Four ways to optimise your CPF savings

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Lorna Tan
Invest Editor/Senior Correspondent
Published 20 Oct 2019

Here's how you may better use the money in CPF if you opt not to take it out on turning 55

I turned 55 early last month.

It's a milestone that I have been planning for since my 30s.

Part of my financial planning revolves around optimising my retirement nest egg, a topic that I have written extensively and given talks on. This is because the foundation block of my retirement plan is my Central Provident Fund (CPF) savings.

Like some of you, I'm happy to leave my CPF money where it is instead of withdrawing it on turning 55. After all, it is difficult to find another vehicle whose returns match those offered by the CPF without incurring significant risk.

With my CPF savings as my financial safety net, I can take on more investment risks with the rest of my savings to generate other cash flows.

I would like to highlight four steps that I have taken to optimise my CPF savings. However, do bear in mind that while these tips work for me, it may not be suitable for all CPF members.

1. MAXIMISING CPF

Special Account savings I'd decided before I turned 55 that I would try to keep as much of my CPF Special Account (SA) savings in my SA, since they earn an attractive interest of 4 per cent a year.

This means I have to avoid the transfer of these savings to my CPF Retirement Account (RA) on my 55th birthday. On that day, a sum of up to the Full Retirement Sum of $176,000 from my Ordinary Account (OA) and SA would flow to my RA.

To achieve my objective, I had to withdraw my SA savings and invest them temporarily in a low cost and stable investment vehicle before my birthday, and have them transferred back to my SA after I turn 55 and my RA has been created.

Last month, I invested $230,000 of my CPF SA savings - after setting aside $40,000 in my SA (in line with CPF Board's requirement) - in Nikko AM Shenton Short Term Bond Fund. My buy-sell transaction was done on the FSMOne.com platform where there is zero sales charge.

During the few weeks that my SA savings were parked in the fund, I made a net profit of $662.

On my birthday, $40,000 from my SA and $136,000 from my OA flowed into my newly created RA. I subsequently sold my holdings in the fund and $230,662 flowed back to my CPF SA and remained there.

FSMOne recommended Nikko AM Shenton Short Term Bond Fund as a "parking facility fund" for CPF because of its high liquidity - which allows investors to get in and out of the investment quickly - and its quality, so there should not be adverse impact to the fund's net asset value over a short time frame.

The fund comprises a diversified portfolio of short-term corporate bonds and money market instruments. Its overall portfolio credit rating is A minus and it also hedges non-Singdollar bonds to reduce the impact of currency volatility on the bond fund.

FSMOne added that when you put these attributes together, you get a stable investment product that pays you dividends while you wait for the next investment opportunity.

2. TOPPING UP TO ENHANCED RETIREMENT

Sum On the day my RA was created, I used the CPF app on my mobile phone and transferred $88,000 from my OA to my RA. By doing so, I topped up my RA savings to the prevailing Enhanced Retirement Sum (ERS), which is $264,000.

I plan to continue to do a cash or CPF top-up to each year's prevailing ERS in my RA until I turn 65, and enjoy a higher monthly payout of about $2,300 when my CPF Life monthly payouts commence at age 65. Without the annual top-ups that I plan to do, my CPF Life monthly payouts from age 65 would be in the lower range of between $1,960 and $2,110.

3. DAD'S CPF RA AS AN INVESTMENT TOOL

Not long ago, I realised that my dad, who is now 84, had depleted his RA savings.

It is a pity not to maximise his RA that can yield 6 per cent interest rate for the first $30,000, 5 per cent for the next $30,000 and 4 per cent for the remaining balance.

I spoke with my brother and said that I would use my dad's RA as my investment vehicle, and parked some money there.

My dad belongs to the cohort of CPF members where it is not compulsory to receive monthly CPF payouts from his RA. That way, my savings can remain in his RA and enjoy the power of compounding - the process of earning interest on your interest - over the years.

By performing the cash top-up, I also enjoyed tax relief in the following tax assessment year, subject to the $80,000 personal tax relief cap.

Should my dad need the savings parked in his RA, he can ask the CPF Board to start monthly CPF payouts to him.

4. VOLUNTARY PROPERTY REFUNDS TO CPF ACCOUNTS

As I had used my CPF savings to buy my home, I decided to do a voluntary housing refund. This meant that I made a cash refund on the principal amount which I had used from my OA to pay for my property.

When doing so, the cash I refunded will earn the 2.5 per cent in the OA as compared to having the extra cash in the bank not earning much interest. The amount to refund is entirely up to you as long as it is no more than the full principal amount and accrued interest.

Members can find out these amounts by logging on to the CPF account with their SingPass.

Do note that the full accrued interest can be refunded into the CPF accounts only if you have refunded the full principal amount.

FINANCIAL LITERACY

I am able to help raise awareness of financial literacy and can be an advocate for consumer protection in my articles, books and talks.

Responding to readers' demand, my articles have been compiled in four books.

Launched last year, my third book Retire Smart: Financial Planning Made Easy has sold more than 12,000 copies.

My latest book, Money Smart: Own Your Financial Destiny, is available at stbooks.sg and major bookstores.

My two earlier books are Talk Money and More Talk Money.

While we are chasing our financial goals, let us not forget the other things that matter, like our spiritual growth, health, family and friends.

Let me end with a quote from Mr George Lorimer, an American writer and former editor of The Saturday Evening Post: "It is good to have money and the things that money can buy, but it's good too, to check up once in a while and make sure you haven't lost the things money can't buy."