Top 5 CPF Decisions To Be A CPF Millionaire

Top 5 CPF Decisions To Be A CPF Millionaire

by with 2 Comments CPF AccumulationMoney Management
Top 5 CPF Decisions To Be A CPF Millionaire
Top 5 CPF Decisions To Be A CPF Millionaire

CPF remains one of the main cornerstone of wealth management in Singapore. There are tons of information regarding the CPF on the web and I’m happy to see that CPF is having a purposeful outreach to the retirees and even the younger crowd. I do notice a better acceptance of the CPF during my 9 years in financial services and I do hope this trend continues.

Previously, I have spoken about 5 Things You Need To Know About Your CPF. This stems from 5 mistakes people make using their CPF that I have written in the last year. One of my friend then asked me why not write about the best advice that I will give with regards to CPF.

I have reservations about using the word “advice” because this assumes that I understand the situations, the profile, the life stage and risk tolerance, etc about that individual. Hence, this article is not about best advice but perhaps best decisions you can make if it fits your situation.

If you wish to find out more, I’m organising a CPF webinar on 29th April 2021. Limited seats only. Click here to join us.

 

#1: Transfer money from OA to SA

This is a pretty easy one. Currently, the floor rate of CPF-OA is 2.5% and the floor rate of CPF-SA is 4%. You would want to put more money into an account with higher interest with all things kept constant.

Top 5 CPF Decisions To Be A CPF Millionaire Compounding Effect
Top 5 CPF Decisions To Be A CPF Millionaire Compounding Effect

For the same $20,000, you would have $68K in your CPF-OA and $142K in your CPF-SA after 50 years. This is a difference of $73K. However, I do acknowledge that some might need to use the monies in the OA for your housing loan or downpayment. If you do not have “extra” monies in your CPF-OA, you can consider to transfer it to your SA.

Please note that this process is irreversible.

 

#2: CPF-SA Shielding

At the age of 54, you might want to consider CPF-SA shielding. In a nutshell, it means keeping your monies in your CPF-SA account to get a higher interest. This is because at age of 55, the formation of your RA (retirement account) starts from your CPF-SA and than your CPF-OA.

Top 5 CPF Decisions To Be A CPF Millionaire CPF SA No Shielding
Top 5 CPF Decisions To Be A CPF Millionaire CPF SA No Shielding

This is an example of no shielding. All your CPF-SA ($150K) will be transferred in the creation of you CPF-RA account leaving $0 in your CPF-SA after age of 55.

Top 5 CPF Decisions To Be A CPF Millionaire CPF SA Shielding
Top 5 CPF Decisions To Be A CPF Millionaire CPF SA Shielding

With CPF-SA shielding, you temporarily transfer out you CPF-SA into a “safe” investment. $40,000 is left in the CPF-SA due to the rules of the CPF. At age 55, during the creation of the CPF-RA account, only $40K is transferred from CPF-SA and the rest will be transferred from CPF-OA. You then transfer the monies back to your CPF-SA which is giving 4% interest.

Remember that the crust of this is to keep your monies in the higher interest account.

 

#3: Upgrade your Medishield Life to an Integrated Shield Plan

I cannot emphasize more on the importance of medical insurance. With the new adoption of the co-payment structure of our medical plan, you can also interpret it as medical costs are getting more and more expensive.

It is important to get a medical plan that suits your needs especially during retirement age where the chances of hospitalisation are a lot higher. Having a strong medical plan is a risk management to help you remain a CPF millionaire.

 

#4: Choosing The Appropriate CPF-Life Option

Big shoutout to families here. Do you know that you can increase the amount of money you leave behind to your loved ones if you select the appropriate CPF-Life option?

Top 5 CPF Decisions To Be A CPF Millionaire CPF Life Bequest
Top 5 CPF Decisions To Be A CPF Millionaire CPF Life Bequest

If you don’t select the CPF-Life option, it will be a standard plan. Let’s look at the difference between the standard plan vs the basic plan.

Difference Between Standard Plan and Basic Plan Monthly: $124 (taking the lower estimate)

Difference Between Standard Plan and Basic Plan from Age 65 to 83: $26,784

The reason I’m using age 83 is because that is the accepted mortality age in Singapore at the moment. This is means that we are expected to live until age 83 (life is short isn’t it). For an extra $124 a month (the cost of one meal a month), your family might lose out potentially $84,368 (because $111,152 – $26,784) worth of bequest. This “extra” bequest may help your loved ones become a CPF Millionaire.

I hope this word gets out to more families out there.

 

#5: Using cash to pay for your mortgage

CPF was set up years ago as a retirement vehicle. In 1968, the government finally allowed the use of CPF for the downpayment and to service the monthly mortgage loan instalment. This means that less will go into your intended retirement (not taking accrued interest into account).

