CPF Accrued Interest Trap Can You Downsize and Retire

CPF Accrued Interest Trap: Can You Downsize and Retire?

“My plan is to downsize my house to use the (capital appreciation) money for retirement.”

I was walking past a coffee shop and I happened to hear the above statement. The man who looked like he was in his 50s seemed to radiate confidence about his statement. I wonder if it was possible. While we are going to explore that today, do check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

CPF Accrued Interest Trap Can You Downsize and Retire

CPF Accrued Interest Trap Can You Downsize and Retire

Context Setting

To buy a home in Singapore, I would say a good majority of us will take a loan. As we are able to take up to 90% (HDB loan) or up to 75% (Bank loan) of the property prices, this means we have to put a down-payment. To illustrate, a $400,000 HDB property would require us to fork out at least $40,000 as down-payment.

To pay for this down-payment, I know most people would use their CPF-OA to pay for it. At the same time, most people will also use their CPF-OA to service their home loans.

This means that our CPF-OA might be wiped out throughout our loan bearing years.

What most people fail to recognized is that we are charged interest for using our CPF-OA, this is known as accrued interest.

 

CPF Accrued Interest

Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.

(Source: How does the Board calculate the accrued interest on the amount of CPF used for my property?)

As CPF is meant for our retirement in our planning of Wealth Management, to safeguard the “loss of interest” during the years the monies are used for property, we need to refund the CPF-OA the following.

  1. The down-payment that was used
  2. The monthly installment that was used
  3. The accrued interest (interest that we would have received from our down-payment and installment if we didn’t withdraw from CPF)

 

Will the plan work? Let’s put it to the test

Let’s fixed a few reasonable assumptions to form an illustration. We will looking at downsizing from a 4 bedded HDB to a 3 bedded HDB after the loan tenure of 25 years.

HDB 4RM Value: $400,000

Down-payment: $40,000 (10%). Buyer Stamp Duty (BSD): $6600. Legal Fee: $3000.

Loan amount: $360,000. Monthly Installment: $1634. HDB Loan: 2.6%

CPF Accrued Interest Trap Can You Downsize and Retire Calculations

CPF Accrued Interest Trap Can You Downsize and Retire Calculations

In month 1, we add the down-payment, BSD, legal fee and the first monthly installment of $1634 to get $51,234. From day 1, the accrued interest would already be $106.74. In 25 years time (300 months), the total accrued interest would have already accumulated to $184,698!

Assuming the property market grows at 3% annually, your $400,000 property will now be worth $837,511. Isn’t that great? Your profited $437,511!! Before you think that your profit will be $437,511 and can be used for retirement, here is when the accrued interest trap comes in.

When you sell your house, you have to return back to your CPF the down-payment, the monthly installment and also the accrued interest. This would mean that you have to return $724,498 ($539,800 + $184,698) into the CPF. Your cash proceeds will only be $103,013.

Wait there’s more! 

Because you are downsizing, you can use your existing CPF-OA to acquire a HDB 3RM. Using time value of money, a HDB 3RM wroth $300,000 now will be worth $628,133 in 25 years time if it grows at the same 3%. You have to make sure that you have enough money to acquire that HDB 3RM.

Wait there’s even more!

You have to pay the HDB resale levy of $30,000 (as of 2020), agent fee of $8,375 (1%) and also legal cost of $3000.

Wait there’s even some more!

After the age of 55, you have to set aside your Full Retirement Sum (FRS) which is a combination of your Ordinary Account and your Special Account. This might post some problems to use your CPF-OA to acquire a HDB 3RM if you are unable to reach your Full Retirement Sum.

And lastly..

Assuming that you can acquire the HDB 3RM without problems, would $113,013 be enough for retirement?

CPF Accrued Interest Trap Can You Downsize and Retire

CPF Accrued Interest Trap Can You Downsize and Retire: Oh Damn

 

Conclusion

Retirement planning is often more than a single solution. There are many caveats that stumble the best of us. To ensure your retirement is secure, work together with someone that you trust and exhibit good expertise in this matter.

In my experience helping people plan for retirement, I realised those that retire in comfort usually have a combination of retirement tools ranging from properties, stocks, annuity and also insurance.

Thank you the uncle at the coffee shop who inspired me to write this article. Please help to share this article so that this article may find its’ way to him.

