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If I had done this, I would have hit the minimum sum too.

Thursday, December 18, 2014

This is my reply to a comment by a reader and because I want as many people to read this as possible, I am publishing this as a regular blog post.

See qook's full comment: here.
".... I just ran some numbers and they were illuminating. If I'd done the same as AK, I would have hit my minimum sum too!"

AK's voluntary contribution in March 2014.

AK's reply:

Hi qook,

Yes, absolutely! That is what I have been trying to tell people for a long time. :)

Feed our CPF-SA early and feed it well. If we do it early enough and well enough, we would only have to do it for a few years and time will do the rest for us.

4% compound interest is powerful. 4% compound interest risk free is very attractive. 

However, we need a more substantial base to see more meaningful results. 

So, we need to help it along to help ourselves. ;)

Once you hit the ceilings for the SA and MA in any year, your monthly CPF contributions for the rest of the year will go to your OA and SA but not the MA.

So, the money in the SA will continue to grow into something much bigger. 

At age 55, there could possibly be a small windfall for us and not just a $5,000 payout. 

The rest of the money goes into a newly created RA and at age 65, CPF Life will kick in.

Like many things in life, the outcome depends on the decisions we made in the past. :)

Want to create a risk free and more conservative portion for our portfolio and not very sure about bonds? 

I hope this blog post has provided some food for thought. 

There is still quite a bit of time before the year ends.

Related posts:
1. Towards retirement adequacy before the year ends.
2. Videos on reaching 55 and CPF Life. (6 minutes in all.)
3. Build a bigger retirement fund with CPF-SA.
4. Do the right things and transform our lives. (Real story.)
5. We do better managing our savings than the CPF?


Lennard said...

Hi AK,

I have one question - assuming I have $7k to top up, would you suggest that I top up my SA, or use that 7K to top up my SRS?

I'm struggling to figure out where should I be parking that amount (not much I know). The thinking is that while both SRS and SA will eventually contribute towards retirement, topping up SA with that 7K does seem to provide some "flexibility" in that should I decide to touch my CPF funds for property, I would be able to to do so (compared to SRS, which will be sitting there unless I invest it).

And just to add, I'm in my late 30s and my combined OA + SA is about 40k short of hitting the minimum sum.

Your inputs will be much appreciated.


Singapore Man of Leisure said...


When we mix math with politics, emotions triumph logic...

Just look at 30 year US treasuries or 30 year SG bonds.

Always wanted to have some bonds in your portfolio - to act as ballast during stormy seas - but felt intimidated as bonds are the playground for institutions?

Well, CPF SA is as mom and pop as you can get ;)

AK71 said...

Hi Lennard,

You would be interested in the comments here:

AK chats with PF.

and here:

AK chats with Mike.

Money in the CPF-SA is meant to help us meet retirement adequacy. It cannot be used for the purchase of property.

AK71 said...


I also say. ;)

Bonds might be intimidating or even out of reach for many of us. Then, why not consider the CPF-SA? A very long term bond issued by a "AAA" rated country that pays 4% to 5% per annum?

I think it is a no brainer. :)

Sillyinvestor said...

Hi AK and Lennard,

I kaypo...because I too free.

Key difference:

SRS you can still withdraw anytime subjected to 5% penalty, CPF only at 55

* (Given only in 30s, we never know when we need money, at least I will choose SRS over CPF)

If he is very sure he will never need the money because he has a ba ba emergency fund, go for CPF.

(He will surely hit above the minuimum sum and mimimum medisave unless ah gong changes the goal poles again LOL), because he can get back the excess of CPF money at 55, whereas the earliest for non-penalty of SRS is 63, also CPF has risk free 2.5%, SRS you need to invest DIY to make it meaningful (Given both has tax benefits)

qook said...

Wahahaha. My 30 seconds of fame on AK's blog. Thanks, AK ;) hope this post helps others too!

AK71 said...

Hi Mike,

I was feeling lazy and hoping that you would be kind enough to weigh in on the issue. Thanks for rising to the occasion! Deeply appreciated. ;)

AK71 said...

Hi qook,

You are welcome. Thanks for providing me with the catalyst to do this. ;)

We have to bear in mind to compare apples with apples and to know what we want to achieve.