Using more cash to pay for your mortgage will leave more money that will be compounded for your retirement so that you can become a CPF Millionaire.

 

Final Thoughts By Wealthdojo

The decisions above serves as a guide and shouldn’t be taken as advice. The main emphasize is to consult an expert to see if any of the decisions above serves you. Most of the decisions circle around keeping the monies in the higher interest account (which is CPF-SA) at the moment to let it compound for the future.

Wishing you all the best to be a CPF Millionaire.

If you would like to benefit from CPF more, I have put together a free webinar to share my knowledge on it. Limited seats only. Join us with the link here.

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

5 Things You Need To Know About Your CPF

5 Things You Need To Know About Your CPF

by with 2 Comments CPF AccumulationMoney ManagementRetirementTaxes

Central Provident Fund (CPF) is a compulsory comprehensive savings and pension plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare, and housing needs in Singapore. It started in 1 July 1955 and just like our Integrated Shield Plans, there have been many changes over the years.

Like with most changes, some will appreciate it, others will not appreciate it as the “rules changed”.

Love it. Hate it. It is an asset class that we will have with us for the rest of our lives.

5 Things You Need To Know About Your CPF
5 Things You Need To Know About Your CPF

To help you understand CPF, the opportunities and optimization better, I have put together a free webinar to share my knowledge on it. Limited seats only. Join us with the link here.

 

Fun Fact #1: You cannot use your CPF to pay for your house in the past

Before 1968, CPF cannot be used to pay for a house. In 1968, the government finally allowed the use of CPF for the downpayment and to service the monthly mortgage loan instalment. Fast forward to 2021, majority of the people around me are using their CPF to pay for their downpayment and their monthly mortgage loan servicing.

This liberation allowed Singapore to have one of the highest house ownership levels in the world. However, as more money is used for housing, the original intend of CPF to help us retire may have taken a back seat. There is also the cause of concern for accrued interest.

Most of you might be servicing your mortgage with your CPF and worry that you do not have enough money in your CPF for retirement. For that purpose, I use a CPF Projection Calculator for my clients. This allow me to accurately measure the amount my clients will have in their CPF at age of 55. So far, they have found this insightful.

5 Things You Need To Know About Your CPF Retirement Age 55
5 Things You Need To Know About Your CPF Retirement Age 55

 

Fun Fact #2: Special Account (SA) was started in 1977

To help you with retirement, the special account was created in 1977. Tons of literature has been written on the special account. Among my favorites are the following. If done correctly, the following opportunities will help you in your retirement.

  1. Transferring Ordinary Account (OA) monies to Special Account (SA) to have a higher interest (up to 5%)
  2. Retirement Sum Top Up Scheme (RSTU): Top up up to $7000 into your CPF for tax deductible benefits.
  3. CPFIA: Using CPF-SA to invest (with limitations)

However, it is worth noting that the higher interest that the SA earns is not guaranteed. The floor rate of 4% has been extended by the government until 31 December 2021. The SA and Medisave (MA) rates are reviewed quarterly. The 1M65 movement takes the assumption of these rates being at 4%.

5 Things You Need To Know About Your CPF Floor Rate
5 Things You Need To Know About Your CPF Floor Rate

 

Fun Fact #3: Medisave was started in 1984

Medical inflation isn’t new. Medisave was created to help you to pay for our healthcare cost. It is not hard to understand that one of the The Hidden Cost Of Retirement is Healthcare. With healthcare cost escalating at more than 10% per year, tons of measures have been implemented to help you pay for our healthcare cost.

Among which, you can use your medisave to pay for (part of) our integrated shield plans. There are some outpatient treatments that can be paid using medisave. You also have to set aside a Basic Healthcare Sum (BHS) in your CPF. The BHS is adjust annually to keep up with inflation. This is one initiative to help with medical cost.

BHS 2021
BHS 2021

With the new co-payment medical plans now, you will have to plan for your retirement a little differently.

 

Fun Fact #4: Minimum Sum Scheme Was The First Version of CPF-Life

CPF is still about retirement. Before CPF-Life, there was the minimum sum scheme (MSS). However, as your life expectancy increase, you run a risk of outliving your MSS. Hence, the retirement scheme was updated/upgraded to become the CPF-Life. The retirement account (RA) is created at age 55. Your OA and SA monies will be transferred into the RA during then.

CPF Life Full Retirement Sum 2020
CPF Life Full Retirement Sum 2020

Assuming that you have $181,000 (FRS) in your Retirement Account (RA), you will get between $1390 to $1490 per month for the rest of your life starting from age 65. This will form part of your retirement cashflow. There are 9 options for you to choose from at age 55.

