Use CPF account as a savings account. (Prefers money close by and is CPF the answer?)

This blog is the continuation of an earlier blog:
Our parents and their CPF plans.

Reader:
Thanks for your well structured reply! It answered most of my questions :)

The reason I am concerned is because my mum keeps cash in the house instead of making it work for her.. And often she gets "tempted" by agents/bankers who sell her savings plans (10 - 15years) with "guaranteed" returns!!!

I managed to stop 1 transaction last week during the free look period but she has another savings plan that is fully paid in the next month and will pay out every year for 10 years (I will just see it as damage is done)...

Hence I thought to further explore the use of her CPF account if she wants to earn more interest over the years.

She likes the feeling of 100% liquidity (which explains keeping of money at home) and she finds it a hassle to even withdraw it at the ATM.. will need to think of an arrangement such that it will benefit her pocket in the long run.







AK:
Yup, it is as I suspected. Your mom likes the feeling of having money close at hand. Haha. So do I, to be honest, if you remember my blog on keeping some convenience cash at home.

Yes, from my habits, you can tell that AK has joint the ranks of the old folks too. Cham. How like that? Die lah.

Convenience is a good thing but there is a price to pay for convenience. Convenience has a price? Yes. I blogged about this too.

Your mom is lucky to have you look out for her, especially when it comes to guarding her against unscrupulous sales people but worse than those would be the PONZI schemes.





Try talking to her about using her CPF account as a high interest savings account. She can do voluntary contributions up to the annual contribution limit ($37,740). 

Please check that her CPF-MA has hit BHS first ($52,000) or else most of her contribution, at her age of 60, will go to her CPF-MA and will be locked up.

Of course, I feel that it is a good thing to hit the BHS because the CPF-MA pays 4% per annum and the interest of more than $2,000 a year will pay for many things but it is her money and it should be her choice.



Related posts:
1. Convenience money.
2. The price of convenience.
3. Unpleasant experience at a bank.
4. PONZI schemes.
5. CPF as a high interest savings account.

Our parents and their CPF plans.

Reader:
I have been thinking about topping up my mum's CPF account in order to earn a higher interest for her monies because she currently keeps the allowances me and my sibling gives her at home 😓..

I tried to read up online on the CPF schemes but got a little confused along the way. She is 60 this year, and I believe she is not under CPF LIFE, she was given an option to opt in but she did not do so. Thus, this would mean she is under the Retirement Sum Scheme and she has around $91k in her RA. Her FRS is $131k and she can choose to receive monthly payouts when she reaches 65.

I understand that I will be able to make use of the Retirement Sum Top Up Scheme to top up her account and also earn tax relief while I do that. However, how would I be able to calculate the impact of my top-ups in order to convince her? Or should she opt for CPF LIFE instead?






AK:
Sometimes, when we think of what is best for our parents, we forget to ask them what is on their minds. I am guilty of that pretty often.

So, ask your mom what does she want to do with her CPF money? It could be that she has no intention to touch her CPF money at all. She might want to leave it as a parting gift for her children. Well, that was what my mom told me she planned to do quite recently.

In such a case, if we top up her CPF-RA, we are actually saving money for our own inheritance. I had a good laugh when I thought of this.

And some older folks are quite resistant to the idea of putting more money into their CPF accounts than what is required by the law. Best to avoid getting into an argument with parents. In my old age, I have less energy for debates.

I bring this up because it sounds like it could be the case for you since you asked me how to "convince" your mom of the benefits.




Talk to your mom and see what she has in mind first. If she plans on receiving monthly payout once she turns 65, I believe that CPF Life would be a better option since it would provide a monthly income for life. Then, let CPF Board know of this decision ASAP.

How to convince her to go with CPF Life? I think being able to receive a monthly income for as long as she lives is a pretty attractive idea.

How to convince her that topping up her CPF-RA is a good idea? I don't know your mom and how resistant she is to the idea. That is your hot potato. Not mine.




OK, I feel that you only need to convince her if you are going to take away her monthly allowance she is now getting from you and putting it into her CPF-RA instead.

If you are going to do a top up to her CPF-RA without taking away or reducing her monthly allowance, I don't think you need to do any convincing. 

The top up is on top of what she is getting from you in such a case. ;p

Part 2: Is CPF the answer?

Related posts:
1. Young people get 6% CPF interest!
2. Don't be stupid to top up CPF!

Why retirement is not an option for some people?

Ever since I went on a low carbohydrate diet, I have been consuming more protein and fats. 

One of the things I do eat from time to time is fish and I enjoy Batang fish quite a bit.

This evening, I paid almost $5 for my fish dinner:

150 grams of Batang fish. 

Just nice for a grown man or at least for me.

A dusting of turmeric powder, a sprinkling of garlic salt and some butter. 

1 minute in the microwave oven at 800 watts, followed by a drizzle of extra virgin olive oil and it is good to eat.

Yummy.

Anyway, as I was walking home from the supermarket, I tossed some numbers in my head.




$5 doesn't seem like a lot of money but to someone who makes $100 a day, that is 5% of his daily pay. 

(Once upon a time, that was my daily pay too.)

Considering the fact that $20 goes to his CPF, $5 is actually 6.25% of his take home pay. 

This is quite a big percentage.





