Last updated on April 3rd, 2018 at 12:17 am
Since 2016, I have noticed a trend in optimising CPF for retirement needs – Transferring CPF OA to SA.
There are multiple blog posts from avid financial bloggers who popularise the idea of transferring your CPF OA to your CPF SA to earn a higher interest rate. There’s even this viral concept that you can achieve S$1M by the age 65, posted in Straits Times paper.
The report assumed that you could consistently transfer your excess OA to your SA till you hit your Full Retirement Sum (FRS). The FRS is $171,000 as of Jan2018. (Would you like to know what is your FRS when you reach age 55? Click here to know more>>)
There are various push and pull factors put forward by various writers.
Why People Transfer From CPF OA to SA?
The main reason is the high risk-free rate of 4% given by the CPF Board.
In the current low-interest environment, by transferring from a low-interest account of 2.5%(CPF-OA) to a relatively higher interest account of 4%(CPF-SA), you are actually earning 1.5% more return.
Assuming now that you are age 35. If you transfer now, this will translate into 33% more interest returns in 20 years due to the compounding effect. What that means is that, if you have transferred $20,000 into your SA, you would have earned $11,000 more or $43.8K. This effectively increases your retirement nest funds significantly!
Why Wouldn’t People Transfer From CPF OA to SA?
The main reasons are:
- Immediate needs to pay for mortgage loan for home stay
- Opportunity cost to purchase investment property during property down cycle
CPFOA monies are an important source of funding for property purchase for the average Singaporeans.
Assuming you are Age 35, 20% of your monthly pay is contributed by you to your CPF(OA, SA, MA) accounts without fail. Of which, 8% of your monthly pay goes into your OA. Assuming your gross salary is $4,000, and your take home pay is $3,200, your total CPF contribution, including employer contribution, is $1,480. $920 goes into your OA.
Your monthly CPF OA contribution of $920 can be used to fund your mortgage, which translates to a loan amount of $202K (25 years HDB loan assuming 2.6% p.a.), fully funded by CPF OA only!
Why I Won’t Be Transferring My CPF OA to SA?
As for me, the reason I won’t transfer my OA to my SA is because I believe in investing it for higher returns and not settling for just 4%p.a interest! There are multiple products that are qualified under the CPFIS product list and we have blog posts on them.
With proper long term investment, you may achieve say 6%? This means you ultimately build a bigger retirement nest.
Based on the rule of 72, a 2% return will double your amount every 36 years.
| Interest Rate | Double Your Money |
| 2% | 36 Years |
| 4% | 18 Years |
| 6% | 12 Years |
What that means is that if you can invest your CPFOA at 6%p.a , you are effectively cutting your time to achieve your retirement target by 6 years early.
For example,
| Monthly Contribution | Investment Rate | Years | Final Amount |
| $920 | 4% | 20 | $328,749.99 |
| $920 | 6% | 20 | $406,112.93 |
By investing at a higher rate of return of 6%, you are getting $77,000 more when you are age 55!
Furthermore, along the years of accumulation, you have the option to use it as a buffer for your mortgage loan in the event you are out of a job. Transfering to CPFSA is a one-way ticket.
Is 6%p.a achievable?
You may be thinking that CPF interest is risk-free while investment return is non-guaranteed.
You are right in an academic sense. But it is possible to achieve it by following a few guidelines.
1. Stay invested long enough by putting time on your side.
2. Invest in a correct vehicle or portfolio that delivers the return you want
3. Rebalance your risk by buying low and selling high through portfolio balancing.
4. Diversifying through time – Dollar Cost Averaging
We have case studies mentioned in the blog post attached below. You can check it out.
Further pointers
CPF SA 4% can be changed due to the macro environment. It has gone down to 2.5% in 1993/1994 before).
In my personal opinion, invest to achieve 6% net of fees is not rocket science. You just have to do a few things approximately right and the return will take care of itself.
As Warren Buffet said, and I quote,
It is better to be approximately right than precisely wrong.
If you have no idea how to do your own investment, you can consult a qualified financial planner with ChFC or CPF certification to do a proper investment planning to increase your odds of achieving it!