Sunday, September 11, 2016

Should You Keep Your Savings In Your CPF Special Account?

While it’s possible to use your CPF Special Account as your retirement plan, you need to prepare for the following scenarios. In the Straits Times, we recently read about a Singaporean man who wants to accumulate a million dollars in CPF savings. Is it possible? Certainly, and we’d even say we know a few people who have done it. While it may sound like a great idea, you do have to make certain preparations if this is going to be your retirement plan.
What Does Getting a Million Dollars in Your CPF Entail?
In order to get a million dollars in your CPF, you need to max out your Special Account (SA). The CPF is composed of three portions: The Ordinary Account (OA), Special Account (SA), and your Medisave Account (MA). The OA is primarily used for providing housing, while SA is used for retirement. MA is used to pay for healthcare. The interest rate on your OA is 2.5 per cent, while the interest rates on SA and MA are four per cent. There is an extra one per cent interest upon reaching the first $60,000, combined across all three (and at least $20,000 in your OA). This means most Singaporeans, after a few years in the workforce, will have an interest rate of 3.5 per cent in OA, and five per cent in their SA and MA. In order to accumulate a million dollars in your CPF, the key is to move the lower interest OA money into your SA. Then, the compounding effect of five per cent per annum can build up your cash reserves faster. In addition, once you reach the Medisave Contribution Ceiling ($49,800 as of 2016), any excess will be put into your OA. Note that the amount of time this takes will differ, based on how much you earn. Singaporeans are required to contribute 20 per cent of their monthly pay to CPF, and their employers contribute an additional 16 per cent. In general, however, someone earning around S$3,000 a month, who starts working at 25 and constantly transfers money from OA to SA, could end up hitting the million dollar mark as early as age 54 to 57. It’s not a get-rich-quick method, but the reliable ones rarely are.
The Upsides of Putting More Money in Your Special Account
There are a number of upsides to relying on your SA to getting your  first million dollars. These are:
    A reliable absolute return
    An interest rate that beats inflation
    Safety from creditors
1. A Reliable Absolute Return: If you were to use mutual funds or Exchange Traded Funds, your returns will usually fluctuate based on the index it’s pegged to. For example, if you buy a mutual fund pegged to the S&P 500, and the S&P 500 falls to negative 1.2 per cent returns, you would probably get negative 1.3 percent returns. If returns are a positive two per cent, you might get 1.9 per cent (it’s not exact to account for expense ratios). Now over a long term, all of this should even out. However, there’s always a chance that you’re one of those unfortunate investors who see more bad years than good ones. It’s not likely, but it could happen. The great thing about the CPF is that returns are absolute. If the SA interest rate is five percent, then you get five per cent – regardless of how well or how badly Singapore is doing. Coupled with the fact that it’s guaranteed by the Singapore government, this is one of the safest investments available to you.
2. An Interest Rate That Beats Inflation: For a retirement fund to be viable, it must grow at a pace that beats inflation. This is usually three per cent for Singapore and most developed countries (central banks take great efforts to keep inflation in this range, for reasons we won’t go into here). This means your retirement fund should be getting at least five per cent per annum, which your SA does. There are plenty of other investment options out there – but an insurance policy straggling around at four per cent, or Singapore Savings Bonds at between two to three per cent, don’t really cut it.
3. Safety From Creditors: Even if you go bankrupt, your creditors cannot take money from your CPF. This isn’t too big a deal for most people (most of us never reach that stage). But if you engage in risky activities, like being a stay-at-home Forex trader or a business owner, this is important.
The Downsides to Keeping Your Savings in Your Special Account
There are a number of issues you have to plan to face:
    You have to pay for your housing the hard way
    You’ll need banks for education loans
    The situation may change in the long term
1. You’ll Have to Pay For Your Housing the Hard Way: When you take an HDB Concessionary Loan, you need to pay at least 10 per cent of the flat price. This can come from your CPF OA or your pocket. And since you have transferred everything from the OA to the SA, your pocket it is. A three-room flat costs around S$350,000. This means you should be prepared to fork out at least S$35,000 in cash somehow (it may be a little less after grants). If you are buying private housing or an Executive Condominium (EC), you will have to take a bank loan and put down 20 per cent. So a $700,000 EC would mean a cash payment of $140,000, if you have nothing in your CPF OA. In addition, many Singaporeans pay their mortgage through their CPF OA. This will, of course, not be an option for you if all the money has been transferred to your SA. You have to be very disciplined at money management, in order to make the significant down payment without CPF. And because you are paying the mortgage in cash, you will have to plan your monthly finances carefully. For bank loans, this entails knowing details like when to refinance, or how to pick between one and three-month interest rate periods with the most efficiency.
2. You’ll Need Banks For Education Loans: Your CPF OA can be used for education loans when applying for studies from a recognised institution (and yes, you do have to pay it back with interest!). If you have not completed your diploma or degree but intend to, you will have to turn to banks if your OA is empty. This is, of course, a less forgiving option. With the OA, you are simply using your own money, with an obligation to pay yourself back. Once you use a bank, you have a student loan that you have to be careful to repay. Failure to do so can greatly impact your credit score later.
3. The Situation May Change in the Long Term: This method, of course, assumes CPF rates stay the same. The situation may change 20 or 30 years down the road.
It’s Probably Better Than Trying to Invest Your CPF Money
You have the option to invest a portion of your CPF savings (see the CPF websites), in order to chase higher returns. Given that the SA already gives higher returns however, and is guaranteed, many Singaporeans would be better off transferring their money to their SA than trying to invest it.
(, Singapore's leading personal finance comparison platform, provides free and easily accessible resources such as its up-to-date credit card product page and the latest personal loan packages available in real-time.)


Unknown said...

Hi there!

I really enjoy your articles! Easy to read and succinct. Thanks and keep them coming please!

Would just like to point out that there is a mistake for the CPF interest rates.

The extra 1% is not given for the entire account; rather, it is given only on the first $60,000, combined across all accounts (OA, MA, SA, RA). After that, another extra 1% is given for the first $30,000 (up to $20,000 from OA). Priority of the accounts is RA--> OA..> SA--> MA.

Thanks for the articles!

Dividend Tech Warrior said...

Hi jcsemaj1,

Thanks for the clarification.