Let us say this person depends solely on his CPF savings to fund his retirement and let us say he hit the FRS 10 years ago and CPF Life pays him $1,380 a month from today for life, he would get $46 in pocket money a day. 

In such a case, $5 is going to be almost 11% if his daily allowance!

The price of Batang fish would probably increase over time too.

Of course, he probably won't be eating Batang fish everyday but it is just an example to show how our CPF savings are probably not going to be enough to retire on.

If we depend solely on our CPF savings for retirement funding, it is quite possible that we would have to continue working beyond age 65.




This is for CPF members who have the FRS at age 55 too as this fishy example shows. 

For CPF members who do not have the FRS or even the BRS at age 55 and if their CPF is the only source of retirement funding, the chance of them ever being able to stop working is almost non-existent.





To people who are still unhappy with having money locked up in their CPF accounts and who want their CPF money returned to them because they have no savings to retire on, you have to wake up. 

You cannot retire. 

You have to continue working.





Related post:
CPF Life payout estimator.

Exploit the CPF-RA for a lump sum payout? (And HardwareZone Money Mind on how to hack the CPF-SA?)

Reader:
Need your advise, my SA is able to meet the MS (FRS), was thinking of opting for the enhanced option (ERS) for CPF life at 55 which is next year. 

There after, at age 65 think of pledging my HDB for the 85K to get back the money. In that way, i am able to earn the 4% interest for the $85K for 10 years, your kind advise please thanks.

AK:
You have to decide at 55 if you want BRS, FRS or ERS. You cannot change your mind at age 65.




Reader:
In a way i am not, but getting back the money of $85K at 65 after pledging. thanks.

AK:
The transfer to the CPF-RA is irreversible. So, think carefully what you want.

The money in the CPF-RA will fund CPF Life which will give you a monthly income for life. You won't be allowed a lump sum withdrawal from the CPF-RA.

Reader:
But spoken to CPF on this and they said its possible to get the $85K with pledging? thanks.

AK:
Yes, at age 55, if you opt for BRS, you can take out all the money in excess. This is probably what they meant.








"On your 55th birthday, we will create a Retirement Account for you. Savings from your Special Account and Ordinary Account, up to the Full Retirement Sum, will be transferred to your Retirement Account to form your retirement sum which will provide you with monthly payouts. For higher monthly payouts, you may also top up your Retirement Account up to the Enhanced Retirement Sum." (Source: CPF)


"Top-ups under the RSTU Scheme are irreversible and irrevocable." (Source: CPF)

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From my Facebook wall.

Kelvin Tan:
What do you think of this plan as a form of hack, which might make sense if you have most of the FRS sum in your OA.

-At age 54, before your birthday, invest all your SA, after leaving aside 40k, into a government T-bill.

-Let your RA formed largely out of your OA.

-Redeem T bills and have the money return back to your SA.

-Profit!

AK:
Unfortunately, I don't think it works that way. At 55 years old, once we have put aside the FRS or BRS in our CPF-RA, (if) we will have to close our CPFIS-OA and CPFIS-SA (if any), we can continue to hold these investments in our name directly or if we choose to liquidate our investments, the money will be paid to us directly and won't go back into our CPF accounts.




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Lee Keh Yi: 
CPF FAQ says: 
"You can continue to invest even after age 55, as long as you have set aside the Full Retirement Sum or Basic Retirement Sum with sufficient property charge/pledge in the Retirement Account."
CPFIS is not auto-close at 55. 

Another FAQ says 
"You may apply to close your CPF Investment Account and transfer your shares to your own Central Depository account after you have reached 55 years old and have set aside the Full Retirement Sum or the Basic Retirement Sum with sufficient property pledge in the Retirement Account." 

Note -> *may*, not *must*

AK:
Ah, I see. 
But if the CPFIS account is closed, the investment is held directly under our name or if liquidated, the money is paid to us and does not go into our CPF accounts.




Lee Keh Yi: 
The "hack" that Kevin described was discussed on HWZ Money Mind forum. 

The conclusion was that it would probably work: 

there is nothing in *current* CPF regulations that stops it from working. 

Some of the participants in the discussion will reach 55 within a year. 

If they try it out and report back like they said they would, we'll know for sure :)

AK: 
I read from the CPF After 55 booklet that if we terminate the CPFIS and liquidate the investments, the money will be paid to us directly. 

I doubt it goes to our CPF accounts. 

It is on page 15. 

Quite clear on this unless I have misread again.

Lee Keh Yi:
the "hack" is intended to make CPF draw the RA-FRS from our OA rather than our SA at 55 (by investing the max SA that we can). 

After RA-FRS is formed (ie 55yo), liquidate the SA investment and return the funds to SA. 

Thereafter we can enjoy the 4% interest from SA. 

All this should work, provided we are able to meet FRS via OA

AK:
Yes, I understand the strategy. 

Well, nothing beats actual field test especially when others are going to be the lab mice. ;p




Lee Keh Yi:
HWZ money mind had examined this very closely, looking for pitfalls in the theory, but we couldn't find anything in the *current* CPF regulations that stops it. 

Yup, it remains a theory, until someone tries it, crosses the 55 mark and can either confirm or refute the theory with their own experience ;)

AK:
I am always ready to learn from someone else's experience. 

It is less troublesome and sometimes less painful. :p



Related post:
BRS, FRS and ERS.