How you can save 24% of your tax, legally!

Source: CPF's website

- Written By Byte Sized Investment

Slightly more than half the year has gone and it is about time to review my annual financial plan. This is usually the time to consider budgets, cashflow and some tax planning for the remaining months of the year.

So recently, I made a trip to CPF office to find out more details on how I could enjoy some tax relief, and at the same time, boost my retirement funds.

Before we proceed, let’s take a quick look at what CPF actually is.

What is CPF?

Central Provident Fund, CPF in short, is a compulsory savings plan for working Singaporeans and Permanent Residents (PR), primarily to fund their retirement. It could also be used for healthcare, education, and housing needs. Both employers and employees contribute a mandated amount to the employee’s CPF retirement fund, where it grows and earns interest between 2.5% to 5%.

#For CPF members above age 55, they can earn up to 6% per annum on their retirement balances! You can find out more on the interest rates here.

The 4 CPF accounts are as follows:

1. Ordinary Account (OA) – for housing, pay for CPF insurance, investment and education.

2. Special Account (SA) – for old age and investment in retirement-related financial products. Interest for CPF SA  4-5% per annum.

3. Medisave Account (MA) – for hospitalisation and approved medical insurance.

4. Retirement Account (RA) – created when one turns 55 using the savings in OA and SA. It is set up to meet basic needs during old age.

#The Special, Medisave and Retirement Account are simplified to be known as SMRA.

What does the government do with the money?

CPF monies are invested in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government through Monetary Authority of Singapore (MAS). The proceeds from the SSGS, owned by MAS, are then managed by the fund manager: Government of Singapore Investment Corporation, more commonly known as GIC. GIC invest the proceeds on behalf of MAS. With the returns from investment, MAS pays the interest on the SSGS to CPF board.

Tax Relief

One can reduce up to $14,000 of his taxable income if he were to do a $7,000 cash top up into his CPF SA and another $7,000 combined to his loved ones’ CPF SA (parents and spouse). This means it reduces his taxable income by $14,000. Let’s put some context to these numbers.

According to data provided by Ministry of Manpower (MOM), the median gross monthly income is at S$3,949, and including 13th month bonus, this translates to S$51,337 annually. This is the amount that our example 28-years old Joe is earning a year in the private sector.

Joe would receive a total of $1,000 and $10,258 of tax relief from earned income* and CPF contributions** (to know more about how to reduce your tax, visit IRAS deductions for individuals here, click here to calculate CPF Contributions). His taxable income would be $40,079, and he would pay taxes of $555.53 for the assessment year of 2017.

However, should Joe choose to transfer $7,000 cash into his CPF SA, he will reduce his taxable income by $7,000, to $33,079 instead of $40,079. Joe would then instead pay $307.77 in taxes. This is a 65% decrease in taxes paid.

If Joe does another cash transfer of $7,000 to his wife and/or parents, he will further reduce the chargeable income by another $7,000, to $26,079. He will pay $121.58 in tax. That’s a 78% tax savings!

Of course, for someone who earns the median income of $51,000 a year, to have up to $7,000 transferred into CPF SA would leave Joe cash-poor as he has to juggle the remaining $34,079 (~$2,800/month), net of CPF contributions, to settle housing and car loans, insurance, food, utility, entertainment, living expenses etc. The $7,000 top up into CPF SA can only be drawn after age 55. For a breadwinner like Joe, cashflow might be a challenge. The savings on tax might not outweigh the need for cash, especially during emergencies.

Let’s explore the effects on Jack, similarly 28 years of age, who earns an average income of $6,000 a month. Working in the private sector, let’s assume Jack’s annual salary package including the 13th month would be $78,000.

Jack would receive a total reduction of $1,000 and $15,600 from his taxable income due to earned income and CPF contributions. His taxable income would be $61,400, and he would pay taxes of $2,048 for the assessment year of 2017. But Jack being financially savvier, planned his cashflow and finances well, and he can afford to transfer $7,000 cash into his CPF SA, lowering his chargeable income to $54,400 instead. Thus Jack pays $1,558 in taxes, a saving of almost $500 or 24% in tax!

Comparing the opportunity costs

Putting $7,000 into his CPF SA would leave him with around $62,400 annually ($5,200/month) after deduction from the CPF contributions for his living expenses. If Jack’s annual expenses are below $62,400, whatever income left sits in the bank earning a measly 0.05% interest. At the same time, Jack has to pay the additional $500 in tax. On the flip side, if he does this CPF cash top up, he would not only save $500, his cash top up in CPF would earn him an additional 4% interest, or $280 the next year. That is a $780 opportunity cost, 11% of $7,000!

Hence, if the $7,000 cash top up does not put too much strain on Jack’s cashflow and finances, doing this top up seems worthwhile.

This tax savings is significant.

At age 28, Jack will continue to work at least another 34 years till he reaches the official retirement age at 62. Assume his pay stays stagnant, the tax savings of $500 a year would result in $17,000 after 34 years!