 

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!

5 mistakes people make on their cpf

5 mistakes people make using their CPF

Wealth Management in Singapore typically entails the use of CPF. Given the wealth of knowledge shared by finance bloggers and planners out there, there is no lack of information but only misunderstanding of information. There are merits for each hack below but if used unwisely, it is often irreversible and regrettable.  The below are the top mistakes 5 people make using their CPF.

I will be writing on the hot hacks and why it won’t be good strategy for a certain group of people.

5 mistakes people make on their cpf

5 mistakes people make on their cpf

Mistake Hack #1: Transfer from OA to SA when…

I have a friend who transferred his CPF-OA amount into his CPF-SA after reading many articles available. He certainly benefited from the higher interest in his SA. He was happy until the day he wanted to purchase a house. After realising that his OA is empty, he would have to use cash or wait for his OA to accumulate back to a significant lump sum before he can buy the desired property.

 

Mistake Hack #2: Top Up $7000 into SA for Tax Relief when…

The same friend decided on top up $7000 into his SA and thought he could do it indefinitely to claim for tax relief. He thought it was a win win situation as his $7000 can grow from the higher SA interest rates and also reduce the amount of tax her have to pay.

5 mistakes people make on their cpf SA Top Ups

5 Mistakes People Make On Their CPF SA Top Ups: https://www.iras.gov.sg/IRASHome/Individuals/Locals/Working-Out-Your-Taxes/Deductions-for-Individuals/CPF-Cash-Top-up-Relief/

He didn’t realised that it is only applicable if his CPF-SA has not reached the current Full Retirement Sum (FRS). As he already transferred his OA amount into SA, he will be able to meet FRS in a few years time and won’t be able to have the relief anymore.

 

Mistake Hack #3: Our Returns are Guaranteed…

While this is not a hack, most people think the returns are guaranteed. In fact, the rates are reviewed every quarter. However, CPF hasn’t change their rates in years and so most people think the returns are guaranteed. Most people might have forgotten that it was changed once in 1999 (Post Asian Financial Crisis) from 4.41% to 2.5% for CPF-OA. I’m personally in favor of the rates not changing.

5 mistakes people make on their CPF Interest

5 mistakes people make on their CPF Interest

You can find out more on the change in 1999 here: https://www.cpf.gov.sg/Assets/common/Documents/InterestRate.pdf.

 

Mistake Hack #4: Topping up their CPF when…

This is a common one. In most of my conversations, people top up their CPF when they have a “feel” or “sense of urgency”. While, we are living in a fast pace world, there is only one month in the calendar year to top up your CPF that make sense.

CPF interest takes the lowest balance of the month to calculate monthly interest, compound it and credit it at the end of the year. As of the time of writing, I unable to find the source from CPF board that states “lowest balance of the month”. It is based on tribal information from seedly etc.

In this case, we should ideally top up our CPF in (around 3rd week) January (compounding effect for the rest of the year), so that in February onward, the lowest balance is already been boosted by the top up and taking into account any tax reliefs from the financial year.

 

Mistake Hack #5: Allowing SA and OA to be transferred to RA..

For those that are servicing your home loan with CPF-OA, you can continue to do so by stopping your OA balance to be transferred to the RA. One of my friend got a shock of his life when he realised his OA is empty after 55. If you still depend on your CPF-OA on your housing loan, please do set aside some saving for that purpose.

5 mistakes people make on their CPF Housing

5 mistakes people make on their CPF Housing: https://www.areyouready.gov.sg/YourInfoHub/PublishingImages/CPF%20Retirement%20Booklet.pdf

 

 

Conclusion

Please do take the CPF-Hacks in their respective context. CPF is not easy to understand but is still relevant and important as part of your wealth management journey.

Thank you SK/PG Mastermind for the inspiration for me to write this article.

 

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!

How to prepare for an emergency. Emergency Funds

Is it too late? How do I prepare for an emergency?

How to prepare for an emergency

How to prepare for an emergency: Oh shit~

Many countries in the world have started with various attempts to separate humans from each other. It could come in the form of social distancing, working from home and quarantined. It seems like a global emergency is just around the corner and we are scrambling to prepare for this emergency. The Singapore government just announced a SGD$55B Resilience Budget package to help Singaporeans tie over this period.

