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Tea with Kai Xiang: Two friends and their CPF savings.

Friday, September 11, 2015

I always enjoy a good story and Kai Xiang wrote a pretty good one to share with me. He has graciously allowed me to share the story:

A and B are good friends. They went to NS at 19 yrs old after finishing their poly diplomas and started work as technicians at the age of 21 with a starting salary of $2,000 (median gross for poly graduates).

Both A and B have the following balance after their 2 year NS stint:

OA: $2,738

SA: $708

MA: $962

However, B realised that the SA offers an excellent 4% interest rate and decided to match his CPF SA contributions every month with cash from his disposable income and plan for his retirement.

A didn't bother because he feels retirement is too far away and he would rather have his money with him.

Both worked at the same factory and received a salary increment of 2.5% of their last drawn pay annually.

At the age of 31, both had CPF balances like this:

(A and B) OA: $75,320

MA: $29,064

(A)SA: $21,868

(B) SA :$41,983

At the age of 36, both A and Bs' MA have reached the cap of $48,500 and any further increases to MA over this amount would be transferred to their SA.

At that time, their CPF balances look like this:

(A and B) OA :$125,190

(A) SA: $41,331

(B) SA: $76,929

All the way until this point, B had religiously matched dollar for dollar his CPF contribution to his SA. 

B decided to continue contributing cash to his SA every month but fixed it at $200 monthly.

B hits the MS ceiling for his SA at age 43, where he is no longer allowed to contribute cash to his SA. 

A hits the same ceiling about 6 years later at 49.

When both men eventually reached the age of 55, their balances look like this:

(A and B) OA: $400,848

(A) SA: $307,601

(B) SA: $414,973

A was able to withdraw about $140k from his SA while B was able to withdraw $250k.

Hope you enjoyed the story too. If you did, you might want to share it with your friends and family. I hope they enjoy it too.

Related posts:
1. A lot of money in my CPF SA...
2. If I had done this, I would have hit MS.


E H said...

Poor dudes. Didnt get married, didn't buy a house.

AK71 said...

Hi E H,

I was wondering if someone would say something to that effect. LOL. ;p

I am sure you gathered that Kai Xiang has kept the story simple to drive home a message. I certainly hope that readers would appreciate this. ;)

E H said...

Perhaps, to inject some realism to the story, you can create friends C and D who get married, buy a house or even have a child. I am sure your readers will further appreciate such moves. But still, it is only a suggestion. 不用太在意.

AK71 said...

Hi E H,

I am crossing fingers now. I hope that Kai Xiang is a closet novelist and that we might see more chapters to come. ;)

CWWL said...

When you say dollar for dollar, you meant for every dollar of compulsory contribution (From both his paycheck and Employer), he adds another dollar from his pocket too?
So there's 3 source of money flowing in

AK71 said...


So, if the monthly mandatory contribution to his SA is $200, he would voluntarily top up $200 to his SA. Yes, mandatory contribution would include both employer and employee contributions.

CWWL said...

The CPF Contributions from Employer/Employee is split among Medisave, OA and SA

For a person that already own a HDB due to inheritance, what are your thoughts on transferring the OA portion from the monthly contributions, into SA too, in order to maximise compounding

AK71 said...


I like that idea and, having done OA to SA transfers very early on in my working life, my experience is proof that the strategy works for anyone who is thinking of upsizing his CPF-SA savings: How to upsize 100K to 225K in 20 years?

Lim LS said...

How about adding a Friend C who instead of contributing dollar for dollar to the CPF SA, used that money to buy STI ETF instead? :p

Its unfair for Friend A to just look at the CPF account and compare against Friend B. For all the money Friend B had invested in CPF SA over the years, of course Friend B would have much more compared to Friend A in the CPF account.

Friend A could have bought STI ETF monthly(or quarterly if the monthly amount is not enough). In the end, Friend A total portfolio (CPF plus cash) might be bigger than Friend B(CPF plus cash), assuming both have similar expenses and one invested in CPF SA while other invested in STI ETF(7.11% returns since inception from 2002).

