How you can optimize your CPF returns

Updated: Jul 30


As CPF is such a controversial topic nowadays, let me capitalize on this to increase my viewership. To be real frank!


Since you are contributing about 20% of your salary into the CPF every month, how thorough do you know about the CPF? Do you think CPF is an important saving tool for your retirement? If so, are you managing it well enough?

The perks of CPF are very rewarding but that comes at a cost of inflexibility which many Singaporeans have expressed their unhappiness upon.

This is like a re-enactment of when we were kids when we argue with our parents for setting restrictions that takes away our fun. Only when we grow up, we realise that what they are doing is actually for our own good. Restrictions are meant to protect a kid’s ignorance but can sometimes backfire by creating over dependence.


Similarly, CPF decides to go for the former approach to protect the general population who are less savvy with their finances and thereby sacrificing those who can save & invest for retirement by themselves. Oh well…

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I will not bore you with everything about CPF (I am pretty sure you millennials are smart enough to google CPF). I will be writing concise facts and tips that could make a difference in the number of zeros you have at the end of your CPF balance. As a disclaimer, these facts are meant for educational purpose which does not constitute to financial advice or recommendation of any sort. They are based on my knowledge, and I will assume no liability to the accuracy or completeness of the information provided here. You shall exercise your due diligence. With that in mind, let’s begin.


1) Some key facts for millennials below 35

  • CPF Contribution

You contribute 20% and your employer contribute 17% of your wage into CPF (37%)

Out of this 37%, 23% goes to Ordinary Account (OA), 6% goes to Special Account (SA), 8% goes to Medisave Account (MA).

  • CPF Interests

OA gives 2.5 to 3.5% interest per year. SA & MA gives 4 to 5% interest per year.

There is an extra 1% interest per year for the first $60K of your combined balances (with up to $20K from OA) which will go into your SA.

  • CPF withdrawal at 55

When you turn 55, all your OA and SA will go into your Retirement Account (RA)

You cannot withdraw everything from your CPF account when you are 55. You have to keep in your RA a retirement sum of money. The full retirement sum is $176K for people who turn 55 this year 2019. Currently this amount has been increasing by $5K a year. i.e. Those who reach 55 years old next year 2020, will have to keep a full retirement sum of $181K in your CPF at 55.


You can only withdraw from your CPF RA the amount above the retirement sum. i.e. For a person who has $200K in his CPF RA can only withdraw $200K - $176K = $24K when he hits 55 years old this year. If there isn’t enough retirement sum, he can only draw $5K. Huat ah. The retirement sum of $176K (example) will continue to make 4 to 5% interest per year. Until you are 65, this will grow to at least $260K due to the compounded 4 to 5% interests.

  • CPF Life Payout at 65 or 70

At 65, you can opt to receive the CPF Life Payout, which will pay you about $1,353 to $1,490 monthly under the standard plan (There are other plans available). Otherwise, you can also wait to automatically receive the monthly payout at 70 and receive about $1,785 to $2,005 every month. You may calculate your payout using this link.


You continue to receive this monthly payout until the day you die. Even when your RA account is depleted, you continue to receive the payout. Therefore, the longer you live, the better the returns. According to Dollarsandsense, the break even point whereby you will start to receive more than what you have in your RA account is when you are more than 88 years old. That assumes that you opt to receive your CPF life payout at 65.


When you pass on, your bequest will be the $260K in your CPF RA account (in this example) minus off the sum of the CPF payout. i.e. if you receive your first $1.4K CPF Life payout at age 65, and die one month later (finger cross), your heir will receive $260K - $1.4K = $258.6K. (estimated). When you reach 88 years old, you would have wiped out your RA account and likely not have any bequest left behind for your heir.


  • Truth about CPF Life Payout

When you are receiving your CPF Life payout say at the age of 65, the $260K in your CPF RA (example) will no longer be earning any 4 to 5 % annual interest.


According to Dollarsandsense, the interest is paid to the Lifelong Income Fund, which is meant to pay for the monthly payouts for those fortunate enough to live to a much older age. Therefore, the 4% compounded interests of your RA account are actually funding people who lives a longer age but has depleted their RA accounts.

2) Tips that you can employ to optimize your CPF returns

  • Transfer your OA to your SA to earn an additional 1.5% interest per annum.

If you find that you are not making your free cash earn more than 5% interest per annum (through property investing excluding your home, stock markets, corporate bonds, businesses), I suggest that you transfer as much money into your SA from OA at an early age.

Your $1K monthly contribution into your OA (2.5%) from age 25 to 55 will net you $532,842.

However, your $1K monthly contribution into your SA (4%) from age 25 to 55 will net you $685,270

That is a whopping $152K difference! You can use this calculator to verify.


I understand that many people will need to use the OA to fork out the down payment of the HDB flat. However, having more money earning 4 to 5% in your SA account can make a difference in your retirement fund. So keep that in mind.

  • Saving your Cash in the CPF SA

If you have tons of money sitting in the bank earning a meagre 0.05% annual interest (E.g. a SG household bank), consider depositing cash into your SA account. Not only will you start gaining a guaranteed 4% interest per annum, but you will also be eligible for an income tax relief of up to $7,000. This is particularly useful for people who are paying at a higher income tax bracket; the income tax less can be considerable.


Your $7K annual saving in your bank account earning 0.05% annual interests from age 25 to 55 will net you $211,529

However, your $7K annual savings in your SA account earning 4% annual interests from age 25 to 55 will net you $392,594

That is a whopping $181K difference, on top of $100s of income tax savings every year for 30 years!

  • Avoid tapping too much on your CPF OA to pay for the down payment of your house and the monthly loan repayments.

The reason is you lose out on the interests that you could have earned if you had stick your money in the CPF SA at 4 to 5% interests per annum. Using CPF OA to pay for the home mortgage is good only if you can use the spare cash you now have from CPF to invest or to do businesses that can generate more than 5% guaranteed interest per annum. Otherwise, it is a losing battle as you incur opportunity costs.


An average $500K HDB loan will incur a monthly loan repayment of $2,260 for 25 years. If you chooses to use your CPF OA to pay every month, you may have an additional $27,120 per year of spare cash from your pay check that accumulates to $678K at the end of 25 years.


However, if you choose to pay off your HDB monthly loan using your cash for 25 years, and keep the $27,120 annually in your CPF SA, you will receive 4% compounded interest every year. At the end of 25 years, you will have a net $1,129,437 in your CPF SA. That’s a whopping $451,437 difference!


Nevertheless, if you are confident in using the $678K spare cash that you got out of CPF to invest and earn a profit of more than $451,437 at the end of 25 years, then yes using CPF OA to pay will be worth it.


3) My personal views

Although the Full Retirement Sum (FRS) is increasing $5K per annum in recent years, I believe this is due to the economy’s low inflation. I foresee that the increment may grow larger than expected at an average of 3% per annum rather than a fixed $5K amount per year. Therefore, I calculated that the actual FRS for me when I reach the age of 55 in year 2047 will be about $402K.


When I reach 55, I will likely withdraw the maximum amount I can and pledge my property so that I will only need to keep half of the FRS amount (Basic Retirement Sum) in my RA account and receive a lower CPF Life payout (read more about Basic Retirement Sum here ). The reason is I am confident in making more than 4% returns with the cash and I am not comfortable with the idea that the interest earned from my RA after CPF Life payout is given to the Lifelong Income Fund. Lastly, I got a feeling that I won't live past 88 years old (Finger cross again).


I believe CPF is necessary and continues to be a valid tool to safeguard the finances and retirement dreams for our fellow Singaporeans.


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