The start of the year always gets Heartland Boy in a pensive mood. It gets even more poignant now that he has a kid in tow. This has fuelled his belief that securing his own retirement could be one of the best gifts for his daughter in the future. That has inevitably become one of his new year resolutions. In order to do that, he employs a multi-pronged approach. The core pillars that support his retirement cashflow will be: (1) dividend income from his investment portfolio, (2) withdrawals from Supplementary Retirement Scheme and, (3) CPF LIFE payouts.
There is no denying that securing one’s retirement will definitely be a long-drawn process. Heartland Boy is acutely aware of that. There were times when Heartland Boy felt that he was further away from his goal than before. This often left him dejected and deflated. However, a recent encounter with a relative inspired and convinced him that securing his future retirement with CPF is entirely plausible.
Annual Interest Income of $30K From CPF Board
Heartland Boy has an extremely frugal relative who earns close to $30,000 in annual interest from his CPF funds. To have that kind of interest income, the relative would probably have approximately $800,000 to a cool million dollars sitting in his CPF accounts! Heartland Boy learnt that this amount was accumulated through a combination of savings and a staunch refusal to utilise his Ordinary Account (‘OA’) funds to buy a second property. Given that he is (i) past the age of 55 and (ii) has set aside the Full Retirement Sum (‘FRS’) in his Retirement Account (‘RA’), this relative can withdraw the remaining savings in his OA and Special Account (‘SA’) at any time. After almost 4 decades of hard work, he is now finally able to enjoy the fruits of his labour.
For instance, on rare occasions when he takes his family on vacations, he would dip into his CPF funds. Yet, he is so prudent such that he never withdraws more than the total interest he earns in his SA and OA. This means that his CPF balances only grow stronger with each passing year.
Having seen how he is able to lead a stress-free life in Singapore and rely on his CPF savings in retirement, Heartland Boy is inspired to be like him one day. More importantly, this episode reaffirms a few things to Heartland Boy:
- Compounding interest is indeed the 8th wonder of the world as coined by Warren Buffet
- Delayed gratification, i.e., starting early in your retirement planning, will allow you to enjoy the sweet fruits of labour later in life
3 Things Heartland Boy Has Done With His CPF
Heartland Boy is only 30 this year and knows that time is on his side. He has many years left for compound interest to work its magic. To make that happen, he has performed 3 simple steps with his CPF.
1. Cash Top Up Into His MediSave Account
Whenever Heartland Boy receives his annual variable bonus, he makes it a point to set aside a cash sum to deposit into his MediSave Account (‘MA’). This is because funds in his MA earn up to 5%* interest and qualifies him for tax relief (provided certain conditions are met). His eventual target is to grow the MA quickly to reach the Basic Healthcare Sum. Once the Basic Healthcare Sum has been reached, Heartland Boy will no longer be able to top up his MA, but subsequent MA contributions from his salary and employer will be funnelled into his SA. Once the SA has reached FRS, future MA contributions and interest will overflow into OA. These will help to turbo-charge the growth engines of SA and OA so that he will have more funds for retirement eventually.
* Including an extra 1% interest paid on the first $60,000 of a member’s combined CPF balances, with up to $20,000 from the OA. Members aged 55 and above will receive an additional 1% extra interest on the first $30,000 of their combined balances, with up to $20,000 from the OA.
2. Transfer Funds From Ordinary Account To Special Account
2014 marked a major milestone in Heartland Boy’s life. He proposed to his girlfriend that year and they successfully balloted for a HDB flat.
Once Heartland Boy paid the initial 5% deposit for his BTO, he transferred some funds from his OA to SA**. In fact, he has been doing this every year for the last 4 years. This is because funds in SA earn up to 5*% interest rate while funds in OA only earn up to 3.5*% interest rate. Collecting more interest today will no doubt help to grow the CPF funds quicker. Today, he has already crossed the halfway line as his SA finally breached the six-digit mark after 4 years of hard work.