And also the difference between both will be that Friend B, though have lot more money in CPF, the amount that he could withdraw is totally subjected to the CPF rules at the time of withdrawal(nobody can really predict the minimum sum 10-20 years later or will the draw down age increase to 67 or even 75? Higher life expectancy, anyone? :p)

While Friend A will have those money in STI ETF which he could cash out anytime he wanted. Even if he don't cash out, he will get to enjoy CASH dividend every 2 years if he decide not to compound the portfolio anymore. He could jolly well cash out early (after he did his sums prudently) and start enjoying his fruits way before he gets too old to truly enjoy it...

My thoughts :p

Solace said...

Hi AK,

Matching our own SA from work contribution is a great idea.

From my understanding, i believe contributing lump sum to SA at the start of the year e.g Jan would have better return over the years. This is due to how interest in our SA is being calculated.

Correct me if i am Wrong :)

AK71 said...

Hi LS,

Indeed, that could be another story. ;)

As much as we can say that rules regarding the CPF could change in future, we should also remember that it is difficult to say with absolute confidence the STI ETF is going to experience the kind of growth that it had in the past.

Also depending on each person's temperament, not being able to have access to the money meant for retirement until retirement age could be a good thing for some, in fact, I suspect, for most of the population.

Personally, as an investor, I look at my CPF savings as the investment grade bond component of my portfolio. Bonds and equities are suitable for different types of temperaments. However, a mix will usually give us a more balanced picture of better performance with reduced volatility. Of course, this could be another story. ;p

Thanks for contributing yours. :)

AK71 said...

Hi Solace,

You are absolutely right. :)

CPF Minimum Sum Top Up and Interest Computation.
"CPF interest is computed monthly, then compounded and credited annually to your respective accounts."

However, contributing on a monthly basis would help with our cash flow. It depends on our own circumstances which approach to choose.

Mao Mao said...

I hope someone can come out with a calculator counting the bonus 1% for first $60k ($20k in OA). It will be clearer for us to project our estimated balances.

AK71 said...

Hi Mao Mao,

Since we think of that extra 1% as a bonus, don't be too concerned. What is more important for us to do is to push as much as we can into our CPF-SA so that we give it a larger base ASAP. Let the magic of compounding do the rest. :)

Lim LS said...

Hi AK,

Thank you for the reply.

Just want to highlight on the point of alternative means of growing your wealth/retirement funds... There is no point of putting all the eggs in one basket.

As you mentioned, there is also risk in STI ETF. So is CPF. Nothing is perfect. If everyone knows there is such a risk, suggesting someone to put all his bets in one place sounds risky?

The advantage of not locking up the money, or better potential returns, etc are all bonuses... What really is the selling point to me is the diversification ;)

P.S. Regarding transferring from OA to SA early, that I am not disputing its advantage. Though I can always bring up the 35% investment in stocks for OA but that's another story for another time. Just wanted to point out the preference when investing "real" cash. Investing in somewhere else helps to diversify the risk. Do not put all the eggs in one basket :)

P.S.S The only time I think investing cash into CPF make sense is when
1) You belongs to the high income group, thus getting high tax rebate when doing CPF top-up, and
2) You have equally big or bigger portfolio outside of CPF. As such, investing into CPF is more of a balancing of your overall portfolio (stocks, bonds, precious metals, properties, CPF, etc)

AK71 said...

Hi LS,

Yes, we have many options and it is up to the individual which one he would choose. Which option he chooses would depend largely on his beliefs and also his temperament.

The CPF is as risk free as can be and although some people have cited policy risks (and I am not denying the possibility), unless the PAP wishes to lose to the opposition big time in future, I cannot see why they would want to introduce any stumbling blocks to the CPF system. It makes a lot of sense the way it is.

For many people who do not have the inclination to be investors, I think that forcing themselves to save more regularly (e.g. $200 a month) is a step in the right direction and locking the money away in their CPF-SA so that they cannot access that extra saving as and when they want, for the majority of the population, might not be a bad thing.

