As I approach a significant milestone in my life - the first time in more than 7 years where I will not be getting a salaried income - I thought it would be good to reflect, with the benefit of hindsight, on how I would have approached a couple of key financial decisions.
As with all posts, this is not meant to be treated as financial advice. Instead, some readers may find these perspectives helpful in approaching their own financial decisions.
#1 - Early CPF monies
Even before I went to university, I had a small amount in my CPF account because I worked in a travel firm during the couple of months between completion of NS and the start of the freshman fall term. This would have been mainly in my CPF Ordinary Account (OA) because CPF allocation rates for young people are set up that way.
On hindsight, I would have been better off if I have moved most of my OA monies to my Special Account (SA) back then. This would have let me tap on SA's 4+1% interest, which is higher than the OA's 2.5%. The drawback of such OA->SA transfers is that it is one-way, the funds will remain in the SA until I turn 55. This means that, upon such a transfer, I lose the flexibility to use this amount of OA for other purposes (typically housing) in the future. But the amount was pretty small, and honestly wouldn't have made much of a difference by the time I actually got around to a situation where I could potentially use my OA for housing. In that sense, leaving this early amount in the OA rather than transferring to the SA was foregoing potential interest.
To illustrate, assume $1000 left the OA, versus $1000 transferred to the SA. After 10 years, the total amounts including interest accrued would be around $1280 and $1629 respectively. This means that someone who did the OA->SA transfer is 27% better off after 10 years than someone else who did nothing and let the money remain in their OA.
#2 - Voluntary Contribution to Medisave Account
Almost every Singaporean starting their first job in Singapore will likely experience the joy of receiving their first paycheck, only to have it slightly dampened by the realisation that a significant portion (20%) of their wage must be channeled to their CPF account. While this reduces the amount of disposable income, it actually presents an excellent opportunity to make savvy moves to maximise the longer-term returns from CPF, and the key is to start early.
I recall focusing mostly on the non-CPF part of my salary, i.e. the "cash", and being quite fixated on maximising the interest I could earn from high-yield savings accounts such as OCBC360 and later DBS Multiplier. There was a point in time when OCBC360 was paying 3.05% interest on balances of up to $50k or so, and because of all the hype and marketing, I was more focused on this and largely left my CPF monies as-is. On hindsight, I could have optimised my CPF returns by being more deliberate.
The CPF scheme is fairly complicated, and I don't think I want to cover too much of that here. There's a lot of material available online such as this DollarsAndSense post that readers may find helpful. I wasn't aware back then, but on hindsight I would have paid more attention to the amount in my Medisave Account (MA) and considered a voluntary top-up to this account (sometimes referred to as VCMA). The MA earns the same interest as the SA, i.e. 4% plus an extra 1% on the first $60k of combined OA/SA/MA balances.
In addition to providing income tax relief, the key benefit of topping up the MA is to be able to reach the MA ceiling, known as the Basic Healthcare Sum (BHS), as early as possible. The BHS stands at $63,000 as of 2021 and increases yearly. Upon attaining the BHS, any subsequent CPF contributions that are supposed to go into the MA would flow into the SA instead (assuming one's SA is below the prevailing Full Retirement Sum (FRS) which is almost certainly the case for anyone in the first few years of work). May help to think of it as follows - once the MA "bucket" is full, any overflow from the MA bucket ends up inside the SA bucket. With both the SA and the MA allocation now flowing into the SA, the speed at which the SA grows over time is accelerated, putting the individual on a quicker path to achieving the FRS.
#3 - Retirement Sum Topping Up Scheme or OA-to-SA transfer
The other voluntary contribution covered in the DollarsAndSense article is the Retirement Sum Topping Up Scheme, sometimes referred to as RSTU. If given the option, I would personally have done the VCMA first, then considered the RSTU, but to be frank either option is okay. Similar to VCMA, the RSTU also provides income tax relief, and involves putting cash into the CPF SA to benefit from the 4+1% interest. As I mentioned earlier, once the cash goes in the SA, it will remain there until age 55, so there are some drawbacks compared to having the flexibility of cash. But as the higher-yield savings accounts began to impose more stringent requirements and/or lower overall interest rates, I ought to have considered either VCMA or RSTU as an alternative to put away cash that I did not have a near-term need for. This would have been especially applicable to any cash that was not earning the higher interest rates (banks only gave higher interest on the first $50k-$70k, and a paltry interest beyond that).
Another way to earn tap on the higher SA interest rate would be to make an OA-to-SA transfer, which I did. At that time, options to invest CPF monies were limited (Endowus - see this post - wasn't an option yet) and I wasn't keen to incur the various recurring fees charged by CPF Investment Scheme (CPFIS) agent banks. And as shared earlier, allocation rates for young people skew heavily towards the OA, so I ended up with quite a lot of money in my OA and not a lot in my SA. In order to tap on the higher interest rate, I moved a portion of my OA to the SA (one-way transfer). On hindsight, I ought to have done this earlier, especially because for the extra 1% on the first $60k of combined OA/SA/MA balances, only up to $20k of the OA balance is eligible - see useful infographic from CPF. This means that I should have gunned for $40k in my combined SA/MA as early as possible. To illustrate more clearly, using three hypothetical persons all with $60k total CPF balance:
- Person A: $45k in OA, $15k in SA+MA. Person A will earn 2.5+1% on first $20k of the $45k, in OA and 2.5% on the remaining $25k in OA, and 4+1% on the $15k. This is roughly $2075 per year in interest earned, or a blended interest rate of 3.458%.
- Person B: $20k in OA, $40k in SA+MA. Person A will earn 2.5+1% on the $20k and 4+1% on the $40k. This is roughly $2700 per year in interest earned, or a blended interest rate of 4.5%.
- Person C: $10k in OA, $50k in SA+MA. Person A will earn 2.5+1% on the $10k and 4+1% on the $50k. This is roughly $2850 per year in interest earned, or a blended interest rate of 4.75%.
I was sort of like person A for quite a while, before finally moving some OA to SA monies and becoming more like persons B/C. Later on, Endowus came into the picture, so now instead of transferring my OA to my SA, I would invest my OA into equities and let that grow over time. Even so, the OA-to-SA transfer remains lucrative because it offers 4% interest risk-free. Of course, if readers foresee needing to tap on OA for housing purchase, then they should plan accordingly, but otherwise as shared in #1, there is sizeable interest foregone if CPF monies are left untouched in the OA for prolonged periods.
#4 - Set up SRS account
Preamble: the Supplementary Retirement Scheme (SRS) and CPF are two completely different things. If you are not clear, I suggest that you read up elsewhere so that you are clear and do not confuse the two.
After working for a few years and building up an adequate emergency fund, it may be worth contributing to SRS to enjoy income tax relief. The catch? SRS funds can only be withdrawn when you reach the retirement age at the point that the SRS account is setup. So there's no reason not to set up the SRS first, put in $1, and lock in at the current retirement age (62 as of 2021). If you wait, then you lose the flexibility because eventually your SRS funds can only be withdrawn at an older retirement age. So just set up the SRS account with your preferred local bank as soon as possible.
The question of when to contribute to the SRS account (to enjoy income tax relief) is a more complex one, as it involves individual circumstances, i.e. one's income tax bracket and what one plans to do with the tax savings, so I won't cover it here
