Wednesday, August 13, 2014

CPF as an asset that generates income

By now, those who're frequent readers of my blog would have understood how the CPF system works. For the benefit of those who've not read my previous articles on CPF, i've consolidated a few of it below:
  1. All about CPF minimum sum and CPF life
  2. Queries on CPF minimum sum - Pledging your property
  3. Will we have enough CPF savings to retire on after using it for housing?
  4. Forum on CPF and retirement adequacy

CPF provides income

CPF is not an interesting topic especially for young people. But, it becomes an important thing when we grow older. Because of the lack of public education on these matters, most people do not know what to do with the money in their CPF. Most choose to withdraw everything less the minimum sum from their CPF accounts when they reach 55 years old. Some even pledge their property so that they can withdraw more cash from their CPF accounts. However, this may not be a wise choice. Why do i say that?

The reason is simple. CPF is actually an asset that generates income for your retirement years. It can be liken to you renting out a property you own and collecting rental every month. Your tenants pay you rental every month which is an income for you. CPF provides income for you in your retirement years. Apart from the CPF life which pays about $1200 every month if you meet the minimum sum of $155,000, the rest of your CPF you leave inside the account continues to earn extra interest as well. Let's say if you had $300,000 in your CPF at age 55, $155,000 is transferred to your retirement account and the other $145,000 stays in your CPF OA and SA account respectively. At this point, most people will draw out the entire $145,000 which is left inside the CPF account and put it into their bank account which gives an interest of only 0.05%. How much interest will you get from the bank? The answer is a mere $72.50 for the entire year.

However, if you choose to leave the remaining $145,000 in your CPF OA and SA account, it earns about 2.5%-4% interest annually. The interest you'll get is a good $3625-$5800. It is extra income for you every year. Why is this important? You see, most people withdraw their CPF money at age 55 and feel rich. They will buy something they like such as an expensive watch or maybe go for a holiday in Europe for a few thousand dollars. But many do not know that if they leave the money in the CPF just for another year, they could actually get the same items they bought for free. They can spend the interest given which does not affect their base capital at all. They can get the same $2000 watch for free and go on that $3000 holiday for free.

How to make CPF an asset that generates income?

To make CPF as an asset that generates income, we have to actively manage it and not just leave it on its own. We have to start making sure we can meet the minimum sum. It was reported in Channel New Asia that just one fifth of Singaporeans are confident that CPF will meet their retirement needs. Only 32% of the surveyed respondents said they actively manage their CPF. Actively managing their CPF means that they review, rebalance their CPF portfolio if needed. Something surprising is a total of 59% felt there should be more education on retirement. This does show that people want to learn more but do not know where to learn it from. Hopefully there will be more public education on retirement planning.

Contribute voluntary cash top up into CPF account to meet minimum sum

This topic of CPF has become a taboo to speak off. Most just want to withdraw everything out fearing that they can never see their money again. However, on the other side, there are people who contribute voluntary to their CPF account year in and year out. They contribute their own cash.

These few people who did that will realise that they are able to meet the minimum sum easily. When they already have more than the MS in their CPF SA account before the age of 55, the interest is actually enough to cover the increase in MS every month. With about $180,000 in the SA account, the interest is about $7000+ which is enough to cover the increase in MS. This person does not even have to worry about not being able to meet the MS any more. A person can contribute a maximum of $30,600 annually less the mandatory contribution which he/she and the employer has already contributed. From 2015, the annual limit will be increased to $31,450.

Transfer from OA to SA to meet minimum sum

There are also people who transfer monies from their CPF Ordinary account (OA) to their CPF Special account (SA). Why they do that is for a simple reason. To earn higher interest. CPF OA earns 2.5% while CPF SA earns 4%. The first $20,000 in OA earns 3.5% and the first $40,000 in SA earns 5%. With the higher interest, the money in the CPF compound faster over the years which makes it easier to meet the MS.

Meet the MS to have better retirement years

Meeting the minimum sum will ensure you have sufficient for your retirement years. Currently, CPF provides about $1200 per month for the rest of your lives starting from the age of 65. At the age of 55, if you've met the minimum sum and do not withdraw the rest of your CPF out, you can actually have extra income for yourself every year with the interest given. I would say if you do not need your CPF money at age 55, consider leaving it inside to earn more interest. You can still withdraw it out any time you want when you need it. People withdraw it out to buy something they like with their hard earned money. You can leave it inside and use the interest to buy something you like without having to touch your initial savings. Which is a better choice? Of course, you can choose not buy anything and let the money continue to grow. It's your choice.

CPF changes coming your way

There will be some CPF changes which will be announced soon. As our Prime Minister has said during his national day speech, one of the focus of the national day rally will be on the CPF. More will be announced in this week's national day rally on Sunday. Watch the national day rally on TV this Sunday evening and we'll see what will be announced. 


  1. $31,450 annual cap including the whatever that is deducted from my monthly salary and topped up by my employer?
    still, it sounds like quite a huge sum to meet.
    to have 180,000 in SA itself is a tall order since i can't contribute specifically to just SA.

    i thought about the balancing of OA and SA but it comes at the cost of having less to spend on housing.
    a little troublesome for one who hasn't bought his own home =(

    1. Hi Lakota,

      The cap is the maximum. You can contribute any amount you want as long as its below the cap. Don't have to contribute the maximum just to meet the MS.

      Yes when you transfer from OA to SA, you'll have less to use for housing. Unless you have sufficient amount of extra in your OA then you should consider transferring.

  2. Hey SGYI,

    Great informative write up for a newbie young investor like me!
    Living solely by the interest(or better still, less than) and not touching the capital is truly a great assurance to any retiree, knowing that their capital is safe and could be used in any emergency their family require.

    Meanwhile, can't wait to see what changes will there be after this week!

    The Independent Abecedarian

    1. Hi,

      I'll be looking forward to the changes too. Meanwhile, if you have any comments on the cpf system, can let me know too and share with the rest here on your thoughts on the system.