CPF - How Should You Use It?
The Central Provident Fund (CPF) is a "comprehensive social security savings plan that has provided many working Singaporeans with a sense of security and confidence for their retirement years."
In the layman terms, CPF serves to be Singaporeans' retirement funds.
CPF is allocated into the followings:
1) Ordinary Account (OA)
2) Special Account (SA)
3) Medisave Account (MA)
Note: When you reach 55 years old, you will have a Retirement Account (RA). The amount in your OA and SA will be transferred into the RA to form the Retirement Sum, also known as the Minimum Sum (MS).
For more info on retirement scheme, please refer to the CPF website.
As an employee, an allocated amount from your monthly salary (as well as employer's contribution to your CPF) will be put into the OA account, which provides you an attractive interest rate at 2.5% per annum. This is way better than putting your money in fixed deposit with the bank.
However, you can only withdraw your money from your CPF OA or SA when you reach 55 years old, provided that you have FIRST met the Full Minimum Sum or Basic Minimum Sum (with sufficient property pledge).
The Full Minimum Sum for those who are 55 years old as of 1 January 2018 is $171,000. And it increases every year. In other words, if you are 35 years old this year, the amount may be way higher when you reach 55 years old --- about $300,000 or more!
CPF - How Should You Use It?
Having assisted homeowners to sell/upgrade their assets from HDB flats, I realise that not many of them understand how CPF works.
Allow me to share it simply...
If you put $100,000 into your CPF OA, you receive $2,500 (2.5% pa) as interest payout to you in the first year.
However, if you withdraw $100,000 from your CPF to pay for your housing loan or do a partial payment for your flat, not only do you LOSE the interest of 2.5% per annum ($2,500 for the first year based on the amount of $100,000), you need to pay back 2.5% compound interest per annum into your CPF OA when you sell your HDB.
CPF website puts it this way, “If you sell your HDB flat, you need to refund the principal amount you had earlier withdrawn for the purchase of the flat, including the accrued interest, to your CPF account. This interest is the amount you would have earned, had the savings not been taken out."
In other words, our government pays you 2.5% interest if you keep your CPF monies untouched. But the moment you touch your CPF monies, not only do you forfeit the 2.5% interest from the government, you will need to pay your own 2.5% interest using your own money.
Someone gave this analogy. If you put your money in the bank, the bank will pay you interest. But if you withdraw your money from the bank, you will need to pay the bank back for the interest you would have earned. Yes, it doesn't make sense...
For illustration purpose, look at the diagram below.
In a nutshell, when you withdraw your money from your CPF OA, you are technically losing 5% per annum based on the total amount withdrawn. Not forgetting that you are also paying 2.6% interest per annum for your HDB loan! That will be a total of 7.6%.
Some people may say, "Well, it's not alot of money."
Let's look at the impact CPF accrued interest of just 2.5% has on your sales proceeds, should you decide to sell your HDB one day. If you have fully paid your 4-room HDB with your CPF monies (let's say it costs $300,000), the CPF accrued interest will be as follows:
In 10 years, CPF accrued interest = $84,025
In 20 years, CPF accrued interest = $191,584
In 30 years, CPF accrued interest = $329,270
If you sell your HDB after 10 years, you'll need to put back $300,000 (CPF used) + $84,025 (CPF accrued interest) into your CPF OA. If your HDB could be sold at $430,000, your cash proceeds will ONLY be $45,975, even though your selling price is $130,000 ABOVE your purchased price.
Now, if you sell your HDB after 30 years, you'll need to put back $300,000 (CPF used) + $329,270 (CPF accrued interest). If your HDB could be sold at $400,000 by then (the older the HDB, the lower the price would be), your cash proceeds will be ZERO!
Some may still say, "It's alright. The refunded CPF monies will still be my money eventually."
What they don't know is as follows:
1) CPF minimum sum increases every year. If you are 35 years old this year, the minimum sum may be close to $300,000 (if we take 3% increase yearly) when you reach 55. You can't withdraw any of that retirement amount until you reach the payout age at 65. Who knows? The payout age may increase further in future. Even at the payout age, you can only withdraw a small monthly payout each month. I'm not too sure if many people would really get to withdraw all their monies in this life with the monthly payout.
2) I have clients who ended up with negative sales proceeds. Based on the scenario above, if you sell at $400,000, you have a negative sales of $229,270 (due to CPF used + accrued interest)! Granted, the CPF board can waive this amount, which you are supposed to put back into your CPF OA by CASH. When they waive it off, your cash proceeds is ZERO, because it is a negative sales. Not only that, the amount of $229,270, which is supposed to be your own CPF monies will also be gone!
Tell me how much you are really losing...
Is holding on to HDB really an asset or liability?
I'm not sharing all these information to get you to sell your HDB. At the end of the day, it still boils down to your unique situation and personal decision. No one should force you to do what you do not want to do. However, it is vital that you find out more by gaining necessary knowledge before deciding what you should do with your HDB.
For more information on how to fully utilise your CPF monies and receive a free assessment on wealth creation and financial multiplication, click here.
In the next blog entry, I will be sharing why I personally sold my HDB and the opportunity cost which I lost because of delaying the sales of my HDB for two years.