Let me start by saying this may not even sound like an option for many who needs to conserve cash for living expenses given the rise in prices and our own growing needs over the years. After all, you need to meet all your most pressing financials needs of the day before you can even talk about the needs for something so far down the line like retirement. Who knows how long we will live? We always assume things will just sort themselves out eventually even for financial resources.
Even if you have excess savings left over every month, you need to stash away for rainy day needs or to do your own investments. Why use cash when you can use CPF? Certainly not ploughing back to CPF (returning the amount withdrawn for housing early) where the options for investment are limited and where any returns can’t be withdrawn not at least until you reach 55 years old. Many will want to deploy their cash savings to invest in the stocks of the three local banks without constraints or U.S. technology stocks like Apple, Tesla, Nvidia, etc., or forex, options, bitcoins, and the list goes on. Some will go for the steady returns in bonds, endowment schemes, mutual funds of their own picking and not be restricted to what’s available under the CPFIS scheme.
In this article, let me try to explain why using CPF to service your home loan, or not putting back your CPF funds quickly after withdrawing for house purchase, is a very insidious financial move for the vast majority of Singaporeans with a CPF Ordinary Account (OA). The difference it makes can be huge. How huge? What if I tell you that difference, for a retired elderly couple age 65 years old, is between living from pay check to pay check of $3,000 CPF Life payout every month in an expensive city like Singapore, versus travelling around the world and living a free-spirited final third of life on a monthly passive income of $24,000! Yes, you read correctly. That’s monthly income, not annual, of $24,000.
Before you think this sounds like a scam, understand I have nothing to sell you other than a whole new paradigm of thinking explained clearly in a book which costs US$37 (excluding delivery but with free shipping in Singapore). You can implement every step in my 7-step system on your own!
Back to the question of why such an outsized difference in the mere act of using cash to service mortgages and topping up to your OA any amounts withdrawn for housing?
To explain this, let’s look at two scenarios:
Using CPF to Service Home Loan
First, we look at the more common scenario where you simply deplete your CPF OA for housing during purchase and continue to service your monthly mortgage from CPF OA as you are confident to be able to beat that 2.5% return using your own cash reserves for investment. In such a scenario, you do not benefit from the compounding effect of 2.5% return on OA, so let’s assume you will end up with only one-fifth of the amount you could have likely amassed in OA by age 55. For a middle-income salaried worker in Singapore who didn’t use CPF for housing and mortgages, our estimate is that by age 55 the projected OA and SA (Special Account) would likely reach $600,000 and $300,000 respectively due to compounding. As such, you will end up with a much smaller balance of $120,000 in OA at age 55 had you depleted your OA balance for housing. SA balance is not affected.
For a complete understanding, you may want to read our article on CPF Life – The 3 Decisions You Need to Make. With only about $200,000 (after balance SA funds of $300,000 less $213,000 are transferred over) left in your OA balance, you might think twice about topping up your RA (Retirement Account) to the highest tier for ERS which requires another $213,000 effectively emptying out your OA. Most likely you will settle for CPF Lifepayout of only $1,560. For a same-age couple who both draw this amount, you will be looking at retiring on a total passive income of $3,000 from CPF Life payouts from the age of 65.
Of course, this is an over simplistic scenario as there are many permutations as to what a retiring couple can do between the pre-retirement years of 55 to 65 when CPF Life payout commences. You could downgrade, sell the property and return lumpsum to OA for topping up to CPF Life, or simply use the profits from your earlier investment returns to do likewise. Still, we all know how difficult it is to even beat the risk-free 2.5% returns of CPF OA over the long haul as most people can’t control their greed and fear and often end up selling into depressed markets thus realizing capital losses.
Using Cash to Service Home Loan
In another scenario, imagine you decide to use cash to service your monthly mortgage using cash leaving your CPF OA funds to compound at 2.5% annually. Plus, you will aim to return all amounts withdrawn for housing quickly before you even sell the property, for example within six years, so that your compounding goes even further! That’s in contrast to what most people do typically which is to use any spare cash to first pay down on the mortgage.
You may wonder why would anyone want to go on such an approach? Well, it’s a two-pronged strategy where, to compensate for the higher risks involved in doing investment later using cash after you first return all your CPF monies, you will go ultra conservative with your CPF OA funds and simply stay away from investing but and settle for compounding at 2.5% over long periods of almost 30 years from working age of 25 to 55.
What which may seem unwise and even puzzling at first to many, especially when mortgage interest is much higher today than CPF’s 2.5% return, is in fact an ingenious way to assemble up to three different “engines of growth” for investment returns:
(A) Lowest risk CPF OA compounding
Guaranteed compounding returns a much higher CPF OA balance estimated around $600,000 by the time you get to age 55, which allows you to easily top up (less painful when using OA funds than cash) to the maximum ERS limit as it gets raised every year. For a middle-income couple, this means you will likely start CPF Life on a combined payout of $4,000 x 2 = $8,000 at age 65 for you and your spouse! (See the same article link above)
On top of that, because you opt to return all your CPF monies withdrawn for housing early, should you decide to sell your property at any point, you do not have to “pay yourself” that 2.5% accrued interest from your sales proceeds. You let GIC take on all those investment risks and pay you that compounding return literally as you watch your balance grows. You also get to keep all your capital gains fully whenever you sell your property.
(B) Medium risk property investment
That’s not all. The best part is this – as you have returned all your CPF monies, you can now tap into the cheapest leverage in the form of a home equity loan where you can structure your debt into a powerful construct of autopilot cash flow system premised on real estate investments, to power your retirement! Doing that well will see you put in place a passive monthly cash flow to the tune of $16,000 per month by the time you finish paying your mortgage (likely much higher in 20 years)! To find out how you can do that, grab my book Mortgage-Free in 6 Years. It will blow your mind.
So, that’s $8,000 from enhanced CPF Life payouts in (A) from age 65, plus another $16,000 in investment passive income when your mortgage is fully repaid, or a combined staggering $24,000 per month in total to make all your dreams come true.
(C) Higher risk cash investment
With guaranteed returns set up in (A), and a medium-risk property investment cash flow system put in place in (B), guess what? As you become mortgage-free early within 6 years and have the peace of mind knowing your safety net in (A) and (B) is put in place, you can now freely deploy your hard-earned salary for investment with the highest risk but which also offers the highest return of perhaps 1000 times growth in capital value!
Whether you choose to put that into technology A.I. stocks or bitcoin, you know even if plans didn’t quite pan out the way you envisage, you are all well covered in life financially.
This blog seeks to improve financial literacy amongst Singaporeans and provide the “best-in-class” knowledge for financial planning to help achieve the best retirement plan. We also hope to become the conduit to channel funds from the well-to-do in this country to the poor and weak as part of our social mission.
ACTIONABLE STEPS AFTER READING: 1. Research more to understand how investors using CPF OA funds for investment fare in their journey over time 2. Ask yourself the hard question of how did you actually fare in the investing journey thus far in life. Are you confident you are able to beat that risk-free rate of 2.5% which GIC pays you after assuming all the risks out on your behalf, or you much rather aim for a much higher rate of return like a professional and staking that with the funds meant for your retirement? 3. Find out more about this how you can put in place the autopilot cash flow system of $16,000 per month eventually by getting a copy of Mortgage-Free In 6 Years! You won’t regret it. |
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