As our tax is progressive, where the low income earners pay as little as 2% to no tax and the high income earners pay up to 22% to the government in tax, a person who climbs the corporate ladder would have increasing income, thereby incurring a higher proportion of tax compared to when he was much younger. In some cases, I estimated that the tax savings could be up to $21,000 in 34 years.

Anyway, this notion isn’t new, a famous blogger (AK71), who earns more than $165,000 from dividends a year, had been advocating it a long time.

Well, if you think a 24% or a $17,000 tax savings is little, wait till you see how much returns you could gain over the years with the additional $7,000 cash contributions you made.

*Deduction from Earned Income. Earned Income refers to the taxable earned income from employment, pension, trade, business, profession or vocation less allowable expenses. The amount of relief is based on your age and taxable earned income in the assessment year. For non-handicapped employees below age 55, the deduction of taxable income is up to $1,000. For more information, click here.

 **Deduction from CPF Contribution. Your portion (not the employer’s) of mandatory CPF contributions counts towards a reduction in taxable income.For every $1 you contribute to CPF, your taxable income is reduced by $1. For more information on the CPF contribution relief click here. To calculate how much CPF you will be contributing, click here.

References:

1. Deductions for Individuals (Reliefs, Expenses, Donations)
2. CPF Contribution and Allocation Rates
3. What is Ordinary Wage and Additional Wage Ceilings for CPF
4. CPF Contribution Calculator
5. Personal Relief Eligibility Tool [.xls]
6. Tax Calculator
7. Personal Income Tax calculator for YA2017 (Resident) [.xls]

This is a Guest Post by Byte Sized Investment

CPF's The Big 'R' Chat Roadshow 2016

CPF is such a big part of our lives where we use it for housing, retirement, healthcare etc. I've written various articles on how we can use CPF to have a better retirement as well as how CPF actually helps us to purchase our first home. It is indeed an integral part of our lives living in Singapore.

The CPF system is here to stay regardless if we like it or not. There have been many changes to the CPF system over the past few years where recently it was announced on more flexibility for us to invest our CPF monies in funds which would yield more returns than the 2.5% we get in our ordinary account. I will blog more on the details in due time when its released.

CPF board is holding a series of roadshows and financial talks in the months of August to November with the first one starting this Saturday at Suntec. This is a free to attend event and I think it is a good opportunity for us to learn more on financial and retirement planning. Personally, I'll be going for the event somewhere in October where I'll be more free.

Some of the highlights of the road show includes:

VR EXPERIENCE

Through an interactive and immersive 360° virtual reality experience, members can find out what is their retirement personality.

RETIREMENT ESTIMATOR

Visitors can calculate how much savings they’ll need to achieve their desired monthly income, and it’ll be given to them in a receipt!

MESSAGE TO MYSELF

After finding out more about their retirement plan, visitors can send a reminder to their future selves to keep them on track!

FUN FOR THE WHOLE FAMILY

For those of you with children, do bring them along. We have activities such as a DIY First Aid Kit for the kids, and lots of other premiums and activities for the whole family.

RETIREMENT PLANNING TALKS

One of the highlights are the free talks they have. I've looked through the topics and think it is quite good especially for those who are planning to buy their first home or planning for retirement.

They have invited good speakers who are prominent in the financial world to give their insights. Some of the topics include buying your first home and future-proofing your retirement plan.

For more information on the event, you can go to the website here.

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Should We Use All Our CPF for Housing or Save It for Retirement?

Most of us know CPF can be utilised for housing. Now comes the question if we should use all our CPF for housing? I have written a few articles on CPF before and got interested in it when a colleague shared with me how he manage to amass quite a huge sum of money in his CPF accounts by the time he was age 55. The irony was, he was not really a high income worker, earning an average of about $2k-$4k a month throughout his lifetime. He had more than $600K in his CPF accounts just before the age of 55 and he has recently just retired from work once and for all. Furthermore, he has a fully paid up HDB flat in Bishan and is still able to accumulate a significant sum in his CPF accounts.

Some of us may say its impossible to have more money for retirement now because housing prices have risen by a substantial amount. Some of us may say it’s impossible to have more money for retirement now as compared to the 1980s or 1990s because housing prices have risen by a substantial amount. According to HDB's website, the price index of HDB resale flats have risen by about 2.5-3 times. It’s true that housing prices are higher now but our salary have also risen much more than the past.

The CPF system was created to help Singaporeans take care of their retirement, housing and healthcare needs.  If we empty it, we will certainly not have enough for retirement. Let's see what we can do to balance between paying for a house and saving up for retirement.  

CPF accounts earn up to 5% interest (Below age 55)

Most people max out their Ordinary Account (OA) monthly savings in their CPF for housing. Is this a wise thing to do?  Our CPF savings earn us a risk-free interest of 2.5% per year on our OA, and 4% on our SA & MA. The first $60,000 of the combined balance (of which $20,000 comes from OA) will earn an additional 1% interest per year. If I just do a simple calculation and take $50,000 and grow it in the OA, how much would the amount be 30 years later? The answer, about $104,878. The amount which was left inside the OA and not used for housing would have grown more than 2 times. We don't even have to contribute more and the money just grows by itself. This is the power of compound interest.

