Tea with Vic: Transferring funds from OA to SA?

This is a guest blog that originated as an email from a reader, Vic, who would like to share his concerns with regards to the transfer of funds from OA to SA:

I was quite alarmed by the 34 year old who transferred all his funds in his OA to his SA.

 

a) transfer is not reversible. (Is he aware or are readers aware?)

 

b) by doing so, he has cut off a pool of funds for the purchase of housing in the future. I am not sure if that is a good idea since there are opportunities for housing investment. I assume that this man must be single at this point in time.

 

c) there is a limit to the amount of money that can be given out under CPF Life. So, any amount put in beyond minimum sum, at the Retirement Account (RA) level, you still get 4%. If you do not withdraw money at 55 years of age, the money is stuck there. This happened to my father who is 66 years old.*

He has $144,000 in the RA but can only be given $620 per month. He cannot withdraw the excess. At 4% per year, the interest from the $144,000 is $5,760 but, every year, he can only get $620 X 12 = $7,440.  Net reduction is only $1,680 per year! In spite of this, he is not allowed to withdraw since he skipped the chance at 55. Medisave is full and untouched.

 

Based on this, my father has to live at least 50 to 70 years more to fully benefit from his CPF retirement funds.

 

Some background:

 

1. My father has faithfully contributed the maximum CPF amount every year, partly as a means of tax reduction ever since he was a young man. He is a CPF believer!

 

2. He has withdrawn $800,000 for purchase of condo in 2006. Condo is fully paid up by his CPF funds.

 

Related post:

Tea with Klein: CPF, SRS, HDB Housing Loan.

 

* AK is a bit kaypoh and checked CPF's website on this.
Check it out at: Withdraw CPF savings at age 55.
And also: CPF Life.

So, what we want to do is to withdraw from our CPF account all that we are allowed to withdraw at age 55 and what is left is the required CPF minimum sum which currently stands at $148,000. This will be transferred into our Retirement Account (RA).

Using the CPF Life pay-out estimator provided, assuming that the annual value of our place of residence is less than or equal to $9,500 and that our annual assessable income is less than or equal to $27,000, we could get the following benefits from the Life Standard or Life Basic plans.

Looks good to me as a minimum safety net.

What do you think?

A car loan is different from a home loan (updated in June 2018).

Gone are the days when someone could walk into a car showroom, put down a $1 deposit and borrow the rest.




How many car buyers actually give the topic of car loan some serious, in-depth thought before signing on that dotted line? 

Most don't think much more than "How much is the interest rate?" and "How long can I borrow for?"

Unlike a home loan which is amortising in nature which means that the interest payment for each subsequent instalment is based on a reducing loan amount, a car loan's interest payment for the entire duration of the loan is based on the initial loan amount. 

A car loan isn't amortising in nature.






So, if a person were to buy a $100,000 car and if he were to take a loan for $50,000 at an interest rate of 2.5% per annum for a period of 5 years, he would be paying $1,250 x 5 = $6,250 in interest or $104.16 per month. 

Total monthly repayment: $937.49.

Now, if a car loan were to be amortising in nature, just like a housing loan, the total interest paid over a 5 year period would only be $3,242.20. 

Total monthly repayment: $887.37. 

This is more than 5% lower than $937.49!

Imagine the good old days when someone could have walked into a car showroom, paid $1 and borrowed the rest for a $100,000 car to be paid over a duration of 10 years.  

How much would the interest payment be assuming a rate of 2.5% per annum? 

$24,750! 

Monthly repayment: $1,031.25! 

How could this not be wealth destructive?





This is why, for years, I keep telling friends and family that if we want to buy a car and if we cannot afford to pay for the car without a loan, try to keep the loan quantum to a maximum of $20,000 and a repayment period of 3 years. 

Assuming the cost of debt is 2.5%, this would mean paying a total of $1,500 in interest payment which is what I personally find acceptable. 

Total monthly repayment over the next 3 years: $597.22.






So, if, for some reason, you are looking to buy a car now or sometime in the future, you might want to keep this in mind. 

Know how expensive a car loan actually is and try to limit its use to the absolute minimum.




Related posts:
1. Car dealers unhappy with LTA.
2. Lease cars, don't buy. (more calculations)
3. Cooling measures for cars.
4. Cooling measures for cars spurned.
5. A new car for $75,000? (depressing!)