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A conversation with a reader:
Hi AK,
As i browse through your blog, I realized that I do have another question.
I am wondering if you would recommend individuals to open a SRS account to have tax relief first or to top up and ensure our CPF has met the mim sum first?
Which option would be a long term wiser strategy to go for?
Regards,
C
My reply:
Hi C,
The CPF is always my first preference because it earns relatively attractive risk free returns of 2.5% to 5.0% per annum.
For MS-Top Ups of up to $7K a year to the CPF-SA, we will enjoy income tax relief too.
The downside is the minimum lock up period to age 55.
The SRS is called "Supplementary" for a good reason.
If our income is higher and we would like to enjoy more income tax relief, the SRS is a good idea to help us save towards retirement adequacy.
There is some flexibility for early withdrawal with the SRS (but this comes with a penalty) while there isn't any such option with the CPF.
The downside is that the interest rate for money in our SRS account is very low and we will have to think of investing for higher returns.
Best wishes,
AK
Reader's reply:
Hi AK,
Thanks for your prompt response.
I now see the CPF as a better option first due to the interest of 5%.
I now see the CPF as a better option first due to the interest of 5%.
I am wondering that if currently I have not met the criteria of 20k for OA and 40K for SA before being able to utilize the funds for investment, should I still go ahead and top up my SA?
(I am going to be 25 this year, and I have just started working for a year, so I do not have a lot of money in my cpf, but I am planning for the future first).
(I am going to be 25 this year, and I have just started working for a year, so I do not have a lot of money in my cpf, but I am planning for the future first).
If I top up my SA now, it's more for tax relief now. I am about 32k away from the min 40k right now, and if i contribute 7k yearly, it will be 5 more years at least before I can use the funds for investment.
I am quite confused so to what's the best way for me now.
Regards,
C
My reply:
Hi C,
I think you know what the CPF and SRS are for now and how they work.
The next thing you need to do is to be very clear about what you want to achieve.
Then, act accordingly.
Take your time to make a decision you are comfortable with.
There is no need to rush. :)
Best wishes,
AK
Related posts:
1. Achieving Level 1 Financial Security.
2. Securing risk free returns early for retirement.
3. Retiring before 60 is not a dream.
"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.
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10 comments:
Hi AK,
Have been following your blog for a few months. I must say your blog has been the most helpful amongst others. It's simple, practical and to the point.
Very grateful for your willingness to share youe knowledge.
It seems like the CPF is a decent tool for retirement. I come from a family where my parents do not save much and do not know how to invest their money. I'm sure there are similar cases due a lack of knowledge. For these people CPF is an excellent tool to help grow their money for retirement.
I will make voluntary contributions and transfer OA to SA till I'm 30. I think the 4% of SA is quite attractive given its fool proof nature. It's true we're locking it in till 55 years old. But the faster we reach the minimum sum the more we'll be able to withdraw if we do decide.
Thinking of paying my BTO installment by cash. Or perhaps 50-50 (dno if it's possible). There're housing grants to help with downpayment and even some installments. Thinking of laying my hands off CPF and let it grow and do what it is supposed to do, to aid in retirement.
I've been very stupid with my expenditure till recentlt but I believe it's still not too late for me to start learning and being prudent about money.
I hope Singaporeans will try to understand CPF with an open mind rather than form conspiracy theories and/or hate it. You help me understand it :)
Looking forward to learning from your blog. Past present and future!
Thanks AK!
Hi Felix,
I am glad that you have found my blog to be helpful. Of course, please remember that I am really talking to myself here and I am sure you made your own decisions after much thought. ;)
I particularly like this bit from your comment:
"It's true we're locking it in till 55 years old. But the faster we reach the minimum sum the more we'll be able to withdraw if we do decide."
If we believe that we should have some investment grade bonds in our investment portfolio, then, we don't have to look too hard. The CPF is probably the best investment grade bond we have in Singapore that pays a very generous coupon.