CPF accounts earn up to 6% interest (Age 55 and above)

Furthermore, CPF members aged 55 and above will also earn an additional 1% extra interest on the first $30,000 of their combined balances (with up to $20,000 from the OA) from January 2016. This is paid over and above the current extra 1% interest that is earned on the first $60,000 of their combined balances.

You can refer to the below infographics to know how much interest you can earn from your CPF accounts;

Optimising OA and SA

One thing we have to take note is when we buy a house using a HDB loan, the savings in our OA will be wiped out to pay for housing. If we have $50,000 in our OA, all will be wiped out to pay for our house and the remaining will be paid in instalments monthly. We will have lesser for retirement and the amount can be quite a significant amount due to the power of compounding. $50,000 earned in the OA at 2.5% for 30 years would have grown to $104,878. This is more than twice of the initial amount.

There is an easy way to build more money for our retirement. If we take a HDB loan for our house, the required down payment is only 10%.  Let's say we buy a $300,000 HDB flat, the down payment is $30,000. If we have a combined OA balance of $80,000 with our spouse, and we take a HDB loan, all our monies will be wiped out to pay for the housing cost if we do nothing.  However, if we decide to build more for retirement and we transfer $50,000 to our SA and leave a combined balance of $30,000 to pay for the down payment, we will easily have more money for retirement.

Just by doing the above, the $50,000 would have grown to about $195,084 in 30 years’ time if we transfer the $50,000 from our OA to SA. This is $145,000 more for our retirement which is quite a significant sum of money. However, do take note there is a limit to the amount that can be transferred from OA to SA, and that the transfers are irreversible and we cannot use the savings in our SA to pay for housing.

Continued use of CPF savings for housing payments after turning 55

This is a common question which people have. Some are shocked when they realise they don't have enough money in their CPF to pay for housing after turning 55. As most housing loans will stretch for 25 years, if we buy a house after the age of 30, there is a high probability that we will still have to continue paying the monthly housing mortgage after the age of 55.

55 years old is the time where we can take out our CPF money subject to the basic retirement sum. However, there are a lot of people who have concerns whether they can use their CPF to continue paying for their housing loan after 55 years old.

Yes, we can use our Retirement Account (RA) savings (excluding top-up monies, interest earned, and any government grants received) above the Basic Retirement Sum and OA savings (including future contributions to the OA) to pay for our property, subject to the applicable housing limits.

When we turn 55, an RA will be created. The savings from our SA and/or OA will be transferred to the RA. If we wish to continue using CPF savings to pay for housing loan instalments, there are three options we can explore:

1. Apply to reserve some savings in our OA from being transferred to our RA before we turn 55, so that we can use them for housing after turning 55; 
2. Use our new CPF contributions to our OA (if we continue working after 55);
3. Apply to use our RA savings above our BRS.

The BRS is in place to ensure we have enough for retirement. We do not want to end up having a house to stay but no food to eat. This is known as asset rich but cash poor. 

Limits on using CPF for housing

Before we even think about using all our CPF for housing, it would be good to know that there are limits on the amount of CPF savings we can use. Using all our money in the OA for housing would possibly mean lesser for retirement. Hence, the housing limits, Valuation Limit (VL) and Withdrawal Limit (WL), are in place to ensure we have enough for retirement. Let's take a closer look at what VL and WL are.

Below is a table from CPF website to show the application of  VL and WL:

Loan From	Type of Home	Applicable Limits	Conditions to use CPF beyond VL
HDB	New flat	No limit	None. You can use your CPF until the loan is fully paid.
	Resale HDB flat/DBSS flat	VL	Below 55 years old To set aside the current Basic Retirement Sum (BRS) in your Special Account (SA)* and Ordinary Account (OA). 55 years old and above To meet the BRS in your Retirement Account (RA), SA* and OA. * including the amount withdrawn for investment. For bank loan, you can only use your CPF up to WL.
Bank	New HDB flat/Resale HDB flat/DBSS flat	VL and WL

Here's a nice info graphic to help you calculate VL and WL:

Conclusion

CPF can be used for housing but there are certain limits to how much we can use so as to ensure we have sufficient for our retirement needs. The power of compounding interest is what makes a lot of people richer and if we just have a little knowledge and leave some money in our CPF accounts, we would surely have more money for retirement.

To me, it is pointless to be asset rich and cash poor. If we buy a big house but have nothing left for retirement, it would be a very sad thing at the end of our golden years where we are supposed to be enjoying life more. Plan ahead, think far and our lives could be much better in the future. 

Why young Singaporeans don’t need to worry about buying their first HDB Home in Singapore?

Almost 2 years ago in February 2014, I wrote an article on "How much money does a couple need to earn in order to afford a $300,000 HDB flat?" and it went viral. Buying their first home seems to be a concern among young people in Singapore. Is it really that scary to own a house as a young person living in Singapore? It is actually not so scary if we know what to do and how to buy a house which we can afford comfortably. Owning a house should be an enjoyable process and not a stressful situation which we put ourselves into. So what can we do to make owning a house in this high housing price era more enjoyable? Let me show you how it can be.

