Effective Interest Rates on CPF Accounts

For an updated version, refer to the article HERE.

Is it always good to have a lot of money in your CPF?
Maybe, maybe not!
As the amount of money in your CPF account increases, the amount of interest you get from CPF increase (and they pay pretty high interest).
However, as your account balance grows, the effective interest rates you are getting from CPF also decreases.
What is Effective Interest Rates?
EIR is the total interest you are paid on the total amount of money you have.
Eg: Total CPF Interest for the year divided by your total CPF balance (express in percentage).

MORE LINKS
Accrued Interest More than Housing Profits?
What CPF means for those in their 20s?
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
The Christmas Stock Market Rally

For money in your Special, Medisave & Retirement Account (SMRA),
a) each account will earn a 4% interest on its money
b) first $60,000 will earn an extra 1% interest
c) in 2016, those age 55 & above will earn an extra 1% interest on the first $30,000

Below is how the interest curve will look like

2015:

The first $60,000 in your CPF will earn an interest of 5% (excluding Ordinary Account)
The rest of the money in your CPF SMRA will earn 4% interest.
Because the first $60,000 is earning an extra 1%, your effective interest rate on your CPF will always be above 4%.
However, the effective rate will keep decreasing to close to 4% as your SMRA grows larger.


2016:

















If you are belong age 55 in 2016, the chart for 2015 will still apply to you.
If you are 55 or above in 2016, the new chart above is for you.
The first $30,000 in your CPF will earn an interest of 6% (excluding OA)
The next $30,000 in your CPF will earn an interest of 5% (excluding OA)
The rest of the money in your CPF SMRA will earn 4% interest.
Because the first $30,000 is earning an extra 2% while the next $30,000 is earning an extra 1%, your effective interest rate on your CPF will always be above 4%.
However, the effective rate will keep decreasing to close to 4% as your SMRA grows larger.


PS: It is actually more complex than this because there is an Ordinary Account section that also earns this extra 1%. We are unable to however show the graphical relationship because adding in OA would make the whole picture harder to understand

We recommend you refer to the above links to "Bonus 1% extra interest from CPF" posts for more in detail information!


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CPF Bonus +1% Interest for Age 55 & Above

Distribution of the CPF Extra +1% of Interest between your CPF Accounts

There is a sequence in how the bonus CPF +1% interest is distributed into your CPF account.
The sequence would determine how much money goes into your 4 different CPF accounts.

MORE LINKS
CPF Bonus 1% Interest for Below Age 55
Accrued Interest More than Housing Profits?
What CPF means for those in their 20s?
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
The Christmas Stock Market Rally

If you are age 55 and above, the order of the extra 1% interest goes like this:
1) Retirement Account (RA)
2) Ordinary Account* (OA)*
3) Special Account (SA)
4) Medisave Account (MA)

*Bonus 1% interest earned on your OA goes into your RA. The rest of the interest earned goes to the respective account (Eg; interest from MA amount goes into your MA)

Up to $20,000 comes from your Ordinary Account, the rest from Special & Medisave Accounts.
If your RA has $60,000 or more, the $60,000 will earn the full 1% bonus interest. No bonus interest will be given to the other accounts.

If you have less than $20,000 in your OA,

Retirement Account
In all 3 Eg, your RA will earn 5% interest.
Ordinary Account
In all 3 Eg, your OA will earn 3.5% interest.
Special Account
In all 3 Eg, your SA will earn 5% interest.
Medisave Account
In Eg 1&2, your MA will earn 5% interest.
However, your MA in Eg3 will earn less than 5% interest.
The first $20,000 in your MA will earn 5% interest.
The remaining $10,000 in your MA will earn 4% interest.


If you have $20,000 or more in your Ordinary Account,

Retirement Account
In all 3 Eg, the RA will earn 5% interest.
Ordinary Account
In Eg 4&6, your OA will earn 3.5% interest.
In Eg 5, the first $20,000 in your OA will earn 3.5%, the remaining $10,000 will earn 2.5%.
Special Account
In Eg 4, your SA will earn 5% interest
In Eg 5, your SA's $10,000 will earn 5% interest while the other $10,000 will earn 4% interest.
In Eg 6, your SA's $20,000 will earn 5% interest while the other $5,000 will earn 4% interest.
Medisave Account
In Eg 4, your MA will earn 5% interest
In Eg 5&6, your MA will earn 4% interest (no bonus interest at all)



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CPF Bonus +1% Interest for Age below 55

Distribution of the CPF Extra +1% of Interest between your CPF Accounts

There is a sequence in how the bonus CPF +1% interest is distributed into your CPF account.
The sequence would determine how much money goes into your 3 different CPF accounts.
The higher the percentage your OA & SA make up of the $60,000, the higher the chances of you drawing out your CPF at old age.