 

Is it too late to prepare for this emergency?

From the Oxford dictionary, Emergencies are serious, unexpected, and often dangerous situation requiring immediate action. I feel the most defining thing about emergencies are that they are unexpected. Looking back, the reason why COVID-19 went out of control is that not many believe it to be serious and so it becomes unexpected.

While governments out there are trying their best to take care of their citizens, is there anything we can do during this emergency? And is it too late to prepare for this emergency?

 

Keep Calm and Prepare

Wealthdojo is a personal finance blog and so the suggestions will be finance related. We do understand that being mental strong and physically healthy is important in this period, but that’s an article for another day. It doesn’t matter where you start, it only matters that you start now. Here are some financial preparation that you can consider in this emergency.

  • Emergency Fund
How to prepare for an emergency. Emergency Funds

How to prepare for an emergency. Emergency Funds

This is the bedrock of your financial planning. When your income source stops (in normal days, it could be a lost of job), bills will continue to pile up. You will still need to eat, have a roof to stay and also feed your dependents. COVID-19 has pressed the pause button for millions of people in the world. Look at Singapore Airlines, senior management pay cut by 10-15%; staff offered voluntary no-pay leave. This would mean that the employees income source will take a pause for this period of time. If they do not have an emergency fund, how will they be able to continue to feel themselves in the months to come?

Solution: Have an emergency fund of between 6 to 9 months of your expenses.

This will ensure you can continue to live your life while waiting for the situation to be better. (Read more: Life Hedge: How to prevent your life from being a roller-coaster (Part 1))

 

  • Insurance
How to prepare for an emergency. Insurance

How to prepare for an emergency. Insurance

Call me bias but this is the most important time to review your insurance portfolio. Insurance takes care of medical conditions that are often unexpected (who can predict that they will have an heart attack) and serious. COVID-19 just serves as a reminder that health is the most important asset that we will ever have and COVID-19 is just one illness out of the whole repertoire of potential illness. Why are we resisting on planning for the other illness when they will rob us our ability to earn in the years to come?

Solution: Review your insurance portfolio

This will ensure you can continue to live your life while recovering from your illness. (Read more: Life Hedge: How to prevent your life from being a roller-coaster (Part 2))

 

  • Learn new things

There are so much information out there and I can never say that I truly know everything. In the midst of a crisis, the most important thing is to learn or even relearn certain things. It could be range from things like “how to maintain your relationship with your neighbor” to “gardening”. For Wealthdojo, we believe in continuous learning and reading. We have specially prepared 2 things for you to learn and explore new things during this COVID-19 period.

Solution3 recommended books to read and CPF Optimization and Opportunity Webinar

We will be having our first ever CPF Webinar on 23April2020. Do join us to learn more on what you can do with your CPF in the next webinar.

CPF Optimization and Opportunity - Launch 1

CPF Optimization and Opportunity – First ever webinar

 

  • Watchlist

The last one is dedicated to all the investors out there. It is bargain season in the stock market now. Many companies are now priced at historically low levels. However, if you don’t have a game plan on what to buy and what price to buy, be prepared to let opportunities slipped away from your hands.

 

Wishing you the best in this period of time. We hope that everyone can remain calm and healthy during this season. It is a season of crisis but it is also a season of opportunity. Invest with what you have and don’t borrow money to invest in this period of time. If you are new to investing and need help, do talk to me using the contact form or any methods listed below.

God Bless.

If you read until here, thank you again for your patience and your support over in 2019. I hope that in 2020, Wealthdojo can continue to value add you. Let us know what you think in the comments below. This is a working article. The above doesn’t represent my stock recommendation in anyway. Please read our disclaimer for more information.

I hope to nurture genuine relationships with all of my readers. Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!

 



 

Enhanced CPF Housing Grant

How to Benefit from the Enhanced CPF Housing Grant

When the government announced the Enhanced CPF Housing Grant, it was a mixed reaction. Those in the sandwich generation cheered, some were disappointed. The question is, how do you benefit from the Enhanced CPF Housing Grant?