Paying For the Down Payment of A New Home

All of us would know that we can use our CPF to buy a house. The down payment for a house is 10% for HDB which means any of us who buy a $300,000 HDB flat would need to come up with $30,000. This is certainly quite a huge sum of money for young couples who want to own their own home. For couples, saving up for their wedding, the renovation works and the honeymoon is already stressful enough. Thankfully, we do not have to save up additionally for the down payment of a house because CPF has automatically saved it for us.

A young person, age 35 and below, earning about $2,500 a month in Singapore would have about $20,000 in his CPF OA account within 3 years of working. 23% of his/her salary is contributed to the CPF OA every month by himself and by his/her employer.  The money in CPF OA can be used for housing which can be used to pay the down payment of a house. Together with his or her spouse, one can safely afford the down payment of a house within 3 years of working.

I started working early in my life right after my National Service. After working for 5 years, I already had more than $60,000 in my CPF accounts in total. I did not start out with a high salary, only $1,700 per month when I just started working and CPF actually helped me accumulate quite a good sum of money. Now, I don't have to worry about housing cost. The savings which I have accumulated can be used for other stuffs such as wedding and renovation costs.

Paying For the Monthly Instalment of A New Home

Besides using CPF for the down payment of a new home, young couples can also use CPF to pay for the monthly instalment of their home. A couple earning $2,500 will have $575 contributed to their CPF OA each. Together, they have $1,150 every month from their CPF OA to pay for the monthly instalment of their new home. If they buy a home within their means, they don't even have to fork out extra cash to pay for the housing loan.

If we buy a home at $300,000, after 10% down payment, we'll need to take a loan of $270,000. The monthly instalment for a $270,000 loan with HDB at 2.6% for 25 years will be $1255 per month. Now, this is still about $100 more than what a couple with combined income of $5000 would have in their CPF Ordinary account.

However, if we and our spouse have a combine income of $5500, the monthly contribution to our OA would be more than sufficient to pay for the housing loan instalment for a $300,000 HDB flat. The instalment will still be $1255 while this couple their combine CPF contribution in their OA is $1265. This is more than enough to pay their housing loans fully by CPF without the need to come out any cash.

Furthermore, there are additional measures to help young Singaporeans in owning their first HDB home a more fuss free experience. Let's take a look at the last part below on the subsidies which we'll be able to get.

CPF Housing Grants for a New Home

For BTO HDB Flats

I've researched and summarised the grants available for a new HDB home. This is for first time applicants only. The special housing grant only applies to 2 room, 3 room and 4 room flats in non-mature estates only. 

Average Monthly Household Income Over 12 Months	Additional CPF Housing Grant	Special CPF Housing Grant (Not applicable for 5 room HDB)	Total Grants
Up to $1500	$40,000	$40,000	$80,000
$1,501 to 2,000	$35,000	$40,000	$75,000
$2,001 to 2,500	$30,000	$40,000	$70,000
$2,501 to 3,000	$25,000	$40,000	$65,000
$3,001 to 3,500	$20,000	$40,000	$60,000
$3,501 to 4,000	$15,000	$40,000	$55,000
$4,001 to 4,500	$10,000	$40,000	$50,000
$4,501 to 5,000	$5,000	$40,000	$45,000
$5001-$5500	Nil	$35,000	$35,000
$5501-$6000	Nil	$30,000	$30,000
$6001-$6500	Nil	$25,000	$25,000
$6501-$7000	Nil	$20,000	$20,000
$7001-$7500	Nil	$15,000	$15,000
$7501-$8000	Nil	$10,000	$10,000
$8001-$8500	Nil	$5,000	$5,000

The CPF Housing Grants will be fully credited into the CPF Ordinary Account of the Singapore Citizen (SC) first-timer applicant, who must be listed as a co-applicant. No cash is disbursed. For a couple applying for the HDB together. each applicant will receive half of the full grant amount.

We can get as high as $80,000 in CPF housing grants. That to me is quite a substantial sum of money. Even if you and your spouse have a combined income of $8000, you would still be eligible for the Special CPF Housing Grant if you are not purchasing a 5-room HDB.

*For more information on the CPF housing grants for first timer applicants, please refer to HDB website here. 

For Resale HDB Flats

If you don't have time to wait for a BTO flat, you can also apply for a resale flat. Resale flats are known to be more expensive than HDB flats but not to worry, there are some other grants to help in this cost.

Family Grant

The grant available for this scheme is $30,000. To be eligible, your household income must not exceed $12,000 (revised from $10,000 before 24 August 2015). You must be a Singaporean and form a family nucleus with another Singaporean or PR. This grant is only available for first time home buyers.

Additional CPF housing Grants

The additional CPF housing grants is similar to that for the BTO applicants as below:

Average Monthly Household Income Over 12 Months	Additional CPF Housing Grant
Up to $1500	$40,000
$1,501 to 2,000	$35,000
$2,001 to 2,500	$30,000
$2,501 to 3,000	$25,000
$3,001 to 3,500	$20,000
$3,501 to 4,000	$15,000
$4,001 to 4,500	$10,000
$4,501 to 5,000	$5,000

Proximity Housing Grant (New from 24 August 2015 onwards)

Under this scheme, you can receive $20,000 in grant.

