How retiree in Singapore saved over $1.6m in her CPF

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67-year-old wants to encourage younger Singaporeans to be like her and similarly plan early for the same outcome

A 67-year-old retiree holds a record of sorts that most of us would yearn for - she has more than $1.2 million in her Ordinary Account (OA) of the Central Provident Fund (CPF).

If that's not impressive enough, she has another $400,000 in her Retirement Account and over $50,000 in her MediSave account.

These savings allow her to enjoy close to $50,000 in annual interest from the CPF alone.

The obvious million-dollar question is how she achieved such high savings.

It is certainly no mean feat because Janet (not her real name) not only refunded all the money she had withdrawn from the CPF when she was younger, such as for a mortgage, she is still doing something that few retirees would consider - making further contributions.

She is putting in the maximum allowed every year - $37,740 - even though she has been retired for about four years.

Thanks to her own contributions, her Special Account, which was initially depleted after the funds were moved to the Retirement Account, has grown to over $15,000.

In addition, she uses only cash savings for her expenses because she is keen to grow her CPF money further before she starts to draw down when she hits 70, as part of her long-term planning.

Janet, who attached a photograph of her CPF statement in an e-mail as proof of her balances, shared her experience with Invest because she wants to inspire younger Singaporeans so that they can similarly plan for the same outcome.

The key is to start monthly contributions as early as possible, because any monthly income above $6,000 will not be eligible for contribution. So such balances have to be gradually saved over three to four decades.

"I have shown that it can be done," Janet wrote in her e-mail.

She can easily withdraw over $30,000 of interest annually now without affecting her principal sums. She can also access a further $2,000 or more a month from her Retirement Account, but chooses not to do so until she is 70 so that the payout then will be higher.

"I am not trying to show off or anything like that, but to reiterate the point that it is possible to accumulate your savings in CPF and achieve your million-dollar status even at age 55," she notes.

"Like what they say, compounded interest is the eighth wonder of the world and this is particularly true in the case of CPF. This is especially so if you start working from age 25 and then save and grow the money there for the next 40 years."

How to have high savings
The CPF Board's latest annual report noted that over 240,000 members aged 51 to 70, or almost one in five of the members in this age group, had over $500,000 in total "regrossed" balances in their accounts.

This means that these members should have these high balances based on their contribution history and interest earned. But the reality is that many could have much less because they used a significant portion of their CPF funds to pay for housing loans.

Indeed, the use of CPF for mortgages is the main obstacle preventing you from having high savings.

So if you plan to buy a home or are paying off a loan, here are four tips that will allow you to meet your payments and still grow your CPF.

 

1. Retain some money in CPF

Most home buyers want to spend every dollar in the OA first so that they can have more cash. But you should look at CPF as your back-up plan in case you face the misfortune of losing your income.

For instance, if you can retain $50,000 in your OA and your monthly repayment each month is $2,000, the balance will ensure that you can still pay for your loan for two years, even if there is no income during this period.

And if you suffer a pay cut, you can increase the use of CPF to tide yourself over until times are better. You will not be able to do this if you start with an empty OA from the word go.

Retaining the $50,000 will also enable you to earn an annual interest of $1,250 even if you use all your CPF monthly contributions to service your home loan.

 

2. Use more cash gradually

If you can afford to, it is a good time now to reduce the use of CPF to pay off a home loan. It does not make sense to use money that earns 2.5 per cent to pay off a loan with a lower interest rate.

Even if you are committed to a loan with a higher interest rate, it is still better to use cash since interest rates for savings deposits are at all-time lows.

It is easy to change. Just log in to your myCPF account and put in a lower amount that you are comfortable with. Try to set a target to lower this amount at least a few times a year until you can pay your monthly mortgage entirely with cash.

 

3. Cut loan tenure

You don't have to be stuck with a home loan for the long haul even if you signed one for 30 years. It does seem bleak if you have to pay for it until you are 65 if you took it out when you were 35.

So you should set a goal to make a lump sum loan repayment every year or every other year. The aim must be to slowly cut the tenure to 25, 20, 15 and even 10 years.

You should also ask for a lower tenure if you can refinance the loan at a lower interest rate so that you can pay bigger sums monthly. If you need motivation to do this, just read your monthly loan statement.

You should know that paying a home loan is akin to taking three steps forward and then moving two steps back.

Just when you think your monthly repayment has knocked off a part of the loan, the accrued interest will be added on. This means only a small portion of the loan is actually paid off monthly.

So the only way to make a significant reduction in the loan is when you make a lump sum payment.

 

4. Refund home loan to CPF

Congratulations if you have paid off your mortgage. Your OA would have been growing steadily since you stopped using CPF for payments. Just like how you set targets to reduce your home loan, you should now set targets to give your OA a regular boost by refunding the money that you withdrew for your home loan.

Go to myCPF, under the "My Request", "Property" and "Make a housing refund with cash". You should see the amount that you have withdrawn for your loan plus the accrued interest on the sum withdrawn.

Some people wonder why they are charged interest on their own money that had been used to pay off the loan. But this interest is not a cost; it is just a signal that you have missed earning this much in interest in CPF because you took the money out for the home loan.

The good news is that if you can slowly refund the principal sum and accrued interest back to your OA, you not only regain interest that was "missed", you can have a high level of savings in your CPF again, as if you have never used a dollar to pay for your home loan.

This is the secret to how people who have dutifully contributed to their CPF since they were young achieve about $700,000 in their OA when they are in their early 50s.

If you can achieve this, you will stand a chance to have $1 million or more in your OA when you are in your 60s. Even if you miss the mark by half, you will still be among the next generation of retirees who can still have decent savings for old age.

But is putting so much money in the CPF a good idea when you can use it for investment?

Janet says: "It is not so easy to make money in the stock market, and I think it is better to leave your money in the CPF and treat it like an insurance policy where you can withdraw at any time you want after 55."

 

Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.

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