Since 2016, I have noticed a trend in optimising CPF for retirement needs – Transferring CPF OA to SA.
There are multiple blog posts from avid financial bloggers and CPF main marketing portal, areyouready.sg popularising the idea of transferring your CPF OA to your CPF SA to earn a higher interest rate. The carrot is made even tasteful by the end goal that you can achieve S$1M by the age 65, posted in Straits Times paper.
The report assumed that you could consistently transfer your excess OA to your SA till you hit your Full Retirement Sum (FRS). The FRS is $166,000 as of Jul 2017. (Would you like to know what is your FRS when you reach age 55? Click here to know more>>)
There are various push and pull factors put forward by various writers.
Why People Transfer From CPF OA to SA?
The main reason is the high risk-free rate of 4% given by the CPF Board.
In the current low-interest environment, by transferring from a low-interest account of 2.5%(CPF-OA) to a relatively higher interest account of 4%(CPF-SA), you are actually earning 1.5% more return.
Assuming you were Age 35 when you did you transfer. That translates into 33% more in 20 years due to the compounding effect. What that means is that, if you have transferred $20,000 into your SA, you would have earned $11,000 more or $43.8K. This effectively increases your retirement nest funds significantly!
Why Wouldn’t People Transfer From CPF OA to SA?
The main reasons are:
- Immediate needs to pay for mortgage loan for home stay
- Opportunity cost to purchase investment property during property down cycle
CPF monies are an important source of funding for property purchase for the average Singaporeans.
Assuming you are Age 35, 20% of your monthly pay is contributed by you to your CPF(OA, SA, MA) accounts without fail. Of which, 8% of your monthly pay goes into your OA. Assuming your gross salary is $4,000, and your take home pay is $3,200, your total CPF contribution, including employer contribution, is $1,480. $920 goes into your OA.
Your monthly CPF OA contribution of $920 can be used to fund your mortgage, which translates to a loan amount of $202K (25 years HDB loan assuming 2.6% p.a.), fully funded by CPF OA only!
Why I Won’t Be Transferring My CPF OA to SA?
As for me, the reason I won’t transfer my OA to my SA is the very same reason why people choose to transfer from CPF OA to SA!
By deploying your money into a higher yielding vehicle, it will give you higher capital return and ultimately a bigger retirement nest.
Based on the rule of 72, a 2% return will double your amount every 36 years.
|Interest Rate||Double Your Money|
What that means is that if you can invest your CPF OA at 6% net of fees, you are effectively cutting your time to achieve your retirement target by 6 years early.
|Monthly Contribution||Investment Rate||Years||Final Amount|
By investing at a higher rate of return of 6%, you are getting $77,000 more when you are age 55!
Furthermore, along the years of accumulation, you have the option to use it as a buffer for your mortgage loan in the event you are out of a job.
Is It Achievable In The First Place?
You may be thinking that CPF interest is risk-free while investment return is non-guaranteed.
You are right in an academic sense. But it is possible to achieve it by following a few guidelines.
How to invest with minimal risk?
If you do the following religiously, you will have a much better odds seeing your money compound at a very very low risk.
1. Stay invested long enough by putting time on your side. (How long should you invest for? Hint: Depends on how long you are willing to commit to transfer your OA to SA)
2. Invest in a correct vehicle that delivers the return you want – My preference is business equities only. Not fixed income instruments or commodities or properties (e.g. money market, bonds, gold, silver, infrastructure)
3. Rebalance your risk by buying low and selling high through portfolio balancing.
4. Diversifying through time – Dollar Cost Averaging
You may not achieve 6% p.a. net of fees consistently for the next 20 years. But if you invest based on the above guidelines, you will likely to achieve more than the 4% that is promised by CPF. (FYI, CPF SA 4% can be changed due to the macro environment. It has gone down to 2.5% in 1993/1994 before).
In my personal opinion, invest to achieve 6% net of fees is not rocket science. You just have to do a few things approximately right and the return will take care of itself.
As Warren Buffet said, and I quote,
It is better to be approximately right than precisely wrong.
If you have no idea how to do your own investment, you can consult a qualified financial planner with ChFC or CPF certification to do a proper investment planning to increase your odds of achieving it!
Look out for my next post on “How To Achieve 6%p.a. return net of fees effortlessly!”