The eligibility criteria is:

Your parents/ married child are:

• living with you in the resale flat
• living in an HDB flat in the same town or within 2km
• owner-occupants of private property in the same town or within 2km

The above grants definitely come in handy to help subsidise the housing cost for first time home buyers. Grants are disbursed into our CPF accounts for our housing needs.

Should I Buy The Biggest HDB Available?

More often than not, I've heard suggestions to buy the biggest HDB flat as early as possible or even on their first home. But, is this a wise advice for young couples? For a fuss free home ownership experience, I strongly believe we should buy a HDB flat within our means.

In Singapore, loans for HDB flats are limited to 30% of our gross monthly income. This is the mortgage serving ratio (MSR) set by the MAS to make sure home owners do not over stretch their finances. If we lose our jobs or should interest rates increase, the MSR of 30% will make sure we can still service our loans.

CPF also has a First Home Calculator to help home owners calculate and make sure they do not overstretch their finances. If you're planning to buy your First Home, you can check out the calculator here.

Another point to consider is that our first home is actually not an investment but a liability. This is because even if you sell the house you're staying in, you still need to buy another house to live in. If you're planning to buy a property for investment, your first home should be bought conservatively so as to save up capital for a second investment home.

Do young people have to worry about buying their first HDB home in Singapore? For me, I can say that when the time comes for me to apply for my first home, I do not have to worry much at all. The money in my CPF account is more than enough to cover all the necessary cost for my first home. Furthermore, with the CPF housing grants, the experience of owning a home will be much better.

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Related Posts:
1. Should Couples Buy A 5 Room HDB Flat For Their First BTO Application?
2. The 3 Big Decisions in Life - Marriage, Buying a House and Retirement

Never Rely On CPF For Your Retirement?

In my previous post on "You Can Never Retire If You Only Save 10% Of Your Income", I said if we only save 10% of our income, it is impossible to retire. There was a comment in that post saying that since we can't retire on 10% savings, then maybe we can retire on our CPF savings which we contribute 37% of our salary on a monthly basis.

In case you didn't realise, yes we contribute 37% of our monthly salary to our CPF. This is quite a high savings rate to speak of. 20% is contributed by us and 17% is contributed by our employer. It goes into 3 separate accounts mainly the ordinary, special and medisave account.


Most of us use CPF to pay for housing loans and medical insurance

However, as we all know, most of us will use our CPF money to pay for our housing loans and also medical insurance. In most cases, young people now and in the near future will need to pay about $1200 per month for their housing loans base on a $300,000 price HDB flat. If we divide equally between husband and wife, each will need to pay about $600 for their housing loan. For a fresh graduate who earns $3000, $600 is almost all that he contributes to his ordinary account. Assuming if salary remains constant, this person would have close to nothing in his ordinary account when he reach 55.

It is a good idea to rely on CPF for your retirement? If we think that we don't need to have our own personal savings because there is CPF, will we be in big trouble?


How much CPF will we have after using it for housing?

Let's demystify how much CPF will we have after using it for housing. Many people say that the future generation of young people will have no money left in their CPF after paying for the high housing loans. Is this true?

I've done the calculation and here is the scenario and the result:

• Starts with $2500 salary and assuming it increases 3% per year 
• Buys $300,000 HDB flat ($275,000 after grant)
• Pays $556/month for housing loan from CPF OA (Divide by 2 with spouse)

From the above scenario, this person will have $580,978 in total from all 3 CPF accounts even after finishing paying for his or her housing loan. Doesn't sound too bad after all. 

From a chart perspective, here's how the CPF money will grow:

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

How much would we have if we did not use our CPF monies at all?

On the other hand, if we did not use our CPF money at all to pay for housing loans, how much would we have?

The number is......  $852,515

This is $271,537 more than the previous example of using CPF for housing. If you notice, the amount paid for the housing loan is only $166,800 per person ($556 x 12 months x 25 years). But, if the money is left inside CPF, there is about $100,000 more due to the interest compounded in the CPF accounts.

Here is the chart for the scenario of not using CPF money at all:

Look closely at the chart again. After age 55 to 65, the person who doesn't use his CPF money at all is a millionaire at age 65. In fact, he has more than a million dollars at $1,152,048. Just by a starting salary of $2500 and growing at 3% per annum, a person can become a millionaire by age 65 if he choose to leave his money in his CPF account.

*Above figures are estimated and assumes no overflows from MA in excess of Medisave contribution ceiling

Should we use or keep our CPF money?

Using your CPF to pay for your housing loans or keeping your CPF money inside to earn higher interest is a decision we all have to make. What I have done is simply to show you the difference between using and not using your CPF money. The example above is never perfect with various assumptions. Some may say a starting salary of $2500 is not realistic and a consistent 3% salary increment doesn't sound realistic too. What if we lose our job along the way? Yes, these are all valid concern but the model above is just to give you a rough guide base on the assumptions.

