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Should he do a VC or a MS Top Up to his CPF?

Wednesday, May 20, 2015

E-mail from reader:

Hello AK,

Hope this finds you well.

Firstly, thank you for sharing your knowledge with the readers! 

Been reading up on your blog posts since last year to improve my financial literacy and I have gained a lot.

Just a short introduction, I am 20 this year awaiting for my enlistment to NS. 

I intend to settle down at the age of 28 and hence, would need to save up quite an amount to afford for the wedding and a HDB flat. 

After reading your blog, I decided to make voluntary contribution to my CPF account starting next year to prepare for a sum of money. 

For example, contributing to OA from age 21 to 28 and thereafter, contribute to the SA till I retire which I aim for it to be at 55 years old.

Can you share with me your opinion on this plan of mine as I want to cover any loopholes as much as possible in my planning. 

Also, is it possible to just make a voluntary contribution to a specific account such as OA and not to all 3 accounts? 

I tried searching for the information on the CPF website but it was quite difficult for me to navigate around it.

Thank you for taking time out to read this and I look forward to your future blog posts!


Money tree? I go for low hanging fruits.

My reply:

Hi N,

Welcome to my blog. :)

Using cash, you could choose to do either a MS Top Up to your SA or a VC to your OA, SA and MA. 

A MS Top Up to your SA requires more serious consideration because you won't be able to use the money for housing unlike money in the OA. 

However, it would be more rewarding with much higher interest rate of 4% to 5% if your objective is to save early for retirement. 

The magic of compounding is amazing, given more time.

However, if you are not sure and it is hard to be sure when you are only 20, it is best not to do a MS Top Up yet. 

Doing VC to all three accounts will give you more flexibility and enjoy 2.5% to 5% in interest rates at the same time. 

A percentage of the money in the OA could be used for approved investments too while money in the MA could be drawn upon in case of hospitalisation (and MA is also used to pay for our H&S insurance plan).

When you start life as a working adult a couple of years later, you might want to consider doing an OA to SA transfer. 

This will not be an out of pocket exercise. 

It is money in your CPF OA that is being moved. 

You might choose to do this for the first 3 or 4 years. 

It will give your SA a boost and the magic of compounding will do the rest for the next 30 years. 

Of course, you might have to push back your plan to settle down by 3 or 4 years, in such a case.

Think carefully your own circumstances and what you want in future. 

The CPF is a useful tool in planning for a more comfortable and secure retirement but there are competing uses for our financial resources. 

I am only sharing what has worked for me in my blog. :)

Best wishes,

VC = Voluntary Contributions
MS Top Up = Minimum Sum Top Up

Related posts:
1. A lot of money in the CPF-SA...
2. How did AK amass so much money in CPF-OA?
3. Beef up to attain financial freedom sooner.


AK71 said...

... 7k a month in 25 years plus interest will be around 350k, and we can only draw out (some) and the rest is still stuck in CPF until CPF LIFE (which we don't know how it will change in 25 years, maybe drawout age 75 lol).

Well, if you believe like I do that there is a place for a risk free and volatility free instrument in planning for retirement adequacy, you would do that $7K MS-Top Up to your SA annually... you would have an annuity that will pay you a meaningful monthly allowance for life... most of that money would then actually be contributions by the government.

AK71 said...

Reader says...
For SA top up, I saw some comments in your post someone said top up in early Jan and some said late Jan? Is there a diff?

It make sense to top up earlier possible in SA right? So to earn the 4% interest as early as possible? Assuming we haven't reach the FRS amount...

Hey its okay now, i found the answer, so late jan will be relatively better since they calculate by calendar mth balance for cash top up.

AK says...
My view is that the difference is micro. Top up a few days earlier or a few days later is OK lah. What is more important is to do it. 😉

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