Sunday, January 03, 2021

Why I do not want my CPF SA to attain FRS now?

Having shared the amount of interests received from my CPF savings for 2020, some readers emailed to ask me if I have attained Full Retirement Sum (FRS) in my Special Account and asked me to share my CPF accounts breakdown.

Here it is the pie chart provided from CPF Yearly Statement of Account for 2020:

It is important to note that the limit for MediSave account in 2020 was $60k and the interests for 2020 were actually credited on 31 Dec 2020 but updated on 1 Jan 2021. Surplus above the MediSave account limit was automatically transferred to Special Account.

Here is the breakdown after the re-adjustment:

Let us focus on the topic of attaining Full Retirement Sum (FRS). The FRS for 2021 is $186k and $192k for CPF members who turn 55 of age.

Although I could transfer the amount of difference between the FRS and my SA account balance, from my OA account to SA account to attain the FRS of $186k this year, I decided not to do so for 2 reasons.

a. I may need a personal loan from my own OA account for property downpayment

As I have plans to purchase a property within the next 5 years, while not having any intention to cash out on my investments in stocks, Reits and savings bonds with average yield above 2%, I believe I may need to give myself a loan from CPF OA to help with the downpayment of my property purchase. Hence, I have stopped transferring monies from OA to SA in the last 2 years, incurring the opportunity costs of earning lesser interest rate of 2.5% in OA compared to 4% in SA. 

It is important to bear in mind that such personal loan is costly as amount of monies withdrawn from OA is subjected to accrued interest of 2.5% and this will possible eat into the profits from property resale profits in the future as proceeds from property sales will need to be credited back to CPF OA together with accrued interests.

b. I want to enjoy tax relief from Retirement Sum Top-Up Scheme of SA account for at least 3 more years

My CPF SA account has been increasing at a rate of around $27k every year inclusive of the annual $7k cash top up for tax relief under the RSTU scheme. It is important to note that as my MA hits the limit, contributions to MA overflows to SA, to achieve a greater contribution amount to SA.

Based on the FRS projection from dollarsandsense, I will have at least 2 years to enjoy tax reliefs from RSTU before attaining FRS of $203,700 in 2024. This is assuming my CPF MA hits the limit, myself staying employed with CPF SA contributions of another 2 x $20k and 2 x $7k RSTU in the next 2 years. 

Since I expect my active income from employment will continue to grow and attract higher taxes, I hope to be able to enjoy some tax reliefs for at least 2 more years. Also knowing that I will attain FRS by plan before age of 37 gives me the confidence to not do anything to tamper with my CPF accounts. After 2024, I will let the compounding effect do its natural wonders to ensure that I will attain FRS of more than $400k in 2048 or so. 

Yes. $400k is the projected FRS after 2048! This is the harsh reality from mathematics. The critics grumble and complain that CPF monies are not our own monies because of this FRS thingy. It is very hard and impossible to withdraw our CPF monies at age of 55 or 65 because we could not attain the ever growing FRS, and due to being unable to earn the ever-growing salary that keep pace with the growth rate of FRS.  

I am not going to dwell on that topic because I am convinced that we are in full control of our own financial health and destiny. We can always transfer monies from OA to SA, save up to make cash top ups or voluntary contributions to CPF accounts in order to achieve FRS early in our lives and let the compounding effect take control to help us attain the FRS when we retire.

Source: Dollarsandsense

Thanks for reading. Stay safe and strong always.

With Love and Peace,

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