There are also instances where we will earn higher salaries which is even better for us. I have done the calculations before that if we save $1500 per month and invest it at 5% ROI, we will achieve a million dollars in 28 years. CPF gives us interest of about 2.5%-5% for us who are below 55. It is possible to accumulate a substantial amount of wealth through the CPF system alone. Never rely on CPF for your retirement? It really depends on how you use it. Most of us will not be able to rely on CPF for retirement if we choose to empty it early in our lives.

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Related Posts:
1. Changes to the CPF - CPF Focus Group Discussion
2. The affordability of housing in Singapore and the various housing grants available

How I Amassed More Than $120,000 After 4.5 Years of Work

Is it possible to save up $120,000 in just 4.5 years of work? Just a few days ago, I was doing a financial health check for myself using an excel spreadsheet which has since became my best friend for financial planning. I was surprised that after adding up, I had more than $120,000 (Inclusive of CPF). How did it happen?

In this post, I'll show you what happened over the past 4 years plus and try to think back on what I did to accumulate more than $120,000. If you think that I started with a high paying salary, you're wrong. I started with just $1700 per month back in October 2010 as a diploma graduate and to make things worse, I had to pay close to $20,000 for my part time university course fees all within the 4.5 years.

How did the $120,000 came about?

1. 5 figure savings before I started working full time

I saved up about $10,000 before I started working full time. The money was saved up from the allowances given to me by my parents while I was still a student, saved up from the many part time jobs which I worked as a student, and saved up from the NS allowance which I got.

$10,000 is not a huge sum of money bearing in mind that it was saved up over many many years. But, it is the habit of saving up in my younger days which made it easier for me to accumulate $120,000 earlier than later.

2. Monthly and Yearly Savings Goals

Is it that hard to save $120,000 in 4.5 years? If we break it down, to have savings of $120,000 in 4.5 years, we need to save about $30,000 a year which is $2500 a month. Most of us will not be able to save $2500 a month when we just started working.

Thus, besides having monthly savings goals, yearly savings goals would make more sense for most of us. If we factor in our bonuses and other income throughout the year, it may just work out to an average savings of $2500 a month.


3. CPF contributions helps us to accumulate more

I know there are many negative sentiments on the CPF out there. But, the truth is the money in our CPF accounts are part of what we have. We contribute 20% of our salary to our CPF accounts and our employer contributes an additional 17%. This adds up to a saving of 37% of our income which is quite a significant amount. Currently, I have more than $30,000 in my CPF OA account in just 4 years of work. This will come in handy when I need to buy a house in the future.

Moreover, CPF gives interests in the range of 2.5% to 5%. Right now, I can receive about $2000 in interest on a yearly basis.

4. Increase income and savings exponentially

My salary has increased more than 60% over the past 4 years. This is more than 15% increase every year. I've also built up additional income through stocks investing and writing. As I earn more, I can save more which leads to both income and savings increasing exponentially.

Most of the time, we spend more when we earn more. That is perfectly normal but we have to bear in mind to control such that the increase in spending does not exceed the increase in income. If we earn $300 more this month, we may want to increase our expenses by $100 but should not increase by $300 or more.

5. Save more than 50% of income

We can save almost 100% of our gross salary if we save more than 50% of our take home pay. Confused by this statement" Don't worry, let me show you an example:

Let's assume we earn a gross salary of $2500 per month currently. Our take home pay after deducting 20% for CPF would be $2000. If we save 50% of this $2000, it is $1000 in savings in cash. The 20% we contribute to our CPF is $500 so that is additional savings. Our employer contribute another 17% which is $425 as savings in our CPF accounts. Adding up all of this, we get $1000+$500+$425= $1925. When we save 50% of our take home pay, we can easily have a savings of $1925 per month.

Saving 50% of our take home pay:

Gross Income	Net Income	Expenses	Cash Savings	CPF employee	CPF employer	Total Savings
$2,500	$2,000	$1,000	$1,000	$500	$425	$1,925

$1925 is a savings rate of 77% from the gross salary of $2500. If we can save 50% or more of our income, accumulating wealth is not difficult.

I generally save more than 50% of my salary and in certain months, I could even save close to or more than 100% of my income due to the passive income which I've built.

Here's my income and expenditure chart for 2013 and 2014:

Let me summarise on how the $120,000 came about in 4.5 years:

• Save up early in life even when you are still studying. If you're a student, you can save from your allowance and part time jobs. Aim for a 5 figure savings. 
• Set monthly and yearly savings goals. 
• Remember CPF is part of your savings too. It helps us to save for a house so we do not have to worry about it
• Increase income and savings. Save more when you earn more. Create passive income.
• Save more than 50% of income to accumulate wealth faster. A 50% savings on our net salary plus 37% savings of our gross salary in CPF adds up to a total of 77% savings altogether on our gross salary. 

Throughout the past few weeks, I've heard a lot of feedbacks that young people are pessimistic for their future. They are worried that they would not have enough money for their lives. I hope that through this post, young people would feel more optimistic for their future. There is no lack of money when we set our path right.


