**“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.

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Accrued interest is the interest amount that *you would have earned if your CPF savings had not been withdrawn* for housing. The interest is computed on the CPF principal amount withdrawn for housing on a *monthly basis* (at the current CPF Ordinary Account interest rate) and compounded yearly.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

- The down-payment that was used
- The monthly installment that was used
- 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%

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*?

# 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.

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It’s still possible if downgrade to studio apartment after 55.

Hi Sinkie,

Thank you for your comment. I personally think that a studio apartment would be very difficult after 55 according to my assumptions. The reason is because a typical studio apartment is already around $500K to $600K now. If we do the same compounding, it would be worth more than the 4Bedded at 55. Hope that answers your question.

Haha, I’m referring to the HDB studio apt scheme for oldies (2rm flat).

Those who can think of moving into another private property as part of retirement have “rich people problems” & won’t be reading strangers’ blogs for retirement help or hints. LOL!

Hi Sinkie,

Thanks for clarifying on your comment. Apologies in making an assumption that the studio apartment will be a private studio apartment.

Let’s put the Short-lease 2-room Flexi Flat numbers to the test. As usual, we will be taking some reasonable assumptions to reach a reasonable conclusion.

The cost of the Short-lease 2-room Flexi Flat depends on the location of the property. In Nov 2019 BTO version (Tengah, Angmokio and Tampines), the cost differs. Let’s take the average of the 3 cost for the purpose of calculation: ($110,000 + $145,000 + $175,000)/3 = $142,000. We will note that the cost are “starting prices” so these are conservative numbers.

(Source: https://esales.hdb.gov.sg/bp25/launch/19nov/bto/19NOVBTO_page_7523/about0.html)

Short-lease 2-room Flexi Flat Scheme started in 2016, there might not be enough data to show if the prices will these property will increase. However, as noted is Annex C (https://www20.hdb.gov.sg/fi10/fi10297p.nsf/ImageView/CORPORATE_PR19082015_Annex%20C/$file/Annex+C.pdf), the base prices depends if you are first timer/second timer or not which we will not go into.

Let’s assume there will be a simple compounding of 3%, the cost of the Short-lease 2-room Flexi Flat will be $297,000.

Returning back to the article, the cash proceeds will still be $103,013 due to the accrued interest effect. However, his/her CPF will now have more money for retirement. Most likely, he will be able to fulfill his full retirement sum and withdraw more from his CPF after the age of 55. The numbers will be from here will be personalised (his income, bonus, etc) and the case might be too specific. However, I do feel this downsize will allow the person to have a better retirement (if he/she is okay with the conditions of having a Short-lease 2-room Flexi Flat and also the income eligibility).

Hope that answers your question! Happy National Day!

Just some random thoughts that i wanted to point out:

1. The amount returned to CPF can also be used for purchase of the next retirement home. This means to say when u sell your flat for 800k, and purchase your new flat at 600k, you are simply putting 100k nett back to CPF and getting 100k cash proceeds.

2. It is important to note that HDB flats fo depreciate in value after a certain number of age. You will always be able to purchase a way older flat which will not yield at the same 3% per annum as compared to a almost new HDB. This means that you will probably spend alot less than 600k to acquire a retirement home, with the rest of the balance going into retirement account, increasing your retirement payout later on.

3. The title of your articles focus on CPF accrued interest is a trap, but i hardly see much reasoning/proof on this particular hypothesis. In fact, accrued interest is still your own money which ultimately contributes to your retirement funds as a monthly payout, or cash drawndown (if you managed to hit FRS or BRS with property).

Hi Honest_me,

Thank you for your random thoughts. Those are not random at all. I’m happy and think that they are great thoughts to be considered as well.

I agree on you with point 2 that HDB flats might depreciate in value after a certain number of years. The assumption of 3% is well questioned. It is a shame that I do not have data of the appreciation of HDB flats that are more than 30 years old. Anyway, here is for your reading pleasure.

https://www.asiaone.com/singapore/price-50-year-old-hdb-flat-can-appreciate-over-next-10-years-khaw-boon-wan

For point 3, I agree with you that the accrued interest is still our own money which ultimately contributes to our retirement fund. The “trap” can happen if the individual have to get his money “lock-out” to fulfill BRS/FRS. He might not be able to purchase another property if there is insufficient OA-balance and cash savings. At that age, he might have difficulty getting a loan and so might need to use a significant amount of cash to purchase/downsize to another property.

Hope that clarifies. Happy National Day!