Everyone of working age would have definitely have heard of Central Provident Fund (CPF). At individual level, they either love it or do not like it. Those who do not like it may feel that it is a forced saving and fear policy changes impacting the scheme or even that it is a scam. In some cases, they may have been misinformed. Whereas those who love it understands the benefits and maxmises it.
I used to belong to the camp that did not like it mainly because of the fear of policy changes and I felt that I could earn more through investment rather than have the money sitting in CPF earning up to 3.5% (for OA) or 5% for (MA and SA).
I was too naive. Having embarked on the investing journey sine 2011, I realised that it is not easy getting a portfolio yield of 5%. From my records, I have not even reached 5% yet, even after 11 years. But bearing unforeseen circumstances, I should get above 5% this year. Due to this experience, I decided to explore CPF and join the 1M65 telegram group. As I understood CPF more, I appreciated it more. I decided to explore ways to maxmise it without topping up with cash unnecessarily as there was still a policy risks such as changes to withdrawal age.
I had two immediate priorities. The first was to transfer excess money from OA to SA to earn a higher interest while balancing the need that I still need OA for monthly deductions for housing. This was not an easy decision as this transfer is irreversible. If I am out of job, I could run into the risk of having to use cash for my monthly deductions when my OA runs out. Hence, proper planning is important and it is essential to ensure that you have at least 6 to 12 months of buffer for your monthly deductions.
Second, reach MA Basic Healthcare Sum (BHS), so that contributions meant for MA would flow to SA instead. I had actually reached BHS since 2022. When 2023 started, I did a top up of $2,500 to my MA using cash in January. Also, whenever I had deductions in MA for insurance, I topped up the shortfall in amount to reach BHS in the same month. This is because I wanted my contributions meant for MA to flow into SA. This is a win win situation for me as based on my income assessment projection, my cash top ups to MA will be eligible for tax relief.
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| Source: CPF |
Now that I reached FRS in 2023, at the age of 39, the bonus is that my OA will increase at a faster rate. This is because MA contributions meant for SA will now flow into OA instead as my SA has reached FRS.
I know that there are some flaws and risk with the scheme such as policy risk. Also, the effective interest rate is actually lower because
a) CPF interest is calculated based on lowest balance of that month (vs interest being calculated based on average daily balance); and
b) CPF interest is paid out in the start of the next year (vs interest being paid out in the next month, allowing compounding).
These 2 points, are unlike the usual interest calculation in Financial Institutes.
I do not know who thought of the CPF mechanism. But it is so well though through. What I type here covers just 2% of the CPF mechanism. Kudos to the CPF team. It is not easy coming up with the policy, refining it and operationalising it.
With this, I have already decided several years back that CPF will be my safety net. We will all have different view regarding anything, and this certainly applies to CPF too. As I am fully into investing of equities and bond, should my investments fail, CPF monthly payouts will be my plan B. I have also decided that this strategy is for me, I am unlikely to purchase a 2nd property and use it for passive income or investment. My personal take is I will consider a 2nd property only if both my spouse and I:
- max out FRS;
- have cash on hand to top up to ERS when we reach 55 years old; and
- have cash on hand for a second property.
All three conditions must be fulfilled before I consider a second property.
What is your CPF Strategy?
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