3. Cash Top Up To His Special Account
If Heartland Boy still has excess cash lying around (which is sadly not often the case), he would choose to perform a Retirement Sum Top-Up. He is allowed to do this as long as his SA balance** is less than the current FRS. In addition, by making a cash contribution to his SA, he gains tax relief*** once again. You can tell that he likes to perform activities that allows him to kill two birds with one stone.
** Including the amount withdrawn from SA for investment.
*** Cash top-ups can be made to any recipient who is Singaporean or a permanent resident. You can enjoy tax relief of up to $7,000 per calendar year if you are topping up for yourself and additional tax relief of up to $7,000 per calendar year if you are topping up for your parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings. For other terms and conditions on tax relief, please refer to the section on the benefits of topping up here.
Secure Your Future Retirement With CPF Today
4 years have passed since Heartland Boy started to optimise his CPF funds. There are certainly small signs of encouragement. For instance, his SA has already crossed the six-digit mark. He is also receiving approximately 1/5 of what his relative receives in annual interest from CPF. On hindsight, his only regret was not knowing this powerful information much earlier in his life. It is often stated that the future is closer than you think. Heartland Boy encourages everyone to start to think about their future retirement today. No matter how small the steps are, they all count at the end of the day. Do not procrastinate as what we do today will impact how we live our future.
Disclaimer: This article is written in collaboration with CPF but the views expressed here are entirely his own.
Hi Heartland Boy,
Congrats on your SA milestone in hitting the magical 6 digit sum! 🙂
“Including an extra 1% interest paid on the first $60,000 of a member’s combined CPF balances, with up to $20,000 from the OA.”
With regards to the above, do you know what is the order of the additional 1% interest on the first S$60k in the CPF balances – OA–>SA–>MA?
Thanks, let me reproduce the answer from CPF website.
An extra 1% interest per annum is currently paid on the first $60,000 of a member’s combined balances (with up to $20,000 from OA).
Extra interest received on monies in the OA will go into the member’s SA or RA to enhance his or her retirement savings. If a member is above 55 years old and participates in the CPF LIFE scheme, the extra interest will still be earned on his combined balances, which includes the savings used for CPF LIFE.”
In short, only the first $20K of your OA can earn the additional 1% interest rate. This is the only limiting factor. For example, if you have $50K in your OA, only the first $20K will earn 3.5% interest rate. The next $30K will earn 2.5% interest rate. There is however no such limitations placed on SA or MA. For example, if you have $0 in OA, $60K in SA, $0 in MA, the entire $60K in SA will earn 5% interest rate.
Thanks for the swift response and have a good weekend! 🙂
If you have spare cash, wouldn’t it be better to first top up your SRS account, and if you still have spare then to top up your SA followed by MA?
While all these allow us to reduce our tax, we can only truly enjoy the full benefits of the money SRS while we still live whereas we might never get to fully enjoy our contributed monies in the RA… Granted though that there’s risk in trying to grow your SRS!
My personal preference is MA>SRS>SA. SRS would take precedence for income earners paying 11% personal income tax.
Hey Heartland Boy!
Thank God for you, and your nuggets of wisdom.
I’m still struggling to understand the need of MA, even though I get it that if I topped up MA to the bare minimum of BHS, the additional voluntary top-up thereafter will spill over to SA (which is awesome).
But what is the need of MA when I already have insurance medical policies, and employers’ insurance protection?
I don’t see a need to use MA.
Maybe I am missing something here?
How are you paying for the premiums of your own medical policies? I am paying mine through my own MA 😀
If I have reached the FRS, and I still owe 15k of accrued interest from the payment of my house. How does this work if I do not sell my house, but at the same time, would like to redraw my money
Another scenario is how does it work if I have reached the FRS, but am selling my house after 55. Wouldn’t I be able to redraw the accrued interest immediately too?
I think it is best to speak to a CPF officer with the various questions that you have. I am afraid that i may not be able to help much.