3 Ways To Optimize Your CPF Accounts [TFC 104]

CPF is an acronym that every working adult in Singapore knows but not many are familiar with its inner workings. Other than 37% of your monthly income as the mandatory CPF contribution, did you know that there are other ways to optimize your CPF accounts even further? TFC 104 explores 3 ways on how you can make your money in CPF work for you!

Before going into the CPF discussion, Reggie pointed out that regardless of your political affinity, we need to recognise that the CPF is part of the social fabric in Singapore and it has vested political interests to do well for us. Contrary to popular belief, it is not out to “eat you”.

With that in mind, he suggests 3 ways to optimize your CPF: topping up your MediSave Account (MA) and Special Account (SA), transferring funds from your Ordinary Account (OA) to your SA, and SA/OA Shielding. Of all the accounts, why should we top up our MA & SA? What’s the difference between keeping the funds in OA versus SA? What exactly is SA/OA Shielding? Listen to this episode to find out which two major expenses you should sort out first in life and how his suggestions can optimize your CPF to help you with the expenses!

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podcast Transcript

Reggie: Okay, finally. After a hundred over episodes, we’re going to talk about CPF (Central Provident Fund). So yes, for all of you that are tuning in from abroad, maybe this episode does not apply to you. But for all Singaporeans, CPF makes a very big part of your life and you contribute 37% of your income into CPF every month. So I think it calls for more discussion and I will share with you a little bit more why I took so long to come to this topic. But yeah, today I’m going to share with you how to optimize your CPF accounts. Welcome back! 

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Good morning everyone! I welcome you to another day with The Financial Coconut. In our podcasts, we are debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well. I’m going to spend some time today to talk about how to optimize your CPF accounts. Essentially, how do you milk the most out of the system? That’s what everybody wants.

A few things… why I took so long to come to CPF as a topic. Firstly, I’ve never really had very prolonged, stable, traditional employment structure where you work for someone, they contribute CPF for you and then you just kind of live your life and what have you. Because I don’t have that kind of employment structure for a long time or forever. I’ve never really had a lot of money in CPF. 

So in that sense, I’m not very invested to think of how to optimize it. But of course, CPF is a pretty important topic for all of us here living in Singapore. You guys keep asking and I’ve decided that… okay, let me go scour the net and try to study this system to come to a point where I’m like okay, I think there are some things to be said about the CPF system and it’s gotta be a two-part thing.

First part, I’m going to share with you about optimizing the accounts and the other part, I’m going to talk to you a little bit about investment structure, CPF Investment Scheme. We’ll do that in another podcast. But specifically for today, we’re going to talk about how to optimize your CPF accounts and before we begin, I want you to be able to recognize that CPF is a system and you don’t need to be too emotional about the system. In that sense, I think it’s a pretty political experience for a lot of people that don’t support the CPF system. There’s a lot of doubt about… you know, is it enough? Can you trust the government? Blah, blah, blah.

So it’s a lot about trust and when it talks about trust of the governance. It inevitably has to go into the discussion about politics. What is your political affinity? Where do you stand? With that, it adds to your bias as to how you view the CPF system. But I just want to put it out there that if you don’t trust the CPF system then, you probably shouldn’t trust the insurance providers out there. 

Let me give you my perspective, okay? You need to understand a little bit of power structures. You need to understand incentive systems. If you look at financial providers or financial services… providers, financial companies, what have you, they have a fundamental profit motive. Their main motive is profit. They want to make money. They will tell you of course otherwise. They want to give back… blah, blah, blah, what have you. Those are in my view teetering on marketing and what have you, but fundamentally they want to make money. 

In CPF’s case, it has a different social mandate. On top of trying to make money, which they do, they also have a social mandate where they have to take care of the people. In other words, if they mess up or they don’t do so well, it’s going to directly translate into losing political power. It’s going to directly translate into losing legitimacy and lose votes and they may leave the parliament. 

In that sense, actually the people managing CPF has a lot more pressure and they do have more vested interests in my view, more vested interests compared to your retail financial services providers. So whether you have big political affinity to the current legislation and what have you, recognize that CPF is a very important part of the social fabric here in Singapore and in that sense, they really don’t want to mess it up. They are not out to cheat you. They’re not out to eat you because it’s going to directly affect your votes so those things matters. 

