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Aim to pay off home loan and hit the MS ASAP.

Thursday, September 24, 2015

The title of the reader's email was "CPF Haywire". So, imagine my trepidation as I clicked on the email.

Hi AK!

I've been reading your blog here and there and my eyes go haywire... so many nuggets of gold! Kam Sia very much for your contribution to society.

I just bought my first HDB and OA start from scratch. I calculated I'd have about 10k in a year. 

In order to meet the MS when i turn 55 in 15yrs time (about $244k if at 3% yearly right?), would you suggest that every few years to transfer a bit (thinking about 10k) from OA to SA for the compounding effect to be greater and yet leave some in OA for financing the 30yr loan? 

I have about 4 years worth of monthly deductions from CPFIS (principal amount), and this is my backup plan to tap on in case I lose my job.

Like you I choose to be conservative with my CPF and not take any chances in the stock market (aside from the only investment I made before purchasing the flat on the advice of my insurance agent) so my aim is to finish my loan ASAP and be able to hit the MS for retirement payout. 

Would you suggest to make partial payments every few years to lessen the years of loan or to stretch it out to 30 years?

I'm aware about tax reliefs or incentives doing VC, MS top-up, contribute to SRS but am not considering these because I have limited cash on hand.

I have 6 months emergency fund and every month I save some (for holidays, etc) and invest some for dividends (Spore ETF, REITS). Its not much because I started late in life (wish can turn back time to tell my bochap younger years to buck up!) and I'm hoping that I can still 'fix things' to ensure I have an okay retirement. 

Do you have any advice on what else can I do to improve my financial situation?

Many thanks,

AK replies:

Welcome to my blog. :)

I hope you did not buy an ILP from your insurance agent. There is no way to guarantee that you will get back the same amount you put in if you need the money.

I say this because you are looking at it as a backup plan in case you lose your job.

Money in an investment should not be looked upon as money in your emergency fund.

Of course, I will have some other stuff to say about ILPs but you can do a search for these blog posts in my blog.

I shall talk to myself now:

1. I just bought a HDB flat. I want to make sure that I have enough in my OA to service 12 months of mortgage. If I am 40 or older, 24 months would be prudent because it could be more difficult to find a job. The rest of the money I have in my OA, I can transfer to my SA.

2. I bought some investments with my OA money. The money invested could have serviced 48 months of mortgage payment. I should look at possibly liquidating the investment if there is a gain or if it breaks even as my motivation was never to invest with my CPF-OA money. Then, I would have more money to transfer to my SA.

3. If the interest rate on my housing loan is less than 2.5%, it makes sense not to pay down the loan with CPF-OA money as the CPF-OA pays 2.5% in interest. I might want to consider the POSB HDB Home Loan.

4. I might want to contribute to SRS and use the money to invest for income. I will save on income tax and still be able to invest. Have my cake and eat it? Sure.

This talking to myself illness is getting worse by the day. Cham.

Best wishes,


Related posts:
1. POSB HDB Loan.

2. How much to have in emergency fund?
3. OA to SA transfer before buying a flat?
4. SRS: A brief analysis.


apex property investment said...

From reading the email, the writer seems not to be a investor and he is in his 40s. I support make partial payment for his home and less of putting into the SA. 1.5% extra compounding is not going to help much, it would be more prudent to have cash on hand. Learn more from AK and start to do small investment. For the OA investment, once it hits the profit you want, you want to bring it out for safety. My OA fell 70% in 2008 and I build from scratch again to buy my own place. Now its less than a 100k nett. I know I can pay off in less than 5 years. Wealth building is slow and boring...

AK71 said...

Hi Apex,

It was mentioned that the flat was just purchased and that it was with the help of a 30 years loan. So, I guess the reader is probably about 35 years of age.

Compounding at 4% per annum, $40,000 in the SA would become about $90,000 in 20 years. This compared to compounding at 2.5% per annum which would give us about $65,550. That is an almost $25,000 difference.

I like the CPF-SA. I think it is sexy. ;p

AK71 said...

Oops. The reader's age is 40. So, 15 years to go before hitting 55.

So, compounding at 4% per annum, $40,000 will become $73,000. Compounding at 2.5%, it will become $57,930. Still a pretty big difference of $15,000.

lettimeworkforyou said...

AK time to take your medicine, haha jk!

Don't worry man, you are more knowledgeable about financial planning than most financial planners anyway, we are in good hands!

AK71 said...


Really? You can cure me of this "talking to myself" disease har?

I have a funny feeling that if you should succeed in doing so, more than a handful of readers might be very unhappy with you. ;p

Anonymous said...

Hi AK. I'm 30 this year and having 2nd thoughts about CPF. I have moved all of my OA to SA and been voluntarily topping up my SA with $7k annually ever since I started working. I had been under the impression that any money after minimum sum is set aside at 55 could be withdrawn but apparently I was wrong. I was recently told that any money voluntarily moved into SA and the interest it earned could not be withdrawn. Plans for that 4% to have made me $150k of living expenses for my years 55 - 65 appear to have gone up in smoke. Do you know any details regarding how much can be withdrawn from SA after MS is moved into RA or if it were even possible?

AK71 said...

Hi FF,

MS Top Up to CPF-SA will be moved to the CPF-RA at age 55. Together with interest earned, it cannot be withdrawn at age 55. The money will compound for 10 years in an annuity, CPF Life, that starts paying at age 65.

