DISCLAIMER: THIS POST IS SPONSORED BY CPF. THEY ARE – LIKE US – WILDLY PASSIONATE ABOUT MAKING SURE YOU CAN RETIRE IN PEACE.
Many younger Singaporeans think that paying for their HDB flats with their CPF Ordinary Account (OA) is very normal.
But to be honest, this is a decision not to be taken lightly. That’s because CPF is also supposed to help you with your (basic) retirement needs. It’s not just for housing.
The moment you decide to pay for your house using CPF, you are channelling funds away from your retirement. (Because the money from your OA eventually goes into your Retirement Account (RA) at age 55)
Now, before you get alarmed, I want to reassure you that you’re not necessarily in trouble.
You see, there are two schools of thought when it comes to using CPF for your housing needs.
“I pay with cash and not CPF”
The logic here is that by paying in cash, your CPF savings can continue to earn interest for you. How much interest? Have a look.
|The first $20,000 in your OA||3.5% p.a^|
|Everything above that $20,000 in your OA||2.5% p.a|
|If you transfer OA savings to your Special Account (SA)# (irreversible move, don’t do this without thinking through)||5% p.a^|
^Includes extra interest on the first $60,000 of a member’s combined balances (capped at $20,000 for OA). Read more about CPF interest rates here.
#Those aged 55 and above can transfer SA or OA savings to RA. Read more here.
The attractive thing here is very stable interest rates – CPF is generally a safer way to grow your savings compared to say, the stock market, bitcoin or even property. There are no price fluctuations, and you basically accumulate wealth effectively with compound interest.
Also, in the event that you lose your job, you don’t have to worry about not being able to pay your housing loan as your “untouched” CPF savings can cover your monthly instalments.
The downside: The big downside here is cash flow – duh. It’s not pleasant to see a chunk of money go to your mortgage every month.
Also, you give up potential higher returns of investing in exchange for safety.
You see, the base interest of OA (2.5% p.a ) and SA (4% p.a) are spectacular returns for a super safe product, but compared to what the stocks or property (might) give you, they’re not so spectacular (sorry CPF, we just gotta say it).
TL;DR: If you don’t use CPF for your home, you’ll earn more interest from CPF, and have more retirement funds in CPF. That said, it won’t necessarily make you wealthier as compared to other investment tools.
It’s a risk/return trade-off thing.
Who this works for: Unsurprisingly, most of the people I know personally who subscribe to this are big on saving and not so much into investing. They don’t like putting most of their net worth into investments, and prefer the stability that CPF provides.
“I pay entirely with CPF”
The good: Most Singaporeans do this, because it gives them more cash flow during a time in their life when they’re not that cash rich (particularly when you are broke in your twenties). For the most part, people are happy with this option – you often hear people say “I didn’t have to come up with a single cent in cash!!”
The bad: The main problem with “paying with CPF”, though, is that statistically, most Singaporeans don’t prepare for their retirement. We tend to deplete our retirement funds for the sake for cash flow. Classic instant gratification.
OCBC Survey, link here.
But perhaps less obvious is that the fact that with all the cash flow, we could have invested more instead of spending it on god-knows-what.
So yes, let’s say paying home loan instalments entirely with CPF frees up $1,000 in cash every month.
But you gotta ask yourself where does this $1,000 go?
Does it go towards saving for your future needs or goals like starting a family and retiring comfortably? Or do you spend it on bubble tea and hypebeast sneakers?
And if you wipe out all the money in your OA for a home like most Singaporeans do, keep in mind this can be quite a significant amount which will not be going towards your retirement.
My point here is this: You know that unpleasant feeling that happens when you have to take cash out TODAY to prepare for future goals?
If you want a cushy retirement, that has to happen no matter what.
You either save more with CPF, or you use other investment options to take on higher risk (for higher returns) outside of CPF to grow your retirement savings.
You pick your poison.
It all boils down to this
Are you paying for your HDB with cash?
Okay, you set aside money in CPF to grow your wealth.
Are you paying with your CPF?
Then it’s time to set aside some CASH to prepare for retirement (you might still want to leave some savings in your OA, as that can be used for your mortgage payments in times of need, and if left unused, will continue to grow decently with compound interest for your retirement)
There is really no wrong or right way to do things, and it’s up to personal preference and your risk appetite.
We can’t decide what’s right for you. We all come from different backgrounds, have different wants, have different goals in life.
What we do know is that while you are responsible for your money, your financial decisions will affect your loved ones – your aging parents, your hypothetical children – who depend on you in some way.
The least we can do is to make informed decisions.
Stay woke, salaryman.