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Related Posts:

1. Save 75% of your income to retire in 7 years
2. Income and expenditure update for the past one year plus

CPF Advisory Panel's Recommendations - 3 Basic Options You Need To Know

The first round of changes to the CPF system has been announced just a few days ago. From what I see, most of the changes are just renaming of the terms which were used previously with a few other additional flexibility to the system. This was indeed what a lot of people want for the system, to have more flexibility in handling their CPF monies. Let's take a look at the changes recommended.

The changes can be sum up into 3 different options as below:

1. Basic Retirement Sum (BRS)

It was previously not known to many people that they can actually pledge their property to leave just half of the minimum sum and draw out the rest in cash. Many people are still confused by the word minimum sum which has been completely removed in this round of changes. So, if you're still confused by what the term minimum sum means, you don't have to crack your head about it any more. Just forget about it.

The BRS will be set at $80,500 and be increased 3% every year from 2017 to 2020. If you set aside this BRS of $80,500 at age 55, the basic payout you'll be eligible at age 65 is about $650 to $700 for life. Your property will still be pledged in this instance. This BRS sum is half of the Full retirement sum below.


2. Full Retirement Sum (FRS)

Now, this is where the word minimum sum is replaced. The FRS is what we called the Minimum sum previously. This amount will be set at $161,000 for those turning 55 in 2016. If you set aside this amount at age 65, you can expect a full payout of $1200 to $1300 a month for life. If you do not pledge your property, most likely you'll be under this option.


3. Enhanced Retirement Sum (ERS)

This is a new initiative which is being recommended. The amount is set at a maximum of  $241,500 (3x the Basic Retirement Sum). This means anyone who wants to top up extra either from their excess CPF or cash to their CPF Life (Retirement Account) can do so to enjoy higher payouts at the payout eligibility age of 65. If they top up to the maximum of $241,500 by age 65, they can expect to receive $1750 to $1900 per month for life.


There you go, 3 basic options that you need to know for the changes to the CPF system. Besides the 3 basic options, there are also other additional details which you may want to take note of:

1. Flexibility to withdraw your Retirement account savings at age 65

If you turn 55 from 2013 or later, you can withdraw up to 20% of your Retirement Account savings at age 65. This is inclusive of the $5000 that can be withdrawn from age 55.

2. Draw down age is renamed to Payout eligibility age 

The payout eligibility age is at age 65. This is the time where you can start getting monthy payouts from your CPF account depending on the amount you have set before (BRS, FRS or ERS).

3. Start your payouts later, up to age 70

There is an option to start receiving monthly payouts at a later age. The advantage is every year you defer the payouts, monthly payouts permanently increase by 6-7%.

4. Top up your spouse’s CPF so that he/she can also have higher payout

Any amount you have above your Basic Retirement sum can be transferred to your spouse's special or Retirement account if you choose to.


Conclusion

The 3 basic options basically allows us to decide how much we want as payout for retirement when we reach age 65. You can receive about $650-$700 per month under the BRS, $1200-$1300 per month under the FRS and a maximum of $1750-$1900 per month under the ERS.

I suppose more changes will be announced on a later date. With the 3 options and the flexibility to withdraw 20% of our retirement savings at age 65, I think in a sense, it does make the system more flexible. The basic purpose of the CPF to provide for retirement needs still applies. Let's see what other changes will be announced in due course.

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Related Posts:
1. Queries on CPF minimum sum - Pledging your property
2. Changes to the CPF - CPF Focus Group Discussion
3. Return our CPF?

Changes to the CPF - CPF Focus Group Discussion

Few months ago during the national day rally speech by the Prime Minister, it was announced that there may be possible changes to the CPF scheme to allow for more flexibility. A CPF advisory panel was appointed by the Ministry of Manpower in September 2014 to study possible enhancements to some key aspects of the CPF system, to make it more flexible to meet the needs of more Singaporeans and provide additional options in retirement.

I was at the first CPF focus group discussion last Saturday. I got to meet and interact with a few other people and know what were the concerns they had with regards to the CPF system. CPF was not a topic of interest to me until somewhere this year when I started to hear a lot of negative things about it. I had no idea what is the Minimum Sum or what it means. What I only know was that a portion of my salary is deducted every month into the CPF.

Because of the negativity spreading around, I decided to look deeper into what was going on. Writing a financial blog at that time also spur me to produce an article on the CPF system which I wrote here: All about CPF minimum sum and CPF life. My conclusion is, CPF is a social safety net that is for our basic retirement needs. Without it, our society may be in chaos with people having no money for even the basic necessities such as food during retirement.

But, as with every system, there will always be more improvements to be made. Many feedbacks were given and I personally heard from readers who emailed me as well as friends, family and colleagues who discussed about the CPF. As a young person living in Singapore, I see some of my older colleagues regret that they did not plan for retirement earlier in their lives. They had to continue working even when they don't like it. They do not have a choice to do what they like in life rather than just working in something they don't like.

During the focus group discussion, we formed into groups of 6. My group had only 5 person with 2 of the advisory panel members sitting in to listen. We could interact and discuss relatively well with the small group.

