Asked 3w ago
I try to keep as much money out of CPF as possible for the following reasons
You can't touch any of the money with the exception of OA. Even if you touch the money in OA to e.g finance HDB payment, you'll still be paying back the principal + accrued interest. This effectively means the second reason.
Ultimately it belongs to the government until you die and give it to someone.
Is there anything I'm missing out here?
No doubt, attaining wealth in the form of cash is the most satisfying as it is as real , as cold, as hard as money gets. If you're comparing $1M in cash vs $1M in CPF then for sure, one would rather go with the $1M cash option. One should not think of 1M65 as the sole retirement strategy but rather, a sure-win safety net for retirement. Here are some points to note about CPF:
The repayment of accrued interest when selling your property financed with your CPF OA is so that you are still on schedule to saving for your retirement through CPF. This accrued interest that you top up back to CPF still belongs to you.
Not everyone has the financial prudence to save and plan for retirement with cash. Some squander it away on gambling, others splurge the moment they get hold of a sizeable sum of money. CPF is supposed to make it stupid simple for anyone to have a decent retirement plan based on their financial standing (BRS, FRS or ERS).
Topping up to your own or loved ones CPF SA up to a max of $7k is tax-deductible. This could be a proposition for some to save on some income tax yet ensuring their loved ones hit a comfortable retirement goal.
Amount in excess of BRS can be withdrawn from 55 onwards. It is not as illiquid as you imagine. CPF is designed to make sure you are on track to a decently comfortable retirement where restrictions on withdrawals are there to ensure you do not overdraw on your retirement savings and deplete it before you leave this world.
You are right that $1M cash and $1M in CPF is very different, and I would like to share my thoughts here. Any CPF guru please feel free to point out any mistakes :)
How CPF works
The first point is on how CPF works. At age 55, if you have met the Full Retirement Sum (FRS) criteria, you will be able to withdraw the balances above and beyond FRS. In that sense, this money that you withdraw will become cash and is liquid.
On top of that, you will also start receiving the FRS monthly payout stated by CPF at that time from age 65.
How 1M65 works
Next, we look at Mr Loo's 1M65. The main reason for using CPF to accumulate wealth is to leverage on the compounding interest of 4% in SA. There are many ways to accumulate $1M at age 65, and each has its own pros and cons. 1M65 is just one of the ways, with safety being its greatest advantage.
With the compounding interest available in CPF, you basically only need a fraction of $1M and let time do the rest of the work.
You are right that putting money in CPF makes it a lot less liquid. And everyone should prefer $1M cash to $1M in CPF — you can always put that $1M cash into CPF if you like.
The important question we should ask ourselves is this: How am I going to accumulate $1M at age 65?
Hope this is helpful to you :)
Agree with illiquid. which is why personally i do not do top ups. but i do still have my own retirement planning outside of cpf system. just have to be comfortable with what you want to achieve. 1M65 to me is a just tag line, something to catch your attention.
i think a lot of people thinks cpf money is not our own becuase of the long time line (20yo-55) there is no parallel product with such a long maturity date. but i do know of people who found the cpf scheme useful to pay for their children's education, a downpayment for a home, medical bills.
maybe let's see it this way, if you think it is the government's money, then just buy a house and don't ever sell it. then you don't have to pay back the accured interests. which is in a way good too. if everyone don't specutale / flip property, then prices will be stable and your children and grandchildren will still be able to afford to have their own homes in the future.
The answer is super simple. If you are able to consistently produce higher % returns than what CPF is giving you, then 1M in hand is better.
However, do note that the common man on the street will find it hard to beat 4% a year growth in stocks/property.
1 more comments
I would begin by saying that the comparison is fundamentally flawed.
Even lottery winners in countries like USA are given the choice of smaller lump sum or regular payment over time albeit, a bigger lump sum in totality.
A $1M cash now with tax versus a $1.5M tax-free CPF might be a better fit. I would choose the latter.
Principal (same even with bank) + Al (not paying but refund own $ back to its rightful place). Acrrued need not be refunded if you never sell your property or if it's transacted at market value (even at a loss).
It can be withdrawn once RA meets the statutory retirement requirements and it is still your $ end of the day.
For the 1st point, you can withdraw the amount in your CPF above FRS.
E.g. 1mil - FRS 181K, you can withdraw 800+k at age 55. But most people choose to leave it inside to compound further at an interest of 4% p.a. with SA Shielding.
2nd point, if you dont sell the house, you will never need to 'pay back' the money. Even if you sell the house and upgrade, when you buy the new house, the amount you returned can be used again for the new house. Thats the whole point of CPF scheme to ensure you have a roof over your head.
But yes, I agree with you on the illiquid part as you cant toucg the money till age 55. Even if you get retrench now due to COVID pandemic, you cant withdraw the money for basic needs. Thus the importance of holding cash for emergency is still preferred.
I would say that if you have excess cash after investing and savings, can consider topping up and treat it as an endowment/retirement plan till age 55.
It is part of your financial plan. It should not be the core. At 65, you should have multiple streams of income from various sources to diversify your risk.
The liquidity risk is somewhat justifiable from the predictable interest rates. OA aside, the SA 4% is hard to beat in a strong currency domiciled country. Other first-class nations can only dream of achieving 4% without running into deficit.
OA at 2.5-2.6% is justifiable to keep property inflation under control and in line with the general inflation rate in Singapore. You can always opt to refinance under local banks if you feel the interest rate is too high, at the risk of a floating rate.
Additionally, the protection from creditors you get for monies in CPF is a benefit that is hard and costly to replicate from other investments.
All plans have advantages and disadvantages, use them to your benefit.
Like u I avoid putting $ into CPF due to it’s illiquidity. Except for the min amount into MA.
BUT the accrued interest (AI) is still your money... so even if you use your CPF to buy a property, it’s fine when the incoming funds from the sale covers the outstanding loan and AI ie +ve sale
It goes into your OA and can be reused to purchase your new property.
Only sucks when you don’t have enough to buy the replacement property due to inflation or price increases.
Or sell 1 buy 2 (2nd being an investment which gives you a passive income) or live in one and pass the 2nd to your child(ren) when the time comes and if you have 2 kids.
Each can inherited 1 as it would get harder for them to buy their own if not for your help
and yeah, you can’t touch it otherwise, maybe except children’s education etc