 

Fun Fact #5: There is a maximum amount of money you can put into CPF a year

You can’t just simply top up everything into your CPF. There is a maximum of $37,740 of mandatory and voluntary contributions that a person (employee or self-employed person) can make in a calendar year is subject to the CPF Annual Limit.

 

Final Thoughts By Wealthdojo

I personally like the CPF scheme because it really helps a lot of people including myself plan for our retirement seriously. I contribute to my SA every single year so that I can make use of the tax incentive and also hit my FRS in the years to come. Having enough in my medisave gives me the confidence to pay my integrated shield plans yearly and usually the interest on my medisave pays for my shield plan.

To each his own. Love it. Hate it. It is an asset class that we will have with us for the rest of our lives.

If you would like to benefit from CPF more, I have put together a free webinar to share my knowledge on it. Limited seats only. Join us with the link here.

 

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.

There were only two things certain in life Death and Taxes

How Much Is My Income Taxes [2021 Edition]

by with 2 Comments CPF AccumulationInsuranceMoney ManagementMoney MindsetSRSTaxes

It is the tax season for 2021. If you had an income in 2020, filing of your income tax starts 1st March 2021. You will NEED to file it by 18 April 2021 (e-filing) or 15 April 2021 (paper filing). If you don’t, it could lead to a fine or even a court summon. Don’t say you have not been warned.

We don’t really talk about taxes in 6 Levels Wealth Karate Methodology. In a simple gist, taxes are bittersweet to me. On one hand, I don’t like to pay taxes as it is an expenses to me. On the other hand, if I pay higher taxes, it would mean that my income is higher! I’m just glad that in Singapore, we have a really attractive tax program and we pay significantly lesser taxes as compared to people in other countries. Without going too deep into that, here’s how how much to pay for your income taxes in 2021.

 

Do you need to pay taxes or not?

Yes. You only pay income taxes if your chargeable income is greater than $20,000. Some income are chargeable and some are not. Fun fact: your winning from your TOTO/4D is not a chargeable income. Check out the full list here.

If your chargeable income in 2020 is above $20,000, you will be taxed with the progressive income tax system. Singapore follows a progressive income tax system. This means that the higher your income, the more you pay in taxes. The resident tax rates are as follows.

How To Reduce My Income Taxes Resident Tax Rates
How To Reduce My Income Taxes Resident Tax Rates

However, this does not show the effective income taxes for your income. When I first saw this table, I thought that if I earn $80,000, my tax bracket would be 7% or $5,600. This is untrue.

How To Reduce My Income Taxes Effective Income Tax Rates
How To Reduce My Income Taxes Effective Income Tax Rates

If you are earning $80,000, you will be paying $3,350 in taxes which means my effective income tax rates are 4.19%. Personally, I think it is quite fair. With the same $80,000, you would be paying $23,571 or 29.46% effective income taxes in USA.

 

Is it automatic?

If you received a letter/SMS/form that tells you to file your income tax, you will have to log in and file it yourself. This sms below is one that I received from IRAS. Typically, most of my income have already be pre-filed as I’m a self-employed working with AIA.

Income Tax 2021 Filing
Income Tax 2021 Filing

 

If you received a letter/SMS/form that tells you NOT to file your income tax, you don’t have to do it. But please verify if your information is correct and accurate.

If you didn’t receive anything from IRAS, you will still need to file a tax return if your:

  • annual net business income exceeded $6,000, OR
  • annual income (inclusive of rental income) was more than $22,000 last year

 

Tax Deductibles

Since 2020 is over, you can’t really do much changes into your deductibles. You can start planning for 2021 instead. In Singapore, we have a list of deductibles given to encourage social and economic objectives such as filial piety, family formation and the advancement of skills.

Income – Deductibles = Chargeable Income

As mentioned above, you will pay taxes on your chargeable income. This means that deductibles will play a big role in the taxes you are paying.

IRAS has created a personal income relief checker to see how much deductible you are allowed. These deductible includes SRS Top Ups, CPF cash Top Ups, just to mention a few. There is a maximum of $80,000 tax reliefs.

 

Final thoughts by Wealthdojo

There were only two things certain in life Death and Taxes
There were only two things certain in life Death and Taxes

Co-incidentally, these two can be well managed by proper financial planning or using insurance tools to achieve your financial goals. This article is meant to be a general article on how to pay taxes in Singapore. If you would like to know more, just comment on this post or contact me and I would love to have a conversation with you on the above.

Stay healthy. Stay Safe and pay your taxes.

Thank you for your contribution to nation building.

 

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

CPF Accrued Interest Trap Can You Downsize and Retire

CPF Accrued Interest Trap: Can You Downsize and Retire?

by with 6 Comments CPF AccumulationInvestment AccumulationMoney ManagementProperty InvestmentRetirement

“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

by with 11 Comments CPF AccumulationMoney ManagementMoney MindsetRetirement

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!