The 3 questions that we discussed were:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”
2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”
3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

I shall not elaborate further on what the general answers were during the discussion as you can probably read from news report by the media. They did quite a good job capturing what was being discussed during the focus group discussion.

For myself, here are my personal views to the 3 questions:

1. “How much of your retirement expenses should be covered by payouts from your CPF savings? And how much will you need to cover your basic expenses?”

I would like CPF to cover all of my basic necessities such as food, utilities bills, transport etc. In today's dollar value, a figure of $1000/mth would be quite comfortable. This is just for basic expenses


2. “How much should be allowed to be withdrawn at a lump sum at 65, bearing in mind that withdrawing this amount will lead to lower CPF payouts?”

Withdrawing a lump sum at age 65 is not needed if we have adequate money for retirement. I would choose not to withdraw any lump sum unless I really have no savings left. The money in the CPF still earns a 4% risk free interest in the retirement account. Moreover, having $155,000 inside the CPF at age 55 would give us an estimated $1200/mth for the rest of our lives starting from age 65. At 4% interest rates, the $155,000 in your RA account would grow to an estimate of $229,437 when you reach age 65 (assuming there are no further contributions). If we calculate, this would mean a 6.27% annual draw down rate (($14,400 divided by $229,437)*100%). This is not a bad draw down rate at all considering you get payouts for the rest of your life under the CPF life scheme.


3. “If there was a CPF LIFE plan that had lower payouts at the start, but increased every year to help with increases in the cost of living, would you opt for it?”

This question is tricky. I think starting to draw down at age 65 is already late and if we still get lower payouts at the start, then the amount becomes very little. With a fixed payout, there would be a worry of not having enough in later parts of our lives but I guess who still cares about increase cost of living when they are in their 70s?


I don't really like the idea of only drawing down our CPF at age 65. Since there're considerations to make the CPF more flexible, perhaps there could be an option to draw down earlier but of course with lesser payouts. An example would be to draw down maybe $900-$1000/mth at age 60 instead of $1200/mth at age 65. This is just my suggestion.

I did ask around and I always hear that draw down age at 65 is too late. Perhaps age 60 would be a good age to starting drawing down their CPF. A concern was that those who are above 60 risk losing their jobs more than anyone else.

There will be more focus group discussions organised for the next few months. If you are interested to participate for the subsequent focus group discussions, please refer to this website for more information: www.cpfpanel.sg. You can sign up for the discussions through the website directly. Information on the next available sessions are also listed on the website itself.

You can also send in your views and feedback on the CPF by emailing to cpf_panel@mom.gov.sg

I did talk to some of the advisory panel members and they were sincere in listening to feedbacks so they can make better informed decisions. We can all do our small little part to give our ideas and suggestions.

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Why it is hard for most Singaporeans to retire early?

I was about to publish some of the post on early retirement which I wrote over the weekends until I saw an article by business times today which shows how much Singaporeans are saving? These statistics was from the recent household expenditure survey which was published last week. Most of us would already have read that average monthly household income increased to $10,500. This number was met with many sarcastic remarks on social media. We would think how can this be true when most of us do not have that kind of household income? Is their average really average?

The purpose of my post today is not to debate on whether the income figures were correct or not. Rather, it is all about the report by business times which showed another angle of that report. How much are Singaporeans saving?

Here are the saving figures:

• The 41st-60th percentile, who are essentially the middle class, are saving about 44%. 

This 44% seems to be a good savings rate but if we look closer, this savings include employer and employee CPF contributions. This is essentially not cash savings which we have in our bank. If we deduct away those CPF savings, we're left with about 9% to 15% cash savings since most of our CPF contributions is around 30%-36%. 9% savings is quite a low amount. If you calculate, saving just 10% of your income will probably take you 51 years to retire.

Credit: http://www.aag.com/

Furthermore, the figures do not include non consumption expenditure such as income taxes and house purchases. We know that house purchases make up a big chunk of our expenditure. This makes the figures rather distorted.

It is no wonder Singaporeans find it hard to retire in Singapore. Most still rely on their CPF savings but the problem is most of us also use the CPF for housing purposes. If we continue to do that, we'll always realise that we can't meet the minimum sum and can't retire comfortably.

If we want to retire early at age 55 or even earlier, then we need to have more cash savings. It is no use depending on the CPF for savings and then realise you can't take most of your money out at retirement age. CPF was structured as a social security or safety net. It is not for us to take the money out in lump sum for enjoyment in old age. If we want some enjoyment and not having to worry about not enough money, then we need to plan and save up in cash.

In the next few posts that I'll be publishing, I'll show you how most of us can retire early. Early retirement means in 10 years and possibly within 7 years. I've done up some calculations which will show you how exactly it is done. Watch out for the next posts soon.

Once you reach that stage, you can continue working but you don't have to work for money any more. You can start to work on the stuffs you love, spend more time with your family and kids and even contribute more to society. People who have enough money to retire don't usually sit there idling around. In fact, they become more motivated to produce things which are beneficial to the society as compared to when they are just working for money.

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