Planning your finances and retirement using CPF

CPF has been a much talked about topic in recent years. However, most discussions has centred on how it works, why it’s good etc. Little has been discussed on how best to work with it to optimise savings for retirement or for monthly expenditures.

Make CPF our savings

Our CPF savings comprises of three accounts: ordinary account (OA), medisave account (MA) & special account (SA). It is funded by us and our employers’ monthly contributions. For different age groups, a certain percentage of our salary goes to the respective accounts. The table below shows the allocation rates.

CPF OA

In my opinion, the CPF OA should never figure prominently for retirement. It should be utilised almost fully for our housing purchase. This means we should purchase homes where the loan’s monthly instalment is approximately 20% of our salary. This is so that our mortgage instalments are funded by the OA with a bit leftover being able to enjoy a 3.5% interest and can be used for later loan repayment.

Paying our mortgage entirely through CPF means we can use our take home salary for other purposes such as equity or bond investing or provide comfort to the family. It makes our life easier as no cash form our pocket is needed. Lastly, HDB housing loan is a strategic debt.

CPF MA

The CPF MA should be used for retirement, pay hospital bills and meet the stipulated minimum sums at 55. As it yields a 4% annual interest, it is strongly advised not to draw down for insurance premiums unless you are a pretty good investor. Otherwise, please do not touch it as it makes a good “long term bond”.

CPF SA

The CPF SA is your retirement and bond fund. To buy into this statement, it is important to accept this point.

We can meet the minimum sums

In my analysis, I painted a scenario where an individual starts off with a pay of $3,000 (inclusive of one month bonus), works from age 25 to 55 with a 3% annual increment. Eventually he will accumulate $360,077 in his CPF SA and MA accounts. This figure is higher than the current Basic healthcare sum and retirement sum set at $48,900 and $80,500 respectively. Adjusting for 3% inflation and 30 years period, the figures is only $314,087. Regardless, you would have accumulated more than the minimum sums.

Furthermore, my assumption is simplistic because for females, they are likely to start work at 23. Hence, accumulating slightly more than the $360,077 projection. For males, it is important to note we will receive $3,000 to $9,000 more in our CPF SA due to completion of national service and reservist cycles. This was not factored in my analysis; hence it is likely we can meet the minimum sums.

Bond/Retirement Fund

Having established we can meet the minimum sums. It can then be said: Voluntary contribution to our SA account is a “bond investment fund”. This is because whatever is voluntarily topped up into SA can be withdrawn in full at the age of 55 since the minimum sums are met.

With the ability to tap on a “CPF bond” yielding a 4% return (CPF SA’s interest) and AAA rated, it is a great bond to be invested in. Due to the low risk but decent returns, we can use the CPF SA to create a product better than insurance products sold by banks. I will advise for individuals to top up into the CPF SA preferably between the ages of 30-35 to capitalise on it.  

After 55, we can opt for our “bond investment” to be converted into an annuity plan through CPF Life. Alternatively we can withdraw and enjoy its fruits during retirement. It is important to note as we get older, our portfolio should not just be chasing returns but focus on income stability. This is why annuity plans are catered for older folks.

Click here to learn more about voluntary contributions to CPF SA.

Planning finances

So there you have it. CPF OA for housing expenses, MA for medical expenses and retirement; while the CPF SA for our retirement/bond fund.