Enhanced CPF Housing Grant

Enhanced CPF Housing Grant

Let’s first start by asking ourselves, what is the Enhanced CPF Housing Grant all about? (Read more: Make The Most Of Your CPF)

HDB Eligibility

The Enhanced CPF Housing Grant that is going to streamline current Additional and Special CPF Housing Grants as an attempt to make public housing affordable and available for everyone.

Firstly, the income ceiling for buying the HDB has increase to $14,000. This means that HDB will be available for more people to buy. Currently, those that are “earning too much” is not eligible to buy a HDB. To put it really simply, if your average gross monthly household income is less than $14,000, you are eligible to buy a HDB.

Enhanced CPF Housing Grant Income Ceiling

Source: HDB Website

Enhanced CPF Housing Grant Eligibility

Now that you know you are eligible to buy a HDB, the question is how much grant are you entitled to for the new Enhanced CPF Housing Grant. The answer is, it depends. It will depend on the followings.

  • Average Monthly Household Income (The higher your Household Income, the lower the grant)
  • Lease Coverage (To get full grant amount, the flat must have enough lease life until you and your spouse is 95)
Enhanced CPF Housing Grant Table

Source: HDB Website

Typically, the average monthly household income in Singapore for First-Timer Families (Assuming a couple who graduated from an University and working now) will be around $5000, this brings the grant amount to $40,000.

There are many permutations as to how this new Enhanced CPF Housing Grant will affect people. There will definitely be people who will compare between the old scheme and the new one. For Wealthdojo, we believe that it is better to well understand your own situation rather than compare your grant to everyone else. You could always consult the HDB Board to better understand your situation.

How will this affect Property Prices?

In Wealthdojo, we are a platform for people to make informed financial decisions. We want to understand how this Enhanced CPF Housing Grant will impact our financial journey as a whole. The below are my personal opinions and strictly my own.

  • There will be an increase in property prices. A grant makes buying the property affordable for a selected group of people. It doesn’t mean the price has dropped. Loosely speaking, we are not taking into account location and various other consideration for buying a property. An isolated trend table for Punggol shows that over the years, there has been an increase in price for BTO flats.
    Enhanced CPF Housing Grant BTO Price Changes

    Enhanced CPF Housing Grant BTO Price Changes

  • Private Property Prices will increase. A simple chart like this show that there a simple positive correlation between private and HDB prices. Logically, if we compare a similar size HDB and a Private Property in the same area, the price of a private property will be higher.
    Correlation HDB Private Properties

    Correlation HDB Private Properties

Insurance for Properties

Buying a property might be the biggest purchase for most people, it is also important to plan for insurance for your properties. (Read more: Insurance for Investors). In a simple nutshell, these are the 3 insurance that you have to get for your property.

  • Fire Insurance

If you are living in a HDB, it is compulsory to get a fire insurance. As the name suggest, it covers for fire BUT the scope of the coverage is very small. HDB fire insurance compensates for damage to the building (ONLY). As a general rule of thumb: If it wasn’t already there when you got your house keys, then it’s not covered by HDB fire insurance. That’s why we need to have content insurance.

  • Home Content Insurance

In a fire, naturally the items in the house will get damaged. This will include items like Air-Con, the fridge, the television, the sofa, the bed, etc. Not only do you need to purchase these items again, you will need to renovate the house again to bring it back to living conditions. Most home content insurance covers for renovation and also home content.

  • Mortgage Interest Insurance

Most people will get a loan from a bank to finance their property. For banks, they will need an assurance that you will be able to pay for the loan. That’s why they assess the loan amount from your salary. The biggest risk a bank (and yourself) will take is if a person is unable to finance the loan. What happens in an event of a critical illness (Read More: Life Insurers to change definition of Critical Illness) such as heart attack and it robs away the ability for a person to earn money? Would this be extra burden on your partner? The bank has the right to claim back the property leaving your family on the streets. Would you want that to happen?

In summary, there will be new changes in the future too. Some things will change while others will remain the same.

In Wealthdojo, we believe in bespoke financial planning. Whether it is money maximization, insurance or investing, we believe that everyone is different and the planning should be suited for you.

All opinions above are my own. Please view our disclaimer page to understand more. 

I hope to nurture genuine relationships with all of my readers. Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page

Now that you’ve read about learnt about how to benefit from the Enhanced CPF Housing Grant , I challenge you to read this article (Careshield Life: Disability Insurance Singapore) to push your understanding further!

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