First Steps to Early Retirement: This is what we do with our CPF savings.

Hi. Everyone! Mr. Minion here.

Following up on our post titled “First Steps to Early Retirement: This is why we chose to exclude our CPF Savings from our retirement planning.” where we explained why we see our CPF savings as more of a bonus income for retirement rather than a source of retirement income,  today we will explain what we do with our CPF savings.

So.. what DO we do with our CPF savings? Do we leave it in the account to rot? Do we spam it all on housing?

Well, this is what we’ve decided to do with our CPF savings:

  1. Mr. Minion’s CPF savings will be used to pay off the monthly installment for our HDB flat. Any excess will be transferred to the special account.
  2. Mrs. Minion’s CPF savings will be transferred to the special account monthly.

As you can see, we have chosen to transfer anything in excess of the monthly installment into the special account. Here is our rationale:

The ordinary account only pays 2.5% per annum with an extra 1% interest paid the first $60,000 of a member’s combined balances (with up to $20,000 from the OA). This means that you get 3.5% per annum on your ordinary account only for the first $20,000.

If you chose to transfer your money to the special account, you will be able to get 4% + 1% (on first $60,000) = 5% for the first $60,000 and 4% for the rest. It’s basically generating cash at a risk-free rate of 4% or 5%  why not?

Some of you may be wondering why we chose not to:

Use all of our CPF towards the housing loan?

The HDB housing loan is currently pegged at 0.1% above the current CPF rate, which is 2.6%. This is a very low-interest rate – why would we pay this off early? We would rather take the excess CPF money and invest it in our special account which gives us 4% guaranteed returns. We are gaining 4%-2.6%=1.4% for every excess dollar we choose to invest in our special accounts.

I guess the only problem with doing this is if we choose to buy a second property because the existing loan would have an impact on our debt servicing ratio.

Invest all our CPF savings?

I think a guaranteed return of 4% is extremely good. I daresay you can’t find this type of returns anywhere else in Singapore, so we chose to take this 4%.

Source of CPF data: CPF Board Website

That’s all we have for today. Till next time then!

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