For those who are more investment savvy, they might want to take higher risk to get higher returns but they would also have to be able to stomach any market volatility which most people are not good at dealing with. As seasoned investors, I think we know that this is true.

We have a very good discussion here and readers will have to decide for themselves what is best for them after taking it all in. Thank you. :)

Lim LS said...

Yes, the option that is the most suitable for each individual will largely depend on his beliefs and temperament.

What works for some might not always work for others. That is why its good to bring up a few viable solutions and let them decide.

As much as CPF is as risk free as you mentioned, the thought of extra cash(cash that one top up into CPF) being locked up for decades makes me cringe. The opportunity cost, losing control of my very own money, the situation of over-concentration in CPF in the overall portfolio, all this just make CPF top-up undesirable for me (at this moment of time).

Of course, this is due to my beliefs and temperament.


Mao Mao said...

Hi AK and everyone

Can I re-confirm that if Medisave hits its ceiling (currently it is $49,800), our monthly employee and employer CPF contributions flowing INTO Medisave Account will be re-routed INTO Special Account? For example, if we hit the Medisave ceiling in the month of July, then the re-routing happens from August onwards? How about the monthly compounding of interests? It will get compounded at the max amount ($49,800) from August onwards? Noted that we only receive the interests at the end of each year.

AK71 said...

Hi Mao Mao,

Yes, if our CPF-MA has hit the ceiling, monthly mandatory contributions will go to the OA and SA only. What is supposed to go into the MA will then go into the SA.

If your MA has $49,800, for sure, interest will be paid on that amount and compounded.

Julian Chan said...

Hi AK,
How different is this dollar for dollar contributions to his SA to the voluntary contributions of $7000 to our SA to get the tax rebate?
Say, in your story... $200 per month only adds $2400 to his SA... Will he also contributed $7000 on top of his monthly additional $200?

Mao Mao said...

Hi AK,

If the MA ceiling has reached, the MA's compounded interest will flow to SA too?

AK71 said...

Hi Julian,

I believe that there is no $7K a year MS-Top up in the story. Instead of a yearly top up, the protagonist in the story did a monthly top up.

AK71 said...

Hi Mao Mao,

The interest earned at the end of the year, from my own experience, gets transferred into the CPF-OA and not the CPF-SA.

Mao Mao said...

Hi AK,

Thanks for sharing your experience. It is insightful to learn that the MA overflow interests do not go into SA. The behaviour differs from the CPF contributions going into SA.

Lim LS said...

Hi AK,

For interest, normally you will see a line that state INT (interest) on the 31st Dec. On that line, the interest for each column (OA, SA, MA) will be stated. That is the interest you get for each of the OA, SA, MA for the year.

In the event the MA is max(S$48,500), or the interest will bring it over the max cap, you will see a line that state TFR below the INT line. There, you will see the transfer of the amount that exceed the cap going from MA to SA.

Please see below for an example;

01st DEC 2014 BAL xxxx xxxx 47,284.39
31st DEC 2014 INT xxxx xxxx 1875.58
03rd JAN 2015 TFR 659.97 -659.97

The above is accurate as this is taken from my own CPF account :p

P.S. Don't ask me why the transfer only took 3 days after the interest is calculated, and 3rd Jan 2015 is a Saturday as well. Doubt they actually work on that day... I just copy the whole thing and paste here for you reference...

AK71 said...

Hi Mao Mao,

I think I might be mistaken if you see LS' comment. -.-"

Hi LS,

Thanks for sharing your numbers with us here. :)

AK71 said...

Hi Mao Mao and LS,

OK, my memory is still reliable. These are my numbers:

31 DEC 14 INT 9,101.88 7,651.65 1,837.60
03 JAN 15 TFR X816.33 XXXXXX -816.33

$816.33 interest income for the MA for 2014 was transferred to my OA.