With that sense, if you ask me to trust insurance companies with a 30 year, long term endowment or what have you… of course it’s a very blanket statement, I do think that you probably can trust CPF a little bit more because of incentive structures, not because they are more competent or less competent. We’re not even talking about competency of private financial brokers or advisors versus the CPF system. I’m just talking about fundamentally incentive structures. So that is my base case when I look at CPF. You don’t need to love it but you recognize that hey, they have more interests to do well for you.

But all that being said, it does not mean that you should love CPF blindly. The reality is CPF are the rules of the game and if you’re unhappy with the rules of the game, you can always talk to your MP, write letters, go for town halls, what have you to make your voices be felt. In that sense, it will have impact on the CPF structure and it may fundamentally change.

Assuming that we are going to keep the CPF as what it is today, I’m going to share with you some of the things that I’ve read online that I feel like yeah, people should do more of this. Why do I say I read them online and I feel like people should do more of these because like I said, I put it out in the very opening of the podcast. I am not in a traditional employment structure, so I do not have a lot of money in my CPF to be super vested, to go and play around all these things over the years. It’s really because you guys keep asking, my team keeps saying “you should talk about CPF”, and I’m like okay, okay, okay. 

Let me put out to you my views, my thoughts and based on what I’ve read online, all these different people telling different things. I’ve consolidated a list, essentially… which brings me to point number one on how to optimize your CPF accounts. Point number one is you should top up your Medisave account, your Medical Account and your Special Account.

Sounds very cheesy. I know, I get it. Everybody’s telling you to top up and they have their views and what have you. So I’m going to share with you my thoughts. The reality is there is actually an upside as to how much you can top up. Topping up essentially means you take your cash, whatever money that you have that’s not in CPF, you put it inside. You top up your Medical Account, top up your Special Account. 

I’m assuming most of us are young and we don’t have Retirement Account yet. Top up about these two accounts… and there’s an upside. There’s a maximum limit. For Medical Account, your maximum limit that you can top up is $63 000 and for Special Account, it’s $192 000 as of 2022. Of course, more details you can always email to CPF. I think these days, they are a lot more open to discuss with you and they have a whole support system. You can always check them out. 

The idea here is when you top up, you actually get the 4% year on year recurring. 4% per annum is growing on the money that you top up. So in that way of looking at things, actually you do make some money by putting money into the system. Of course, the whole like Special Account top up, 1M65 movement and what have you, they have done all the discussion about… you put your money inside, you get 4%, blah, blah, blah. Very simple, it sounds very simple, very basic. You want to milk that 4% per annum recurring, risk-free return and what have you. 

We’ve talked about it with different people. One of the episodes coming out will be with Endowus, and they also talk about this in a sense of “hey, that is a risk-free return. Why don’t you use it?” Of course, the bigger guys in the space that’s talking about it are the 1M65 guys from Loo. Whatever… those are simple ideas. There’s an account there that you can put money in. You cannot do much with the money until you retire, but if you put your money inside, it gives you a 4% risk free and that is amazing. So why not do it? 

In my view, I think that’s an okay thing to capitalize. If you have excess cash, do it. Max it out. But for the Medical Account, I think this is a little bit underappreciated. There are a lot of financial models out there. A lot of financial planners or financial companies out there that are modeling medical expenses increasing at about 6 to 8% year on year.

It’s quite wild if you think about it. Of course, I believe that this growth rate will come down. The government is going to do something about it. They cannot allow this to keep going on. If not, there’ll be revolt and what have you. People are finding it very hard to breathe for sure. With that in mind, I think if you top up your Medical Account at 4% year on year growth, it helps to mitigate the cost and what is interesting is after you top up your Medical Account in your CPF system… CPF got 3 systems: OA (Ordinary Account), MA (Medical Account), SA (Special Account), I’m assuming you already know those three, you’re here to listen to how to optimize. 

When you top up your Medical Account, it gives you 4% year on year. You can use that Medical Account to buy all your Integrated Shield Plans, which is what a lot of people are doing. Whether you call them Enhanced Shield Plan, Integrated Shield Plan, whatever adjective that they put in front, as long as you hear the Shield in their name, it does suggest that it is building on the MediShield ecosystem, which is part of the CPF system also. 

So all of us, we get MediShield, like it or not. This is a basic insurance structure that the government has given out. Based on what Cherie from Planner Bee told us… Episode 58, you should check out that episode, also based on some other observation with Chris from Providend and what have you… different leading voices in the space, they all say that CPF is built for the mass, like 40th percentile. That’s the target group.

