Should I top up my CPF-SA, CPF-MA or SRS account?

This blog post is inspired by a comment by a reader, Lee Jiahui, who thinks that the "SA is last priority to throw cash at", preferring to top up "self SRS or parents or children's medisave account".

To read the full comment, please go to my FB wall.

Since I always say that we should beef up our CPF-SA and do it early, what is my response to this comment?

Well, in a nutshell, what a person does would depend on his objectives.

The purpose of the CPF-SA is to fund our retirement and cannot be used for other purposes unlike the CPF-OA which although is meant to fund our retirement ultimately can be used for myriad purposes.

Keep going.

Discounting the additional 1% for the first $40K, the CPF-SA pays a 4% per annum base rate which, if given time and a boost very early on, will result in almost magical results. 

The 8th wonder of the world, remember? 

This was what I thought almost 20 years ago when I first entered the workforce as a working adult. I decided to experiment with it and regular readers know the results today.

I also like the idea of having an SRS account and contributing to it to reduce total income tax payable. 

Topping up of the CPF-MA is also a good idea since it pays 4% per annum too and get "free" H&S insurance in the process. (See related post #5 at the end of this blog.)

We can also top up the CPF-MAs of loved ones to help pay for their H&S plans.

These are all financially prudent things to do but what we do ultimately depends on our objectives.



If our objective is to speed up the creation of a retirement nest egg in a risk free manner, then, doing CPF-OA to SA funds transfer very early on in life is something we can consider.

This was what I did.

Doing MS top up to our CPF-SA will also help and this comes with the added advantage of income tax relief (for up to $7K of top up per year).

However, not everyone will have the spare cash to do this, especially early on in our careers. I know because I was in the same shoes before.



There are many things we can do to help ensure that our personal finances are healthy.

However, there are so many areas to cover in personal finance and what we do or don't do now (beyond the basics) will depend on our objectives which would probably be prioritised differently for different people, depending on our own beliefs and circumstances.





Whatever the case may be, in a world like ours, we need to have a sound long term financial plan. 

Some are lucky to have their parents plan early for them. For most of us, we have to take on this responsibility ourselves and the earlier the better.

Source: CPF Board.
Always bear in mind that there are opportunity costs.
Always bear in mind that our home is a consumption item.

Map out a path but be on the lookout constantly for a better way to travel towards our destination. 

It will be hard in the beginning. It might even be demoralising. I know. 

However, if we keep doing the right things, it will get easier with time and we will be rewarded. Believe it.

Related posts:
1. Ten questions from an undergrad.

2. If we are not rich, don't act rich.

3. Save 100% of your take home pay.
4. SRS: A brief analysis.
5. How to get free medical insurance in Singapore?

AK answers ten questions from an undergraduate.

Question and answer time:

Hi AK,
I was about to post a comment on the thread, "Want that $1m in liquid assets or $120K in passive income? Thursday 19 March 2015".

I am somewhat in a similar situation  as the person who emailed you (uni/about to graduate) and have some questions as well.

Currently I'm vested in a couple of IPOs from 2010 onwards (dad's advice) and some stocks through SCB (no min comission) but only got really active in 2014/2015. 

Building up my knowledge at the moment through borrowing / reading books and the internet.

1. You seem to be skilled in both FA and TA from your 2010 posts as well as book recommendations and current posts using Chartnexus, and advocate learning both. Would I be on the right track in learning FA to sieve out companies and TA to pick a correct entry point?

AK: I am probably semi-skilled but, yes, I think we should know both fundamental analysis and technical analysis. 

Fundamental analysis (both quantitative and qualitative) tells us the track record, health and prospects of a business while technical analysis provides us a window into Mr. Market's emotions which might give us clues as to when might be a better time to buy (or sell).





2. Do you do any trading currently or in the past and what is your take on trading? Considering advocating a certain % of my portfolio to it. Not sure if it's the right move. Say 5-10%.

AK: I do a bit of trading and make some good money from time to time when I see what I feel is a good set up. 

So, it is not about allocating a percentage of my resources to trading. It is about whether there is a good set up. 

I will say that a good trader must know technical analysis. There are many tools in technical analysis. 

Each of us will have to choose the tools that we are best at interpreting with a high level of confidence. 

Only time will tell which combination of tools works best for us.

3. With so much knowledge out there, it can get confusing what path to take sometimes. For example picking individual stocks vs etf indexing your portfolio (random walk down wall street, EMH) vs a permanent portfolio weighted by certain % (equities, bonds, gold, cash) vs trading vs a myriad of other strategies and derivatives. Would you have any advise for this?

AK: What I will tell you to do is to explore all the options and then ask yourself if the options will meet your objectives. 

Choose the one that meets your objectives best. 

Which method we choose must match our motivations. It is about choosing the right tool for the job we want to have done. 

I have my own way and I am careful to say that it is never my way or the highway.