It could be because my SA has hit the MS.

Lim LS said...

Hi AK,

AK is so CPF rich... hee hee.

I heard that once your SA is max(the currently minimum sum), even the monthly contribution goes to the OA. Is that correct?

Also you will no longer be able to do SA top up?

Lastly, I also hear that although SA reach max, the interest generated from SA do stay in SA thus causing the SA to exceed the max cap. Is that also correct?

My SA is still a long way from max so unable to see it for myself :p

AK71 said...

Hi LS,

A portion of our monthly mandatory contributions will still flow into our CPF-SA even if the SA has hit the MS. However, we are no longer allowed to do MS Top Ups or OA to SA transfers.

Interest earned in the SA will stay in the SA even if the SA has hit the minimum sum. This is correct.

I don't know how old you are but you could be many years younger than me. Time has been kind to my CPF savings thanks to the magic of compounding. Of course, I did help the process a bit through early OA to SA transfers and some voluntary contributions when I became financially more comfortable.

Lim LS said...

Hi AK,

Thank you for the quick reply.

So monthly contribution still goes to the SA even when SA reach the MS. That is something new. I thought since the excess from MA goes to SA, the excess from SA will go to OA.

Will not complain about this inconsistency though. If money still goes into MA, it means more money will be stuck... Money in MA is really money you will never see in your lifetime (your beneficiary will love you deep deep though for the huge stash :p).

Also the monthly additional money allowed to accumulate in SA means more interest generated rather than going into OA and only earn 2.5%. Although, more money going into OA means I got more to invest... lol

Anyway, I still have a good 2 decades ahead of me so the SA will have time to accumulate. Also based on my excel spreadsheet calculation, even if MS will to continue to increase at 3% per year ($290,000 20 years later!!! hopefully it will not come to that amount...), my SA will still exceed MS by a good margin during my later years... (if I managed to hold on to my current job and no salary increment is taken into account :p)

As such, my OA shall be used purely for my housing needs and some stocks investment. Additional money also will not be allocated to CPF but put into other investment vehicles for diversification. My preference...


AK71 said...

Hi LS,

Well, we might not see the money in our CPF-MA in our lifetime but I am willing to bet that it is money we will be using in our lifetime. ;)

I won't have any mandatory contributions to my CPF account very soon. However, I will probably be maxing out the yearly contribution caps through voluntary contributions. I think of it as having a AAA rated sovereign bond in my portfolio. :)

Lim LS said...

Hi AK,

Yes, the money in MA will be used in Medishield Life premiums. Or to the hospitals if you get sick. I rather not get sick if possible. Lol.

Based on the amount you have in your SA now (estimated to be around 181-190k based on your SA interest you revealed earlier on :p), there is no need for any voluntary contribution anymore. Your SA with its yearly interest will already outpaced the increased in MS yearly. I do not want to even bring up the amount in your OA. hee hee.

Voluntary contribution after you have no income also do not bring you any tax rebate. If it is for AAA rated sovereign bonds, why not considered Singapore Saving Bonds? They can be cash out easier and the yield is as good if you put in for long term. There is a limit of S$50,000 though so might it be too little for you? :p

There are also corporate bonds, preference shares, etc that are also very safe. But guess you will already had this planned out so I am just being a busybody. Lol

Anyway, you are more than ready for a nice and easy retirement. How I envy you... Guess I must work harder to reach your stage.


AK71 said...

Hi LS,

Voluntary contributions (VC) whether I am employed or not will not have any tax benefits. VC will see the money flowing into the OA, SA and MA. In my case, it flows only into the OA and SA because my MA is maxed out.

So, because some of the VC will go to the SA, some of the money will still enjoy 4% interest per annum. Since I am not able to do any MS Top Ups to the SA anymore, this is one way to get a higher yield "bond". ;)

As for the SSB, I thought of using it for my emergency funds but I decided against it. I blogged about this too.