I believe that most of us are listening, we are a little bit higher than the 40th percentile or we aim to be higher than 40th percentile. You want to do a little bit better in your finances and what have you. I’m assuming that’s where we are, white collar PMETs (Professionals, Managers, Executives and Technicians) and what have you. In that case, what these people, Cherie, Chris, they are saying is that because CPF is built for the 40th percentile, it is not sufficient for you based on the amount that you spend, based on your income, based on your need for coverage, it’s not enough. 

So using Medisave to go and buy…. using your Medical Account that you topped up to go and buy all these Integrated Shield Plans is going to help you to have a fuller coverage, to feed your need. In that sense, if you think about it, if you top up… that means the first thing you top up, because now you make money, you have extra cash sitting around. The first thing you top up is your Medical Account, it’s going to give you 4% year on year. 

You can draw down that additional 4% or you can draw down from this Medical Account to pay for your Integrated Shield Plans. You can offset a lot of medical bills in that sense and if I try to think about how early phase of life will be, 25, 35 45, actually your biggest burden in the early days, mostly 2 things: the housing in Singapore, and your medical expenses. Retirement, all these, I get it. You start earlier, it’s better, but honestly you may not get there. Okay… touch wood, touch wood. 

If you cannot sort out your medical expenses first and your housing, it’s probably going to be very hard to even consider retirement. So in my view, Medical Account top up is the least appreciated amongst all the discussion that people are having in CPF on how to optimize.

So really, sit down and think about this thing of how much you can top up in your Medical Account and leverage on the 4% yield growing on the Medical Account, and then use that Medical Account to go and buy your Shield Plans and what have you to capitalize on the local public health care infrastructure. Rather than you straight away go out and buy insurance, really look at this Medisave, Medical Account element in your CPF. 

But if you want to optimize it, of course, you’ve got to put more money in. Put more money, it’s going to help you and like I said in the early beginning, whether or not you support the current party, they have incentive structure to do better than the private wealth management or private insurance providers. That is my view. 

Look at this, also definitely check out the episode with Cherie, Episode 58 that we did. I think she talked a little bit more about what is the kind of pricing structure that is being implemented in the Integrated Shield Plans and what have you. She did say that actually… 最不赚钱 (the least profitable), least profitable one is the Integrated Shield Plans. In that sense, that means you are getting the most value for your buck. So definitely check that out. 

Which brings me to point number two of how to optimize your CPF accounts and that is to transfer your OA to your SA. I know a lot of people say this, but I’m going to add this one more line: you transfer your OA to your SA and in my view, you only need to keep sufficient in your OA to buy a BTO (Build-To-Order flat). That’s it. I’m going to talk to you a little bit more about this after a word from our sponsor. 

Okay, you’ve seen this everywhere. I’m not the first “mover” in this content space of CPF. People have been talking about it: OA transfer to SA, but the question is how much? How much to transfer and how should you model this transfer? Simply put, your OA, Ordinary Account is only paying 2.5%. The discussion is when you shift to your Special Account, it gives you 4% and there’s an additional 1% for the first… how many tens of thousands. 

The idea is Special Account is giving you more, but it does not allow you to do as many things as Ordinary Account. But it gives you more, so in the long-term it’s going to help you. My thoughts are… other than investing your OA, which we can talk about in the next episode, I want to capitalize as much as possible my SA account. I want to be able to top up until I max out my SA top up so that I can get the 4% risk free. Eventually, it will help me in my retirement. 

Tons of articles out there telling you why you should do this, blah, blah, blah. There’s a whole movement, 1M65 and what have you, people topping out their SA like free and transferring all their OA to SA, trying all sorts of ways to try to put all the money in SA. But how much to transfer? How much to keep in your OA? I think it’s a little bit underdeveloped and under discussed. 

In my view, after solving your medical expenses, which is in point number one, after solving your medical expenses, the major discussion will be housing. I think in the grand scheme of all that can be used in CPF, these two things are people’s major concern. When it comes to retirement, I do think people are concerned, but like we’ve observed these days, a lot of younger people… they’re very happy to invest their own money for the longer term future for whatever reason. 

Of course, you can say that maybe because the CPF system is cracking, because more and more people are having alternative ways of employment. They are not in a traditional way of employment anymore. People will then think of how to protect themselves for retirement. So I think me and my friends, a lot of us… the guys that are not in traditional employment structures will invest our own money and prep essentially. 

