Tuesday, June 10, 2014

CPF Interest Compounding

The current hottest topic in Singapore has to be CPF, with so much interest generated online rebating pros and cons of the CPF scheme. I feel this is a relevent time to do a blog on the subject as it plays a part in our journey to achieving financial independence. I will not be going to blog about whether the governement has done a good job with the CPF scheme, but to share how to optimize the CPF returns to increase chances to meet the minimum sum (which is set to increase every year).

I have decided and requested to transfer part of my OA account to SA to generate higher interest. When I mentioned this to my wife, I got "..." look. LOL. Why do I decide to do the transfer? Simple, because the SA interest rate is higher. I think most people is aware the current OA interest is 2.5% and SA is at 4% (guaranteed by Singapore government). But I think there might be some who are not aware that the first $20K in OA and $40K in SA gets an additional 1% interest (I was not aware until I checkout the CPF website recently).
We should think of growing the SA faster to let compounding do its magic. If we have enough fund in SA, the extra interest will be able to help us meet and even exceed the minimum sum even with its yearly upward adjustment. If we do not yet have $40K in SA, transfer OA to SA to have that first $40K in SA. It will be compounding at 5% per year. Where can you find a risk-free and guaranteed 5% investment (better than the current dividend yield of StarHub. LOL)

Here's a presentation on CPF by SIAS speaker, Christopher Tan, which I find useful in explaining how CPF works.

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