As for using the SSB as a place to park my long term savings for retirement in a bond. The only way to benefit from the maximum interest rate (coupon) is to hold on to it for 10 years. I am already 44. In another 11 years, I will be able to withdraw a lump sum from my CPF, I rather get the 2.5% to 4% a VC to my CPF account will secure. ;p

Lim LS said...

Hi AK,

Thank you for the information.

Will check out VC. Always thought it is only for the self-employed or doing it for others. Never knew you can do for yourself as well.

As for SSB, I am not subscribing for it too. Too low a yield for me at my current stage. If I need to invest in safe, low yield product, I rather go for OCBC 360 though there is a limit of 60k...

Nether less, learnt a few things about CPF and hopefully this discussion will also inspire some readers to take a look at their retirement planning and start working towards a more financially secure future. Its is never too early nor too late to start planning, though the earlier, the better :)

Keep up the good work, AK.

P.S. I will love to see more blog post on other vehicles of investments like bonds, stocks, etc. We need to get readers have a more complete picture of the overall portfolio instead of just focusing on CPF. CPF is like your back-up to your retirement planning. Hope nobody is thinking of living off that measly $1200 per month (provided you meet the MS...). That $1200 will only worth slightly more than half of its value 20 years later due to inflation...

AK71 said...

Hi LS,

Definitely, the earlier we start planning for retirement, the better. :)

I have maxed out the $60K cap in OCBC 360 and also the $50K cap in UOB ONE Account for higher interest rates. See: UOB ONE Account or OCBC 360 Account?
These days, I only use the OCBC Frank Card or the UOB ONE Card when I pay for stuff. ;p

I guess my blog is really a reflection of what my beliefs and plans are. I never really intended for it to be a one stop financial planning and investment blog. It is way too much work for lazy AK. I don't have the know how to do it too. Just being honest. ;)

I do blog about matters to do with insurance, real estate, bonds etc. sometimes. However, just remember that they represent one person's opinion, mine. Sometimes, people forget this and place too much weight in what I share.

The CPF Minimum Sum or what the call Retirement Sum now will see a 3% increase yearly from 2018, if I remember correctly. So, it is not going to stay at the current level. So, the CPF Life payout will also see an increase in time to come. It won't be $1,200 a month for younger cohorts, I believe.

CPF Life will probably remain sufficient for a very simple lifestyle. For sure, if we want to have the finer things in life at age 65, yes, we shouldn't be leaning too much on CPF Life.

Lim LS said...

Hi AK,

Just read through the CPF website to know more about the changes. I really hope the government will stop keep changing the names(Can't they bloody stick to one naming convention??? MS to BRS, FRS, ERS. DA to PEA. MCC to BHS, etc). With all these name changes, it is really hard to keep track of the changes. Imagine if a 30+ guy like me having trouble keeping up, I wondered what about the old people who are not financially savvy.

Also the changes to the CPF system every few years is not helping it. What I planned for few years ago might be invalid a few years down the road...

It is not that we don't welcome changes but CPF being a retirement tool as proposed by the Government, it is something that requires long term planning in order to maximize its effectiveness. Changes every few years definitely do not help you in the long term planning. I rather they spend more time to really evaluate, hold more focus group discussions, national debates, etc before rolling out with the changes. As such, there will be less changes and not as confusing as now. Last heard that they are discussing on new changes yet again...

Anyway, I need to stop my whining...

You are correct. There will be a 3% increment annually and the figures will be made know to us in advance. Currently the FRS (previously known as MS) will be as below;

2017 -> $166k
2018 -> $171k
2019 -> $176k
2020 -> $181k

Based on my excel spreadsheet, with 3% increment, 20 years later, it will be $290k.

Good luck, everyone. Better start doing your sums early in your work life and work out a plan on how to achieve this figure 20 years later.