For all of you that are in this structure, you really want to consider topping up, leveraging on SA, since you are Singaporeans, you can get 4% risk free. Why not? Don’t need to explore bonds, but that’s a whole different discussion for a very specific group.

But if we were to bring him back to focus on this point, which is to transfer OA to SA, how much you keep in your OA? This is my view, most educated view in my perspective. Please go and learn and figure it out for yourself what works. But if you think about it, one of the biggest ticket to purchase will be your BTO or your HDB if you live in Singapore. 

In that sense, HDB gives you a 90% loan quantum. For private properties or if you take from the banks, about 75% your maximum loan quantum. You can definitely check out the episode with Baey, the one we did from Mortgage Masters, Episode 97 in this podcast, or you can check out Coconut Avenue to hear the whole property season. We are preparing a new season, so that’s great. 

When I hear from him, what he tells me is… 90% HDB loan, he recommends everybody to get it because it’s the highest quantum and for young family that’s just trying to start up, you can max up the loan, you spend the least amount of cash. Hey, why not? That’s a fair perspective. So you only need to put 10% down payment, 5% in cash and 5% from CPF. That is your maximum. 

If you think about it, BTO, $500 000, you can really only use $25 000 from your CPF for the down payment. I know some people, they want to use the CPF to max out so that they can reduce their loans and what have you because they don’t want to have very high, ongoing payments etc. But if you really calculate, debt is not a bad thing. A lot of people have oversimplified debt. Actually, mortgage debts are extremely low risk for us individual retail investors or individuals. Not everybody needs to be an investor. 

The CPF current loan rate is at 2.6%. It’s probably one of the cheapest loan that you can get. So if it’s one of the cheapest loan, then you want to loan up, in my view. Okay, my view ah. This is what I will do. I’m not saying you need to do this… wah a bit scared but yes, I will take the highest loan amount that I can get for 2.6% from HDB and at the same time, I will continue to invest my CPF and whatever I can get to transfer to my SA to get an additional 1.5 to 2%, depending on how much SA you have. It’s essentially just trying to make more money from the CPF and take the most amount loan I can take from HDB and in that view, I max up the leverage on both sides.

But at the same time, you need to recognize there’s this thing called cashflow in your statements, which is every month you’re going to make income. Every month, you’re going to be making money, right? With that cashflow, you can service your loans and you can service your mortgage repayments every month. It’s not that difficult if you really sit down and calculate. A basic loan calculator or mortgage calculator, assuming 35 years of loan tenure hovering at 2.6% per annum interest for $450 000 because 90% loan… maximum, right? Every month, you are only paying about $1600 with you and your spouse, I’m assuming. If you think about it, about $800 over per pax, it’s not very, very high.

For a lot of people that are listening in, I think you have spare cash to optimize, that’s why you can really think about these stuff. So the idea here is of course, HDB loan, a little bit more complicated if whether is it your first purchase, second purchase… what have you. Go to HDB. They have a loan calculator. They have actually a loan calculator. Check it out. That will give you a little bit more clarity. But the idea here is to… transferring OA to SA is to max out the amount that you can leverage from SA because you get more interest there, but also at the same time, allowing you that one time payment that you don’t need to spend a big bulk for one time purchase of your flats, and also capitalizing on the maximum amount of loan they can get with HDB.

I think too many people are very afraid of taking debt and taking loans and they will feel like “oh, I want to put all my CPF into my HDB” at one time and to me, that is not the smartest way. If you really want to sit down and calculate our finances, it’s not the best way in my view. 

Of course, the third point is the classic, by now it’s a classic, SA Shielding when you reach 55. Because once you reach 55, your SA cash balance and your OA cash balance will be merged into RA: Retirement Account (I know, a lot of A) with a 4% per annum return once again. If you think about it, your SA is already giving you 4%. If you really want to work the system, you can actually use the investment structure by CPF. You pick a very low risk fund, say a short term bond, and put all your money into SA, aside from the $40 000 that you cannot touch, the basic one and then let CPF push more of your OA into RA. 

So you get a higher 4% for most of your cash that wasn’t already getting 4%. With that, after the RA is formed, the OA is being pushed in, of course there’s a max upside based on your Minimum Sum, then you can take that 40, essentially liquidate back your whatever bond that you put in with your RA and then it also comes back to give you 4%. Essentially, what it’s trying to do is to give you more money that is rolling at 4% until you reach 65. 