There are always other options out there competing for our money. Some might offer a bit more than 4% per annum in returns but we have to question what is the level of risk that we have to undertake in such instances.

It is true that money put into the SA is tied down but we have to remember also that the primary intention of the SA is to help fund our retirement, ultimately, in a risk free manner. So, the fact that the money is tied down till age 55 before the excess (if any) is returned to us is really a non-issue.

The MS in the SA then gets transferred to a RA and is left to accumulate for 10 years. This becomes a lifelong annuity at age 65 which is again in keeping with the motivation to have a risk free element in funding our retirement in time to come.

I would be hard pressed to find any comparable product with comparable returns which is risk free. :)

After saying all this, if some people still don't get it, then, I guess, they will just have to do whatever they are comfortable with and which they think is best for them. ;)

Lennard said...

Hi SillyInvestor,

Your kaypo-ness is most welcome! Thanks for your inputs. Much appreciated!

Mao Mao said...

Hi AK,

I noticed that you are a strong believer of using cash (liquid) to top-up the CPF (not so liquid) due to the benefits of tax reliefs and the power of "4% compound interests".

However, several people that I spoke to find the 4% compound interest rate nothing fantastic since it is being locked aside for DECADES. In addition, the tax benefits is being calculated at the assessable income level, NOT at the chargeable income level.

pf said...

I wld suggest to put money in SRS first over the cpf min sum top up to SA. Coz it can be taken out when there is a loss of job. Pay a penalty is better than no money to use.

meesiam said...

curious to know if thrle $3k to OA entitled to tax relief also?

AK71 said...

Hi Maomao,

4% per annum doesn't sound that fantastic to some? That is because it is a small number, on its own. People are naturally attracted to large numbers and I had a blog post for these people on the matter:

Upsize $100K to $225K!

The SA is to help us plan for retirement adequacy. It should naturally take decades to do so. :)

If we can save some money on taxes while stashing away money for retirement, I think it is a good deal.

“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.

AK71 said...

Hi meesiam,

Nope. Unfortunately. :(

Once we have hit the MS, we can do voluntary contributions to our CPF account (must not exceed $30,600 a year, including mandatory contributions) but there will not be any tax relief.

Cory said...

We are suppose to lock the saving in CPF for decade theoretical because that's the whole idea to fund our retirement.

In other country it manifest as a form of high taxes which is then channel to more medical subsidy or retirement benefits distributed therefore unfairly to those who pay more.

So having 4% by AAA rating by "Institution" is as good as it get.

Thanks for reminding bloggers and friends and me too.

victorlsl1 said...

contributing to SA directly means that you are still subjected to income tax for the amount contributed. only medisave contributions count towards tax relief. SRS contribution can be withdrawn subjected to tax for the year of withdrawal and 5% penalty. however you are allowed to recontribute to SRS on the next year. so putting into SRS is actually better due to this flexibility

AK71 said...

Hi Cory,

I prefer our country's system of helping the government to help ourselves too. The tools are out there and it is up to us to make use of them. :)

I don't like the idea of a welfare state either although I do feel that there are people who genuinely need help because life dealt them a bad hand of cards. However, a welfare state does not discriminate between genuine cases that need help and perfectly able people who are free loaders. -.-"

I still think that more should be done by our government to educate the public about the importance of retirement planning and what are the tools that are freely available. There shouldn't be any commercial agenda.

People shouldn't have to pay money to some private entities to learn such things or get free previews that will lead to fee paying services. -.-"

AK71 said...

Hi Victor,

I think you have misunderstood. :)

If we do a top up to our CPF-SA, we will get income tax relief. This top up is subjected to a cap of $7,000 a year for people who have yet to hit the MS.

If we do a top up to our CPF-MA, there is no income tax relief. If we do a top up to our parents' MAs, for example, our parents will get income tax relief, not us.

victorlsl1 said...

I found the info abt the SA tax relief. thanks for pointing out. When I was talking abt medisave tax relief I was referring to this

AK71 said...

Hi Victor,

Thanks for the link to IRAS' website! I must have misunderstood CPF Board's words! ;p

They said that I could make a contribution to my parents' CPF-MAs but such VCs "are tax deductible for recipient only".

