shouldn't be throwing all our money into our OA or SA. CPF is to help with our long term retirement planning. To think that it is the only tool we ever need is definitely dangerous.

CPF provides certainty and it is an important risk management tool for any Singaporean's long term retirement plan. Keeping this in mind, we would not be lulled into any false sense of security.

A pertinent question to ask is also how much is our total wealth and how much of it is in our CPF accounts. If a person has a total wealth value of $200k (minus his home), then, maxing out his CPF-SA is somewhat silly. If a person has a total wealth value of $500k, then, maxing out his CPF-SA makes more sense. Why?

With more liquidity on hand, we might be hard pressed to find "safer" investments with consistent and relatively high returns. With less liquidity, well, we can't really afford to lock up too much.

AK71 said...

Hi Serendib,

When the government proposed to make changes to the CPF interest rates, it was with the intention to have higher returns for account holders. I believe this was articulated in the national media.

Since pegging the interest at 1% above the 10 years government bond coupon is going to result in a lower return, they keep extending the current interest rate of 4% for the SA.

Until a time when yield on the 10 year government bond is significantly higher, I do not think this will change. Otherwise, the ramifications would be too much for th PAP government to bear. ;)

AK71 said...

The Ministry of Manpower (MOM) and CPF Board jointly announced that the CPF Minimum Sum has been increased to S$155,000 to account for inflation.

This will apply to CPF members who turn 55 between July 1 this year and June 30 next year.

This will be set aside in their Retirement Account using savings from their Special, and then Ordinary Accounts.

The minimum sum for members who turn 55 before July 1 this year remains unchanged.

Meanwhile, the Medisave Minimum Sum will be raised to $43,500 from $40,500 with effect from July 1 this year.

AK71 said...

"Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer." Charlie Munger

The CPF and the SRS are what we have here in Singapore.

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