Whether you’re a fan or critic of the CPF, we all have to admit that it is a fact of life in Singapore. So why not make the most of it and maximise your CPF savings for your retirement?
While the limitation of your CPF savings is that you can only withdraw it when you reach 55 years of age, the upside is that you’re putting your money in a effectively risk-free AAA-rated investment that pays you 4% returns annually. You’d be hard-pressed to find anything like that elsewhere in the markets.
So if you’re the kind that doesn’t mind saving your money in CPF till you’re 55, then here are four ways to maximise and grow your CPF savings for retirement:
1. Transfer from Ordinary to Special Account
The CPF Ordinary Account (OA) pays you 2.5% interest annually, while your CPF Special Account (SA) pays you 4%. (CPF actually pays you extra 1% interest for the first $60,000 in your combined OA and SA balances, but we’ll exclude that here for ease of calculation.)
Knowing this, you can transfer the money in your OA to your SA to earn the extra interest. While the extra 1.5% may not seem like much, it makes a big difference when compounded over time.
For example, let’s assume you can fund the Full Retirement Sum ($171,000 as of 2018) you’re allowed to transfer to your SA. When compounded over 30 years at 4% per annum, this comes up to $554,620.97.
In comparison, if you left that amount in your CPF OA that earns 2.5% interest, you’d end up with $358,684.06 – nearly two hundred thousand dollars less.
So it makes sense to park your money in the SA to earn the higher interest, but what’s the catch? The catch is that you can only transfer money from your OA to SA, and not vice versa; it is a one-way trip.
So if you need the money in your OA to fund the purchase of a home in the near future, then you might want to put off doing this. But if your housing needs are comfortably taken care of, then transferring money to your SA will go a long way toward your retirement — which brings us to our next point…
2. Pay your mortgage in cash
Besides using the CPF OA to fund the 20% down-payment for a home, many Singaporeans also use it to service their monthly mortgage. But if you can afford to, there are several advantages to paying your mortgage in cash.
One advantage is that you can treat the money in your OA as an emergency fund (assuming you don’t transfer all your funds to the SA). If you end up never using the money, it will compound at 2.5% interest and buffer your retirement fund.
But if something does go wrong, you can stop servicing your mortgage with cash and switch to using your OA. This means you won’t have to worry about losing your home in the event of emergencies such as a sudden retrenchment.
The main benefit of paying your mortgage in cash though, is that it’ll allow your money to compound much further when it’s left untouched to grow in your CPF, especially in the SA.
3. Top up your Special Account
If you haven’t yet hit the Full Retirement Sum in your SA and you’d rather not transfer the money from your OA, you can still choose to contribute to your SA by making a voluntary cash top-up. Effectively, you’re using your SA like a bank savings account — albeit one that pays you 4% interest and can only withdraw from at age 55.
You also get a tax relief equivalent to your top-up amount, up to $8,000 per calendar year.
Another good tip is to make your top-up at the beginning of the year — if you top up in January each year instead of December, you’ll earn 20% more interest over 10 years.
4. Top up MediSave Account first
Now if you plan on making voluntarily cash top-ups to your SA, I’d suggest contributing to your MediSave Account (MA) first. Your MA also earns the same 4% annual interest as the SA, but with the added flexibility of being able to use it for medical care and hospitalisation expenses.
Currently, you can contribute up to the Basic Healthcare Sum of $66,000 (as of 2022). This will earn you an annual interest of $2,640 — which you can use towards paying your MediShield Life annual premiums.
As you can see, your annual interest covers even the most expensive premium for MediShield Life. (Though I doubt anyone reading this is over 90.) In essence, adequately funding your MA entitles you to ‘free’ health insurance in Singapore.
Voluntary contributions to your MA also allows you to claim a tax relief – all the more reason to make a contribution if you’re already planning to do so.
The fifth perspective
So these are the four simple things you can do right now to maximise and grow your CPF savings for retirement. As good as it sounds, remember that you always need to evaluate your personal financial situation before making any decision.
For example, voluntarily topping up your SA may be a great idea if you have excess cash that you won’t need until you’re 55, but may not work if you’re tight on finances right now and need the money for more pressing things. Just like any other financial instrument, the CPF can be a great tool to help you achieve your retirement goals if you use it right.