Not everyone has the aptitude or right attitude to be a good investor but I believe that everyone could be a good saver. I believe it is much easier to be a good saver than a good investor. Take Charlie Munger's advice and good savers will do well enough. :)
Stiff upper lip, soldier on and I look forward to hearing more of your adventures in future. :)
Hi AK,
Thanks for replying!
Although you're talking to yourself, they are articulated very simply and honestly. I've seen many bloggers who talk/post so much technical information that the common person will not be able to understand. Your blog can really be an ebook! It contains a broad aspect of topics. Most importantly is philosophy, for without it we will find it hard to motivate or commit ourselves to a certain plan.
You are a humble person despite your vast knowledge and wealth. You're a good role model not just financially but as a person.
Yes it's easier to be a good saver! Will be tight as I'll have to pay housing loan soon, renovate and have a wedding. Currently only using POSB Invest Saver to set aside a small amount $100 STI ETF, $100 ABF Bonds. Try and saturate SA these few years. The rest will have to save cash and learn how to invest from your blog :D
Thanks. Will definitely share my experience in future. Mostly learnt from your blog :)
Hi Felix,
So much praise from you. My head is feeling a bit heavier now. ;p
Thanks for the kind words. Very encouraging. :)
My life philosophy runs through my blog and, to regular readers, it is quite clear to see. What we learn and adopt in life is anchored to our philosophy in life. Without a philosophy, we would find ourselves just drifting with the currents without an anchor. :)
I certainly hope more people would come to see my blog as an e-book like you do. I have been asked by many people to produce e-books or to publish physical books before. I usually turn them down. If people are interested in my thoughts, they are all here in my blog and free to read. Why buy an e-book or book from me?
You have a personal financial plan and it is a good one too. Stay the course and, given enough time, I don't think you could go wrong. You will be a good role model to your kids in future. ;)
Hi AK,
This article has been 3 years ago but i thought I'd clarify something.
It's said here that the MS top up (via cash presumably) will be "locked up until 55" and thus inferred that after 55, we will be able to withdraw those sums (topped up) once we achieve amounts higher than the min sum (thus an "investment grade bond")
However, I thought CPF's website said that top-up monies /minimum sum top up/retirement topping up scheme cannot be withdrawn at age 55 as they are used for retirement and will only form part of CPF Life and be distributed monthly.
This way, it's not really a "bond" since the "principal sum" (i.e. the topped up amounts) can't be withdrawn upon maturity (age 55).
Hi LGRT,
I always tell people not to top up more than $7K a year to their SA if they want to do RSTU (formerly MSTU). This is because they don't get income tax relief beyond the first $7K.
At age 55, just imagine that it is their top up money and interest earned that goes into their newly created RA. Everything more than the FRS, they can withdraw at age 55.
The CPF is an investment grade bond and, later, also an annuity. :)
See:
Retire with an investment grade bond and an annuity.
Hi AK!
The reply from CPF Board facebook messenger:
===
Hi XXX, upon turning 55, cash top-ups and the interest in the SA will be transferred first to the RA to set aside the Retirement Sum. The cash top-up is meant for retirement and cannot be withdrawn in a lump sum. If you have non top-up monies in excess of the FRS, these can be withdrawn in a lump sum.
===
I think this was what I meant as well. Only non top-up monies in excess of the FRS can be withdrawn in a lump sum. Meaning we can't top up monies at age 50 and expecting those monies to be withdrawn at age 55 even after exceeding the FRS.
Hi LGRT,
If we have never topped up the SA before, it is still OK to top up a sum of $7K each year from age 50. By age 55, the $35K and interest earned will go into the newly created CPF RA to form the FRS.
If we did not have this top up money, non top up money and interest earned (of the same quantum) will have to move into the newly created CPF RA instead to form the FRS.
Any excess money (i.e. above the FRS) can be withdrawn in either instance at age 55.
Hi AK!
Hmmmm, but if you see the graphical illustration here https://www.cpf.gov.sg/Assets/members/Documents/Illustration_of_topup_monies_in_RA.pdf
It describes what you’ve just said, and that $35k you’ve mentioned would not be able to be withdrawn.
Hi LGRT,
That illustration is correct for BRS.
I have been talking about the FRS and not the BRS.
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