Merry Christmas everyone! I will be busy with gatherings and celebrations over the next 2 days so I might as well send my well wishes earlier. We have finished our Christmas presents shopping and are ready for the gifts exchange tomorrow evening after dinner. The shopping areas have been really crowded during the weekends and I’m glad I no longer have to jostle with people for now.
Anyway, I logged into my mum’s Central Provident Fund (CPF) Online Services today afternoon after having lunch with my family. I was helping my mum transfer her Ordinary Account (OA) and Special Account (SA) balances to her Retirement Account (RA). She still does part-time work every week to occupy her time and receives some CPF contributions.
My mum’s CPF Life Payout Eligibility Age is 65. With every passing year, she gets closer to the day she starts receiving her CPF Life monthly payouts. At the end of each year, I help her do the OA and SA to RA transfer. My dad has already starting receiving his CPF Life monthly payouts and it has been a useful additional source of income in retirement. Hence, the importance of increasing my mum’s RA as much as possible up to the point when the withdrawal starts.
Reviewing our CPF strategy and approach is an annual exercise that my wife and I go through as well. We also do it at the end of each year because that’s when we have a good idea of our current and projected financial positions. We look at how we have performed in terms of our cash savings, investments, expenses for the year. And we think about the likelihood of us maintaining, increasing or decreasing their level in the next year while considering the possibility of major life events. Then we consider these 4 big questions and our answers to them when reviewing our CPF balances.
Should we invest our OA and SA?
As long as we remain employed, we have no incentive to pursue higher returns with our OA and SA. The 2.5% and 4% with additional 1% interest rates are decent if you take into account the current low interest rate environment in Singapore. They are relatively risk-free as long as the country does not collapse. We have taken enough risk with our jobs, savings and investments. Not keen to take any risk with our retirement funds.
Should we contribute cash to our SA for tax relief?
This is a more difficult question to answer. We have contributed cash to our SA for tax relief before but that was a while ago. We did that mainly to accelerate the growth of our SA to make up for the first years of our career when we were not working in Singapore. By now, we have mostly caught up to where we think we should be compared to our peers.
Which makes this a tax relief versus loss of liquidity argument for us. With our plan to be more aggressive financially for the next decade, access to liquidity is important for us to make it work. It’s not worth us paying less taxes in the short term if we can generate higher returns with the cash contributions in the long term. And I would like to be able to access and use my money after 10 years.
Should we transfer balances from our OA to SA?
Another tough question. We build up our OA balances as an emergency buffer for housing loan repayments in case of retrenchments or as a new deposit for a bigger apartment if we don’t lose our jobs. Our OA is more flexible in its usage options compared to the SA. But our cash holdings are increasing to the point where it can act as the emergency buffer or new deposit.
Which means it’s time to reassess the purpose of the OA. I reckon it has an additional objective now, to serve as a pipe for excess balances to flow into the SA as retirement funds. This grows our SA more quickly but without using our cash holdings. So we transferred about S$3,000 from our OA to SA. It’s not much but represents a significant step in widening the scope of how we use our OA.
Should we contribute more to our Medisave Account (MA)?
As our families and us get older, we are likely to face more medical emergencies and hospitalisations. Although the main purpose of our MA is to pay for our medical insurance premium for now, we expect this to change going forward and may even start using it for hospital bills.
Until then, we might rely on the mandatory contributions to fund our MA. It’s not a lot and can be easily wiped out in a medical emergency. Hence, the importance of not losing our jobs so that we retain our corporate medical insurance cover for our dependents and us. This is on top of our own personal medical insurance cover. When the first major drawdown of our MA happens, that’s when we would consider contributing more.