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Options for the CPF-OA with a new flat on the way.

Tuesday, July 15, 2014


(Please make sure you have enough cash, CPF savings and housing loan to pay the balance, duty and fees.)

This was taken from a letter B wrote to me recently:
My wife and I recently got married and will be receiving the keys to our new home (BTO) soon. We have indicated to take up HDB loan and I know that on the point when we receive our place, both our CPF will be wiped out completely for the house.

We have worked for about 2-3 years and CPF balance is about 30-50k currently.
I have received advice from different people on this. I am actually quite confused with so many choices.

My reply:

Hi B,

Do you know why there are so many suggestions? Because people with different circumstances, beliefs and risk appetites will do different things. ;)

So, it is important to know yourself. 


What is comfortable for you? 


Have a discussion with your wife and weigh the costs and benefits of all the suggestions and decide on one which you are most comfortable with.

Of course, I have never faced such a question before but if I had to decide, then, having a roof over our heads is of primary importance for my family. Any decision I would then make would have this consideration in mind. 


Transferring money from OA to SA would not be an option in such an instance with only $30K to $50K in the OA. I would rule this out since funds in the SA cannot be used to pay down housing loans. The SA is to help secure finances for our retirement.


If I were to place what is allowed in the CPF-OA in investments approved under CPFIS, I would have to make sure that these investments are virtually risk free like the CPF-OA and would generate a return similar to or higher than what the CPF-OA generates. 


In the end, it is really difficult, if at all possible, to tick all the boxes. Some risk taking is probably necessary as risk free options are limited to T-bills and Singapore Government Securities (bonds) which have much lower returns compared to the CPF-OA for those maturing within the next 2 years. We are looking at a coupon of 0.4% or so per annum now. Acceptable?


Let HDB wipe out all the money in my CPF-OA? That is certainly a simple option but I would lose that 3.5% interest on the first $20K. HDB's home loan only attracts 2.6% in interest cost. I would lose 0.9% per annum in interest income on that first $20K. 


Hmmmm... How much is that? 


$180 a year (and of course, it would be compounded over the years). Is that significant enough for me to take some short term risk?

Just sharing my thoughts. :)
Best wishes,
AK

Related post:
1. A new flat on the way and $200K in spare cash.
2. CPF or Singapore Government Securities.
3. CPF, SRS and HDB housing loans.

2 comments:

seth wong said...

Hi Ak, my fiancee and I are in a similar position. We decided to transfer all our money from oa to sa, leaving only what is needed for the 2nd 5% of our hdb loan. We believe that this amount transferred to sa will help us earn more in the long run.

We reckon that in e future, with almost all our monthly oa contribution going into the hdb loan, there will not be much of a chance to boost up the sa anymore.

My 2 cents worth.

AK71 said...

Hi seth,

If the motivation is to give our retirement finances a boost in a risk free manner, then a transfer of funds from the OA to the SA definitely makes sense. Just let long term compounding work its magic. :)

Of course, we must do this with the knowledge that money in the SA cannot be used to make payment towards the home loan. So, if we have ample cash reserves or we have some form of assured income, it would give us more confidence to transfer funds from OA to SA even though a new mortgage is on the horizon. This is in case our monthly CPF contributions should be disrupted.

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