P.S. I had work out my numbers and my SA alone will be able to outpace the 3% increment during its later year. I seriously concerned if our younger generation know about this and prepared for CPF Life. The higher income will have their sum work out by itself due to the high CPF contribution. It is the lower income or odd job workers who will fall through the cracks if nothing is done... sighz

P.S.S. I had being holding small talks with my younger colleagues from time to time to discuss with them on financial matters(insurance, savings, housing, investment, CPF, etc). From the interaction, you can see they are really lacking in these areas. Our education systems should really teach our kids on these matters. Recently another young colleague of mine just spend close to half a million for a BTO(4 room flat, shocking!!! why is a government subsidized flat so expensive??? What is wrong???)... I really wonder if they will be able to retire comfortably with all this heavy commitments for the next 30 years. I should just point them to your blog and get them to read your early posts on the accumulation of wealth. Since you are lazy :p, why not just do a simple post and link them to your older post? Not many people might check out the old posts but if you do a new post and link back, it might get them to start reading. My thoughts :)

AK71 said...

Hi LS,

Thumbs up that you took the trouble to learn more about the CPF and its recent changes. :)

I am crossing fingers and hoping that there will not be many more changes to the CPF system. I think we have the a very good version now.

I am lazy but I did make an effort to help new readers with navigating my blog IF they visit the full web version of my blog. I have grouped together a few articles into "e-books" and I have also provided tens of links to what I think are useful past blog posts. You will find these in the left and right side bars of my blog.

So, if you do direct your colleagues to my blog, ask them to go to the full web version which they will see on their PCs, tablets or notebooks. They will only see the mobile friendly version or the lite version on their smart phones. This version is missing the side bars and also the search function.

OK, here is the link to the e-books I mentioned:
Free e-books by AK now has a cover.

Hope this helps. :)

UCP said...

Hi Ak, thanks for sharing. I hv transferred some fund from oa to sa after reading yr blog. The 4% compound interest rate is really attractive , I am considering whether to do cash top up for cpf. However, my income is not high and age not young, I hope my top up can help me meet the basic retirement amount at my 55 , so I more concerned about the payout for the retirement instead of how much difference can take out from cpf when 55. In the cpf website, I can find the list of full retirement sum from 2003 till now, u can see the sum keep increasing every year. I want to see the cpf payout rate from 2003 till now, are they also increasing proportionaly? This is very important to me. But there seem little info regarding this topic, even the payout calculator also not working , I only can find the basic payout is 1200 to 1320 corresponding to this year's basic full retirement sum 161k. U r expert to cpf , do u know where can get more info on cpf payout ?

AK71 said...


I guess when you say you are more concerned about the payout for retirement, you are referring to what you can get from CPF Life from age 65.

Right now, the Full Retirement Sum (FRS) is $161K and the payout from age 65 is estimated to be at least $1,200 a month. However, this FRS is going to increase. See Lim LS' comment above. It is likely to increase by 3% yearly. It is reasonable to assume that the monthly payout from CPF Life from age 65 will see a corresponding increase.

If you could only hit the Basic Retirement Sum (BRS) which is half of the FRS, then, the payout from CPF Life at age 65 will be lesser. However, the assumption is that you have a property which you could pledge and likely rent out a room or two to help fund your retirement in such an instance.

Transferring funds from OA to SA makes sense if you have no need for the money until age 55. Good move. :)

AK71 said...

After setting aside BRS, can I withdraw the interest earned from SA yearly as my pocket money?

At 55, if you decide to pledge your home and put aside only the BRS in your CPF-RA (note that the money comes from your CPF-SA as transfer from OA to RA will only be made if the SA has insufficient funds), you can withdraw whatever is left in your CPF-OA and CPF-SA, not only the interest. ;)

ZMay said...

Hi AK,
Would it make sense to return the sum that is attributed to housing loan interest to CPF OA . Asking this because currently I have this amount in FD earning only 1% and I have ERS sum too. Subsequently if I need funds I can still withdraw right ? Thanks for taking time to reply

AK71 said...

Hi ZMay,

If we want to stop accrued interest from growing and if we want the government to pay us more in interest income, of course, it is a good idea. You might want to read this:
How to stop accrued interest from growing?

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