CPF Overview 2018

As someone who likes the idea of having multiple streams of income, I view the CPF system as the “bond” component of my portfolio with a 30-year maturity date.

The CPF system is my insurance should I choose to venture into business or early retirement. Knowing that the CPF funds are protected from creditors and continue to compound till the withdrawal age of 55 gives me priceless peace of mind.

For 2018, I am pleased to say that the CPF board has paid me a total of SGD 2,710 in interest payments across all 3 accounts. If not for the deductions made for housing, the curve would have been steeper.

Combined CPF Received
CPF interest received since starting work.

Homeowners can retain up to $20K in CPF-OA when applying HDB loans

The latest news that homeowners can elect to retain $20k in their CPF-OA when applying for a HDB housing loan, is to me a welcomed move.

Previously, homeowners had to completely use up their OA balances, before being able to take a loan with the HDB. This meant that not only are they left with minimal buffer space in their CPF, they also miss out on the additional 1% interest from the first $20k in the CPF-OA.

Some may ask, why bother to retain the money in the OA when you can be paying down the loan and avoiding the interest? I think that an immediate advantage is to let the first 20k sit in the OA garnering an additional 1% of interest, while funneling the rest into the SA, where it earns an additional 1.5%.

The new rules are a boon for soon-to-be homeowners like myself, who see the SA as a cornerstone to their retirement plans. In fact, if you continued to funnel everything above the first $20k into the SA. I’d reckon that the FRS would not be too difficult to achieve.

Big fat problem

I have a happy problem to resolve.

The girlfriend got her bonus yesterday, a rather fat one worth 4 month. The news has unsurprisingly left her grinning from ear to ear. It will no doubt be a useful bargaining chip for her as she negotiates her job change.

However, the small windfall also leaves her with another problem. How to minimize the tax payable on this amount? Being a permanent resident (PR), she does not qualify for many of the tax advantages that I (Singaporean guy) would typically be eligible for (i.e. being an NS-man or claiming parent’s support).

Even after contributing the max amount into the CPF-SA and deducting her CFA coursework amount, her income tax would likely be twice that of last year’s. As we are not married, she is also unable to “share” claim “in-law” support. Neither can she top up my CPF-SA while being reimbursed in cash from me.

I still have yet to figure out what to do. For now I think the only options are either to open an SRS account or suck up the income tax.

Repaying the CPF Housing Loan (Part 1)

CPF Repayment of House

Its done..

I repaid half of what I took from the CPF to pay for the first 5% + Stamp duty. Its quite a hit on my wallet, especially since I paid 75% of the total bill. But I’m sure the money + interest will come in useful again when the key collection is here. At 2.5% this was higher than the banks savings interest rate, prevailing SSB or short-term instruments that were available, so while I am cognizant that the returns are low, I’m glad I tried my best. Also, the extra 1% under 20k goes to feed the SA account.

I also coerced/forced my girlfriend to do the same with her withdrawn amount. She paid down >90% of her outstanding. Hopefully, we will both be able to cross the line smoothly come key collection day in 3 years time.

The amount was quite a significant one and might well affect my ability to meet the portfolio targets set out for the year, but heck, it wasn’t money I was prepared to lose.

Why I chose to top up my CPF-SA with cash?

Most can agree that the extra 1% interest from CPF savings is a low hanging fruit that most young Singaporeans should be reaching for. What they disagree on, is how to achieve this. 

Should we be depositing cash or transferring from OA-SA? Having already met my CPF-SA Target. I would like to pencil down my thoughts on this.

1. Bring down mortgage payments to a healthy level

Reducing liability and making loans work for you is always a smart move. I know some would advocate stretching out home loans to maximize the low interest rates on a housing mortgage. But that makes sense only if your mortgage is at a comfortable level. By comfortable, I mean when the monthly OA contribution from your salary is able to cover 80-100% of the mortgage payment.

As I had bought a place with a convenient location, (i.e. expensive), the mortgage payment was high relative to my OA contribution. If I had transferred from the OA to the SA, this would mean I was less able to reduce the principal on the loan, which translates into a higher monthly mortgage payable. This would be like saving water when the bush is burning. A mortgage which takes only 80-100% of your current OA contributions means future salary growth would automatically improve your cash position.

So Yes, not transferring from the OA-SA meant I was potentially losing the 1% free interest from the CPF board per month. So here was what I did next…

2. Setting aside a retirement account apart from investments

I do recommend setting aside a separate retirement fund from your investment fund. First, we will never be certain if our investments will always make money. Second, my intention for my investment fund is to generate a continuous cash flow in the future. This means, I hope never to draw down on this fund.

Not transferring from the OA to the SA meant that I did not have a free ticket to boost my SA quickly. I did this step by step over a 3 year period. I did so while investing and reducing my tax payable

Being a little older than my peers and due to outstanding loans, I decided to prioritize contributions to my SA before my investment portfolio. Only towards the third year did I put in more into my investment fund as compared to SA.

CPF vs Investment fund contribution.png

Started work for half a year in 2015, paid down my loans in 2016, full force in 2017

Looking back I would advise to start with increasing your monthly SA contribution via monthly top ups rather than what I did. Investing is something that takes time to pick up and I see the above graph as me not learning anything in 2015.

In conclusion

Anyone who is into FI would be driven by their own motivations. I chose the top up route as I wanted financial security in retirement, while paying down the house. It was a conservative choice, but my own nonetheless.

At the end of the day should you not use cash to top up your SA, be sure that the alternate use of it would be in assets of other kind which can generate you a positive return. 

Milestone: CPF SA+MA = 40K

I reached a personal milestone on my quest to being financially free today.

Today, I am sitting on 40K for my combined SA+MA.

CPF (MA+SA) Target = 40k.png

The thought of me submitting my first cheque at the Bishan CPF building 2.5 years ago is still fresh in my mind. (That was before I found out that I could do the contribution online).

I am hopeful that this amount will continue to keep rolling at 5% interest till I am 55 and maybe go a long way in helping me achieve the CPF minimum sum.

I know many would question the wisdom of setting aside such a large amount in cash right at the beginning of my career, since there were other likely expenditures like the house and the wedding.

However, I can only say with some experience that the struggle between sitting on cash and staying invested is a continual one, and one doesn’t always get it right.

I don’t know if this investing journey will truly allow me to retire early. But i do know that the amount set aside today will help me retire with dignity should everything go down the chute.