The link you provided is good. I am bookmarking it. Thanks again. :)

AK71 said...

From my FB wall:

Christopher Tan:

Well blogged. And kudos to those who commented in your blog too. They really understand the power of their SA account. It is indeed like a risk-free bond paying a good fixed interest p.a.

Allow me to introduce you to a good endowment plan with medical benefits. As you pay your monthly premiums, Part of your money goes to buy "mortality charges" that will pay your family money if you suffer demise or total and permanent disability. This is a "rider" that you can opt out if you don't find it useful.

Part of it, is growing at 4% to help you pay the annual premiums for your hospitalisation insurance.

Your net premiums then grow annually at a minimum 2.5%, or 3.5% guaranteed and up to 5% guaranteed currently.

At age 55, your accumulated sum becomes the premium to convert to an annuity plan (growing at 4% p.a.) that pays you for life. Unused premiums if death happens early will be given back to your beneficiaries.

This insurance product is called CPF. The converted annuity is called CPF LIFE. The "rider" is the cost of DPS. If this product is available to the insurance agents or financial advisers, it will be selling like hotcakes. Unfortunately, political dissatisfaction (which I can understand) is clouding our eyes to see a wonderful financial product that can complement our retirement plan.

Mao Mao said...

In response to Christopher's comment about the DPS. I find the maximum sum assured amount of $46,000 to be insufficient in current standards of living.

AK71 said...

From my Facebook wall:

"The more I read the more confused I get. Total CPF contribution including mandatory is $30,600. Contribution to SA would not be taxed deductible if minimum sum is met. Contribution to SA got no tax relief. Contribution to MA if MA is not maxed out is tax deductible. If maxed out, no more contribution. Contribution to spouse / parents SA and MA is tax deductible. SRS is self explanatory - tax deductible. Are all the above statements right?"

"1. Mandatory + Voluntary contribution cannot exceed Annual Contribution limit which is $37+K this year.
2. No MS Top Up to SA is allowed once MS (FRS) is hit.
3. Voluntary contribution money is split between OA, SA and MA. No tax relief.
4. Voluntary contribution to MA alone gets tax relief for recipient only."

AK71 said...

Yeah AK. I have heeded your suggestion and reached SA Min sum at $166k at the age of 35 with cash TOP up ard $15.5k plus transfer of OA to SA yrs ago!!
Nw I want to go celebrate!! Like what you say on the blog!!!
Hooray! Hooray!!!!!!!!!!
Celebration for new milestone achieved!!!!!!

Gong xi gong xi! 😀

AK71 said...

Reader says...
I feel that I want to work smart to build up my nest egg before I hit 55. I only have 11 years of doing this. I should have done it much earlier.

AK says...
There is still quite a bit of time before the year ends.

AK71 said...

Reader says...
The only con is that we can only withdraw the monies at the age of 55 and after setting aside the prevailing minimum sum. The minimum sum keeps rising over the years. The goalposts keep shifting as well.

AK says...
I have shown in my blog how we can let the government help us meet the yearly increase in minimum sum.

People talk about shifting goal posts but it really is not a big deal and, frankly, it is a very sensible thing to increase the minimum sum every year as cost of living inflates over time.

AK71 said...

aaron tan said...
Hello AK,

Chanced upon your blog and i have to say that it has been nothing less than valuable information for me.

I am 26yo and i have little savings now as i have finally cleared off my education loan as of 2018. From my understanding, if i were to start VC now and transferring all my OA to SA, i should be able to achieve the FRS and reach the end game ASAP (Maxed out SA & MA). And thereafter, any interest in excess of FRS would be my source of passive income after age 55. I only need to clarify something before i commit.

Correct me if i am wrong, I was told that and interest earned on VC cannot be withdrawn even after FRS is reached. Therefore it only serves as a base for FRS and for us to achieve the spill-over sooner. But would there be instances where VC + accrued interest will be more than the FRS amount? Which will also mean that the excess interest will serves essentially no purpose since it cannot be withdrawn :/

AK said...
Hi Aaron,

It would mean that you will have a bigger annuity at retirement.

Your CPF savings is your money and you will enjoy greater financial security by maxing out your membership benefits. :)

AK71 said...

"End game".

I like that phrase.

So Neverwinter. ;p

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