This is a hack that I think is quite prevalent already. I’m sure you’ve seen it again and again everywhere. The InvestQuest guys, they did write a pretty good article about CPF, so you can just go and Google “CPF InvestQuest.” You can read the article for more detail, but the idea is to try to milk the highest amount of interest out there. 

But as the discussion carries on and more and more people talk about it, you never know, maybe CPF will close this loophole and what have you. So it depends on whether do they view as a good thing or what is it. Essentially, it’s really just trying to get more money into a 4% structure that is risk free. So yeah, go and read up about CPF SA Shielding. Of course, there’s even more complicated OA Shielding after SA… to me, it’s like “不用, 不要这么夸张 (never mind, no need so drama).“ But yeah, if you want to have a more detailed discussion, you can go ahead and read the CPF article that the InvestQuest guys have wrote. Google search “CPF InvestQuest.” 

So I’m going to sum up today. I think we’ve talked about a lot of points and there are a few concepts here and there that I want to reinforce and for us to grasp. The first point is top up your Medical Account and your Special Account to the best of your abilities. Prioritize your Medical Account first. In my view, I think that’s the most important and underappreciated one. It grows at 4% per annum with a lot of financial models out there modeling 6% to 8% per annum increase in medical expenses, topping up your Medical Account ASAP and then using that compounding to pay for your Integrated Shield Plans is going to help you cover a lot of the medical expenses and reduce the first main risk in your early days of working life. 

In your early days, it’s not about retirement. Medical is the biggest problem. If anything were to happen to you. After… you can cross all the medical problems than you can talk about retirement and housing and what have you. So I think this is underappreciated. People should top up their MA Medical Account and tap on the 4% per annum. Check out the episode with Cherie from Planner Bee. 

Number two is transfer your OA to SA. This is a very big thing… 1M65, they’ve talked about it. Essentially, they want to optimize the SA 4% and keep as little OA as possible that to them, is not really making as much of money now. But in my view, I think you need to keep sufficient OA for your downpayment for your flat and then after that, max out all your long quantum with HDB. 

My view is put the OA money into SA to get more interest and keep sufficient OA to have a HDB downpayment and take the maximum loan quantum from HDB. Don’t try to put more money to pay for an HDB so that you can have a lesser monthly recurring payment. If you didn’t know, you have to pay accrued interest back to CPF after that, but that’s a whole different discussion another time. 

The idea here is mortgage loans are actually very low risk and they’re not very high. One of the cheaper loans out there are mortgage loans, so you want to max them out and you want to leverage on SA to get the kind of interest returns. This is my strategy. You don’t have to follow. Just think about it, okay? 

And number three, of course, SA Shielding when you reach 55 so you can get the most bang for your buck at 4% per annum. So yes, with that, I hope you learnt something useful today. See ya!

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Okay, I know… very, very big topic and there are a lot of little pointers here and there that are being dropped. I feel like they don’t stand on their own. It’s very hard to have one very nuanced discussion on each topic, so I decided to put them together. It may be a little bit dense, but I definitely think after looking at all the different CPF strategies, to me, these are some of the pockets that are underappreciated. 

You have your 1M65, you have your Shielding and what have you. All these are extensively talked about… all the bloggers write about it. But my view, Medical Account and HDB loans and keeping sufficient money in your OA for the BTO mortgage, that’s good enough. Everything else is an add on and in our early days, pretty much that’s it. 

Also, recognize that CPF is an ever-changing structure. It’s not like it will massively change, but some of these strategies may fade out eventually, or interest rates may change and things can change. When things change, then we’ve got to change. For all of you that are listening in and have a lot of money sitting around here in CPF and not doing anything about it, maybe these are some pointers that you can really consider. 

Also, for a lot of gig workers and freelancers and entrepreneurs out there that are listening in that do not actually have a consistent CPF top-up, consider the MA and consider topping up your SA. I think Singapore government gives you some sort of risk free return. Let’s not waste it, okay? Capitalized at 4%… yeah, that’s all for today. 

Next week, we’ll talk about the CPF investment scheme. It’s a little bit more complicated and yeah, I have some pointers to share, essentially. That’s kinda what it is. So yeah, take care, stay healthy. See you soon. Bye.

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