Asked on 20 Nov 2019
What are the pros and cons?
To successfully achieve this, you need to aggressively top up your CPF-SA as early as possible. Given that this is a unidirectional transfer, not many will be able to achieve the level of conviction required for such a move.
2. Low availability of Funds
As you are just starting out in your career (with student loans to pay, and upcoming family commitments), cashflow and finances are likely to be tight. It may be difficult to part with the money with these conflicting objectives
3. Other financial instruments that may give a better yield than 4% p.a.
Theoretically, there are a number of instruments that provide a better yield as compared to CPF-SA. For example, if you employ a DCA strategy in a home market index over a long period of time (i.e. 25 years), you could theoretically get returns up to 6% p.a. However, past performance is no guarantee of future results, so do your own due diligence ;)
Pros: It's similar to forced savings, so you won't be tempted to use it, you can't even if you would like to. And this will allow for compounding effect to be in full force.
Cons: Not liquid. Will have to use cash for housing loan or kids' education loan, which may not be plausible for household with single working parent
Earn better interests
Safe from creditors
Can’t use the money for home
Need to depend on banks for education loans for self or children
Can’t touch the 1 million until past 65
Interest rates may change
It’s a one way street. Once in SA can’t take out
It’s not easy to accumulate the magic “130k” in OA to transfer to SA if you are new to the workforce (less than 10 years) and if you used CPF to fund your home
It is an investment form where you leverage on the high interest rate of your CPF's SA.
This can be done by topping up SA (Special Account) on your own or moving fundsfrom your OA (Ordinary Account).
The returns are high however, the main drawback is that you can't access to the funds as SA is a one way transfer. There is no liquidity to the 1M65 investment. Really depends on your priority.
Though topping up SA do give an attractive 4% compounded interest, the transfer to SA is locked and can't be withdrew at any point of time until you reach age 55.
Unless you do not have any big ticket item (such as wedding, house renovation) coming up in the next 3 to 5 years, you can consider doing yearly deposit into your SA as retirement planning.
Makes you very disciplined with your finances and you will have a peace of mind when you invest subsequently because of the knowledge that compound interest will allow you to have enough for your retirement even if your investments do not produce good results.
The main con is that there is no liquidity and you must be like Mr Loo who is willing to save aggressively and not believe in the Singapore property dream. However, Mr Loo does make a good point that property prices are pegged to Singapore's growth and it's not guaranteed that you would be able to make a handsome profit should you sell the property a few years down the road.
You also need to know how to properly plan and manage your finances so that you will have enough for your house / wedding / renovation / child(ren) etc. since your money is locked up in SA.
If you are a savvy investor, 4% might not be that attractive and there remains the possibility that the government will change its policies.
I think if you are a savvy investor, you can build up your investment portfolio first and then consider using CPF SA as the last line of defence.
I'll also share my favourite financial blogger's take on the 1M65 approach here: https://treeofprosperity.blogspot.com/2018/11/a-gentle-critique-of-loo-cheng-chuans.html
Hope the above helps!
1M65 means to have a million at the age of 65. I guess the biggest con is the liquidity of the cash invested. One can only withdraw the cash after the retirement age. This means that you have to make lifestyle and financial changes (and sacrifices) to fulfill the 1M65 objective. The pro is of course, retire with a million.
I think if there's no immediate commitments, such as big ticket items like house, wedding, then I think it's good to start young by either topping up SA with cash or transferring OA to SA. Make it a stash-and-forget mentality and compounding will take effect by the time you know it when you have commitments then.