I keep hearing this recommendation to push more money into their CPF Special Account as a good recommendation.
I think this is dangerous.
And there are reasons why I think voluntarily doing that is unwise. However, there are genuine benefits for a voluntary contribution.
This article will explore the benefits of voluntary contribution but mainly why there are reasons not to do it as well.
The Benefits of topping up CPF SA with cash
You get to Enjoy Tax Relief on Your Taxable Income
In one year, you can top up your CPF SA with cash up to $7000.
Not just that, you can top up family member’s CPF as well.
The main benefit is that you enjoy tax relief from your income tax.
So if you top up $7000/yr to your SA, your tax relief for the upcoming year is $7000. You can top up to $14,000 ($7000/yr for yourself and $7000/yr for family members)
If your next year annual income is $85,000, and you contribute $14,000 in top ups, your taxable income is reduced to $71,000.
This will move you possibly to a lower tax bracket. (Tax relief info here)
The Cash Flow Yield on Your CPF SA is Higher than Cash
As a form of wealth building, the CPF SA yields at least 4% or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher.
For Now. Currently, the SGS bond rate is 2.6% so if there are changes, the CPF SA would yield 3.6%.
This is higher than the fixed deposit rates for your cash of 0.25%.
The benefits of topping up CPF SA with CPF OA
You can also transfer your CPF OA monies to CPF SA. You can do this up to the current minimum sum (note that your minimum sum will change), which is $161,000 (refer here to the past minimum sum progression)
The main benefit is that CPF SA’s yield is higher than that of CPF OA, which is 2.5% currently.
So why do I think you should consider carefully not to do this?
Here are some considerations
1. Transfer from CPF OA Account to CPF SA Account is One Way
There is no turning back.
Once you transfer from cash or CPF OA to CPF SA, you cannot reverse the process. The money will be in CPF SA.
This creates an inflexible situation that there are some risks that you need to be aware of, and need to evaluate carefully.
Sometimes, life has a way of making you learn that you need some form of liquidity when you least expected them.
2. You cannot Cash Flow for an Early Financial Independence
The CPF OA and SA works in conjunction to fund a fixed retirement milestone. The current age is 65 years old. Judging by realistic rule of thumb and that we will live longer, this age will be pushed back.
Even in current scheme, they are encouraging us to delay till as late as 70 years old so that the monthly annuity cash flow we can withdraw is larger.
Even in the earliest we can only withdraw excess money after setting aside of our minimum sum at age 55.
However, what if realistically you could retire early near 40 to 45 years old?
They would be able to achieve financial security or financial independence before 55 years old just like me.
If you put all the money to be locked up in CPF SA, you have less assets to cash flow so that you can enjoy the wealth asset earlier than the retirement age.
Choosing to put money from your disposable income into your Wealth Machine(s) will enable you to build up a machine that will one day able to give you wealth cash flows:
- to take risky career bets
- start a side business
- be financially secure
- be financially independent
- evolve to a part time job
3. Emergency Situation: What if You are hit by Unplanned Unemployment?
I could have said unemployment, but usually if you have soundly plan for an unemployment, you would have adequate liquidity that these complications would not likely occur.
If one spouse suddenly gets fired from his or her job, cash flow profile for the family suddenly becomes very challenging.
Chances are, you do not even budget, or have very little awareness of your current cash flow situation.
When you get unemployed, there are some big ticket obligations that you need to take care of:
- daily subsistence expenses
- car loans
Had you not transfer your CPF OA to SA, or top up with your cash, you would have cash holdings to pay for mortgage or other obligations temporary.
CPF OA is rather useful in this scenario to tap upon to pay the mortgage.
Even if you have investments in unit trust, or stocks or Singapore Savings Bonds, whether they lose money or make money, you can liquidate them, if you feel that your home or car is important enough to maintain.
If you had transferred the money to CPF SA, you have a problem there.
The situation is made more critical if the income between spouses is uneven, and the one with the larger income is unemployed. The most critical case is when both spouses becomes unemployed.
My friend Mr 15 Hour Work Week considers his CPF OA to be part of his emergency fund. This means that his CPF OA is able to fund roughly 4 years of mortgage payment.
4. You Lose the Opportunity to Start or Fund a Business
Once in a while, you came across a good idea, and that you require some start up capital.
This business opportunity may work or fail, but if you do not have money that you can tap upon, such as selling your unit trust, stocks or fixed deposit to deploy to this venture, this becomes a missed opportunity.
5. Learn to build wealth to make up for the difference in interest of CPF SA
Be more proactive. Make an effort to learn to build wealth.
With effort you can be freed from the prison that only CPF SA offers you the highest risk adjusted returns. Do not be trapped that your only available options is cash, CPF OA and CPF SA.
CPF OA is investible. If you invest at greater than 4% yield, you have beaten the CPF SA. Take a look at the high yielding dividend stocks here that we have listed on the Singapore Stock Exchange.
You need competency to evaluate but don’t be lazy. You can do it.
6. Devils Advocate: What if your CPF SA money is not there?
Here is me throwing out the conspiracy scenario that was the trigger for all these very fruitful discussion on CPF.
What if Mr Roy Nerng’s investigative work was right?
Due to the lack of disclosure, we cannot verify what our CPF is invested in eventually. Was our CPF eventually deployed by the GIC and Temasek in their higher risk investment?
Perhaps there wasn’t enough money for the baby boomers to withdraw in a lump sum when they reached 55 or 65 years old.
That is why the official retirement age is pushed back to 67 years old. There may not be adequate liquidity to pay them in lump sum!
The worst case scenario is that, what if the 4% floor for CPF SA was not renewed?
Our system is based on forced saving in a bank we cannot see, while in other countries, they pay taxes which goes into a bank they cannot see.
The folks overseas are planning to be less reliant on their government pension for retirement since the pension is underfunded.
For each of these 6 reasons not to top up your CPF SA, you may have counterpoints for them.
You could be that rare unicorn in Singapore that have such elaborate planning that most of these reasons are not valid for you.
In that case, topping up for the tax relief looks attractive.
My fellow blogger Christopher at Growing your tree of prosperity states that if you are relying on your CPF for retirement, then you are not ready at all.
I agree to that, more so that you should trust yourself more than trust the system. You control your own destiny and you reap the benefits from your own performance.
If your conservative planning shows that you can retire before the age of 65, then work towards it.
Get into a position that whether you top up CPF SA or not doesn’t matter.
If you are a disciplined person who saves 40-70% of your take home income, use your CPF to pay for your home. Don’t worry so much about the minimum sum.
Create your own retirement.
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