For CPF-OA to CPF-SA transfer, if we have met the prevailing minimum sum in the CPF-SA at age 55, we would be able to withdraw the excess in a lump sum.

So, if we have done both MS Top Ups and OA to SA transfers, think of it as the former being retained for the RA and the latter being available for withdrawal at age 55. ;)

WK said...

Hi AK,
What happens if when I hit 55 and I have not hit the MS? What is in my SA would be transferred to RA and be closed down? Then RA earn 5% yearly for 10 years and if I still don't hit the MS, the payout would be very minimal for life?

Assuming I'm still working from 55, would the CPF contribution flow to OA and RA then?

Also when I die, would my beneficiaries get everything from my CPF account immediately? I heard that some got stalled for years and another friend said CPF is transferred to beneficiaries' account, not in cash.
Thank you.

AK71 said...

Hi WK,

There has been some changes to the CPF system. The MS is now called the FRS. You might want to read this blog post: Changes to the CPF system.

At 55, if we do not have the MS in our OA and SA, then, we might be paid only $5,000. The rest of the money goes into a newly created RA. The first $30K in the RA will be paid 6% per annum. The rest of the money is paid 4% per annum.

If we continue to be active in the workforce and contribute to the CPF, the contribution goes to our OA and SA. Nothing goes into the RA unless we choose to do voluntary contributions.

If we should pass on, our beneficiaries would receive our CPF savings in cash as long as they were 21 years old or older. Otherwise, the money would be held by the State trustee. If we were 85 years or older and had been taking monthly payout from CPF Life from age 65, there wouldn't be any money for our beneficiaries if we should pass away then.

WK said...

Thank you for shedding some light in the ever confusing CPF system.

SA before 55 is used for investment and for accumulation of funds for transfer to RA. If I'm still in the workforce then and CPF is contributed to OA and SA, wouldn't it be better to transfer all the funds in SA to RA for compounding till 65 if I don't invest with it? The accumulation to reach FRS is faster as funds in RA is more.

What does pledge one's property mean- I cannot sell it for as long as I want half the sum to be incorporated for the FRS? Sorry so many questions- I read until I gong gong already.

MaTaKazer said...


Just to confirm that a VC to SA can't be withdraw even if we meet the FRS at age 55?

Anonymous said...

Hi AK,

Really appreciate your response, it gave me some hope!

So if I have understood you correctly, MS Top Up to SA only helps with tax savings and higher payouts after 65. At 55 I can withdraw all my compulsory contributions to SA$ and OA->SA$ compounded at 4% - FRS. But of course, I intend to only withdraw a portion of the money annually and let the rest compound.

Thanks again for all that you share with the community!

AK71 said...

Hi WK,

Don't worry about pledging your property (i.e. home) unless you cannot meet the FRS. Seriously.

As for whether you should do OA to SA transfers, I think it is a good idea as it will grow your CPF money faster. However, you might want to read the blog post again to see under what circumstances this could be a good idea. :)

AK71 said...


We cannot do a VC to the SA alone. When we do a VC, the money is split between OA, SA and MA. If the MA has hit the ceiling, then, the money is split between the OA and SA.

We can do a MS Top Up to the SA. This Top Up is meant for retirement funding. So, the Top Up and the interest it earns over the years will find their way to the RA when we turn 55 eventually. This cannot be withdrawn even if we have hit the prevailing MS or FRS at age 55.

AK71 said...

Hi FF,

Yes, consider the money retained in the MS or FRS as your MS Top Ups to your CPF-SA plus the interest such Top Ups earn over the years. Those mandatory contributions which the OA to SA transfer is a part of can be withdrawn in excess of the MS or FRS. ;)

AK71 said...

"I had recently bought a HDB and from what i research online, people have been talking about doing a CPF OA buffer for housing. May i know your thoughts on this? If so, do you know of any low risk funds for me to do the investment?"

"Having a buffer in the CPF-OA for mortgage repayment is prudent. Low risk funds? In a bear market, nothing is spared. Some investment grade bonds will give peace of mind and that is what the CPF does for its members."

"i am just unsure what to invest in using the CPF OA money. Lets say i have 30k in my OA account, what do you suggest i can do with it? It seems like the first 20k cannot be use for investment."

"Well, in case we should lose our jobs, our CPF-OA money should ideally be able to service our mortgage for 12 to 24 months. If the money is stuck in some investments, if we need the money, we might have to sell at whatever price Mr. Market offers... That is not a good buffer. There is uncertainty... Buffer should provide certainty."

AK71 said...

Reader says:
I would prefer to pay off the housing loan first before investing. Maybe I am too kiasi because I think there is no guarantee to make money for every investment. By paying of the housing loan first, I get one big burden off my mind. I did this before I reached 45. The sense of relief...I don't know how to describe.

AK says:
Peace of mind is priceless, definitely. :D

I repaid my last housing loan fully because the interest rate hit 5.1% per annum.

Interest rate rose 1% each year for 3 years in a row back then. -.-"

AK71 said...

Jimmy Ng said...

A friend proudly declared at a gathering that he has "paid up the loan" with CPF OA $.

Hate to pour cold water but... I asked him what was his bank loan interest (was like <1.7%...) and if he is aware of the OA interest rate (2.5%) & the housing loan accrual interest rate (2.6%).

The mid 30s couple called CPF on the spot to check and face change color faster than a chameleon.


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