4. With regards to CPF, I'm also wondering whether I should do full 100% transfer from CPF-OA to SA in the first few months/years of working life to allow 4/5% risk free interest rate compounding to work it's magic. I have no education/housing debt in the near future. However I understand that cash in SA wouldn't be able to buy shares except for STI ETF's and Bond Index, is that a relevant point? As I wouldn't have a potential "warchest" to scoop up deals when times are bad.

AK: The CPF is a risk free and volatility free instrument available only to Singaporeans and Singapore PRs. If we can, we should take full advantage of it. 

Money in the CPF-SA earns 4% to 5% per annum but the downside is that it is not near money. 

I decided very early on that I wanted something that I didn't have to worry about monitoring which would give me a meaningful nest egg. 

The CPF-SA was an obvious choice for me. It is a low hanging fruit which I decided to pick very early on. 

If all my investments should go awry, I would still have my CPF savings. 

I used cash on hand to invest in stocks and used some of the funds in my CPF-OA for investments for the first time during the GFC.

5. The irreversible part of transferring is also an issue to me. Thus would it be prudent to transfer a certain % out instead? Say 50%. Or whatever I feel comfortable with. Open to ideas.

AK: Oh, for sure, whatever you do, you have to feel comfortable with the decision. What I am comfortable with, you might not feel the same. 

However, if you have read my blogs where I shared how much I have in my CPF-SA and CPF-OA today, bearing in mind that I transferred all the funds in my OA to the SA very early on as a working adult, it is possible to beef up our SA and yet have substantial savings in our OA by a certain age. 

It is about delaying plans to buy a home by a few years.

It is about a willingness to downsize and locking in capital gains if the opportunity presents itself. 

It is about being prudent in personal finance always so that we have an option not to drain our CPF savings dry.

6. Lastly, i'm also looking at insurance. Correct me if I'm wrong but I believe you are an advocate of BTIR? I do know you had some non-term plans from a long time ago from your blog posts. I am considering BTIR, but also considering term vs whole life (premium paid to certain age and insured for life) as I'm wondering whether having the insurance over my entire life is worth the extra premium paid.

AK: If I had known the things I know now when I was much younger, I would not have bought any whole life or endowment plans. 

Of course, there is no way to know whether a much younger AK would have been a prudent investor or if he might lose all the savings from buying term instead. 

Anyway, now, I believe that we do not need a whole life policy (for examples, till 85 or 100 years old) unless we have dependents in our old age. 

Buying term life till age of 55, for example, makes better sense and we are more likely than not to save a bundle of money. 

(At 55, if we have been conscientious in our efforts to meet and exceed the minimum sum, we would probably be collecting a tidy sum from our CPF accounts then.)

7.What are your takes on the SAF Group Term Life Insurance Policy as well? Is it worth keeping? $12.80/month for 100k coverage.

If it is worth keeping, could I just upgrade the plan to have a higher premium and thus higher coverage, which you mentioned 500k, thus that would be my term insurance part settled? I understand 500k is just a rough guide and should be individualised.
http://singaporeanstocksinvestor.blogspot.sg/2014/08/how-much-term-life-insurance-should.html

AK: I think that is a value for money Term Life Insurance. 

How much insurance do you need? 

It depends on how important you are financially. 

Do you have dependents? How many are there? How much money from you goes to supporting them? What if you were to suffer from permanent disability and not death? 

These are some questions you have to consider when buying a term life policy. You might want to read:  http://singaporeanstocksinvestor.blogspot.sg/2014/09/term-life-insurance-why-buy-term-how.html

8. I do also already have a private H&S plan, would be waiting for Medishield Life and the relevant changes by MOH.

AK: Your private H&S is an integrated shield plan. 

You don't have to do anything because Medishield Life will form the foundation of your private H&S plan.

9. I'm also wondering what other steps should I take on my financial journey.

AK: Well, always start with the basics. 

a) Make sure that you are always prudent with your personal finance matters. 

b) Get the necessary insurance coverage but don't overpay. 

c) Know what are needs and wants. Delay gratification. 

d) Go for low hanging fruits. 

e) Invest in income producing assets to supplement your earned income. 

f) Be an opportunist and buy more when assets are on sale. 

g) To do that, have a war chest ready always. 

10. Also you mentioned "You probably read my blog posts on what fresh grads should think of doing first to help towards a financially secure future. Must always get the basics right first."

May I enquire which are the blog posts you are referring to? Would love to read the related posts for fresh grads/young adults.

AK: I have thousands of blogs by now and it is quite hard for me to track down specific blogs. 

From time to time, I unearth useful old blogs. 

I think if you were to do a search in my blog, you might find some of the blogs which might be useful to you. 

Many are already found in the right side bar of my blog. 





Hope you could help a young Singaporean adult in a small way.

Thank you very much AK, your blog has been an inspiration and the frankness of the content is great.

Sorry for the very very lengthy email.

Kind Regards,
DJ

Related post:
Read 9 wealth building blog posts.