MORE LINKS
Accrued Interest More than Housing Profits?
What CPF means for those in their 20s?
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
The Christmas Stock Market Rally

If you are below age 55, the order of the extra 1% interest goes like this:
1) Ordinary Account (OA)*
2) Special Account (SA)
3) Medisave Account (MA)

*Bonus 1% interest earned on your OA goes into your SA. The rest of the interest earned goes to the respective account (Eg; interest from MA amount goes into your MA)

Up to $20,000 comes from your Ordinary Account, the rest from Special & Medisave Accounts.
If you have less than $20,000 in your Ordinary Account,

Ordinary Account
In all 3 Eg, your OA will earn 3.5% interest.
Special Account
In all 3 Eg, your SA will earn 5% interest.
Medisave Account
In Eg 1&2, your MA will earn 5% interest.
However, your MA in Eg3 will earn less than 5% interest.
The first $20,000 in your MA will earn 5% interest.
The remaining $10,000 in your MA will earn 4% interest.


If you have $20,000 or more in your Ordinary Account,

Ordinary Account
In Eg 4&6, your OA will earn 3.5% interest.
In Eg 5, the first $20,000 in your OA will earn 3.5%, the remaining $10,000 will earn 2.5%.
Special Account
In all 3 Eg, your SA will earn 5% interest.
Medisave Account
In Eg 4 your MA will earn 5% interest.
In Eg 5, your MA's $10,000 will earn 5% interest while the remaining $10,000 will earn 4% interest.
In Eg6, your MA's $15,000 will earn 5% interest while the remaining $10,000 will earn 4% interest.



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The Christmas Stock Market Rally

December is the month of the Stock Market!

MORE LINKS
Accrued Interest More than Housing Profits?
What CPF means for those in their 20s?
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest

https://www.cnbc.com/2015/11/30/86-years-of-history-point-to-year-end-rally.html

December has been a time where the market has never performed worse than any point in the year.
December also has a history of posting gains from the start of the month to the end of the month over 86 years.
When the market starts the month of December above the 200-day Moving Average and in an uptrend, there is an 80% chance for the market to gain 2%.
December is also the month that frequently sees the expansion in valuation (rising P/E, P/B etc).
So seasonally, December is the month to invest in the market.

With S&P500 priced at 2102 on December 1st, there is a very high chance of S&P500 ending the year in more than 2150.
Considering that currently, the price of S&P500 is at 2020+, it is a pretty good entry point.
The S&P500 is also down 1.85% year-to-date, we shared an article that mentioned that 2015 will be a good investment year, read up here why (LINK)
Of course, the US Fed is expected to raise rates next week, which might create a little turmoil in the markets, but if you can hold and ride through the week, historically, the odds are in your favour!

As Warren Buffett always says: "Be greedy when others are fearful and fearful when others are greedy!"

Disclaimer: I am not suggesting any claims that the market will rally. I am only stating that the historical trends point that there might be a rally. It is by no means any form of recommendation to purchase stocks in the market. Investors are recommended to do their own assessment of what they should or should not invest in.


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What CPF means for those in their 20s

CPF, in short for Central Provident Funds, is a "social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. It also addresses healthcare, homeownership, family protection and asset enhancement.".

Source: https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview

.s This is quoted from the CPF website and as defined by CPF. While most people would think that CPF is just applicable for old people, youngsters should definitely not neglect it. This is especially true due to the magic of compounding interest. So what are the schemes that people in their 20s should know?

1. CPF Education Scheme

This scheme allows you to use your Ordinary Account (OA) savings to pay for your own, children’s or spouse’s subsidised tuition fees. Applications can also be made to use CPF savings to pay for your sibling’s or relative’s subsidised tuition fees but will be assessed on a case-by-case basis.

However, one point to note is that this is effectively a LOAN from whoever's CPF you are using to pay for your education. Hence, it is necessary to pay back this loan with interest. The effective interest rate payable is then pegged to the OA interest rate, which is adjusted quarterly.

The student has to start repaying the loan one year after graduation or termination of studies, whichever is earlier. Repayment must be made in cash either in one lump sum or via monthly instalment over a maximum of 12 years. The minimum monthly instalment is $100 and the rate will be computed for the student based on the loan amount and repayment period.

2. CPF Investment Scheme

As we graduate and take on our first job, it is imperative to consider investing for retirement. If you are thinking of that, then this is the scheme that you do not want to miss out. This scheme allows you to invest your Ordinary Account (OA) and Special Account (SA) savings in a wide range of investments.

Conditions to be met before you can adopt this scheme:

1. are at least 18 years old;
2. are not an undischarged bankrupt;
3. have more than $20,000 in your OA; and/or
4. have more than $40,000 in your SA.

You can find the range of products which you can invest in here. One of the products is Exchange Traded Funds (ETFs) which our blog had been advocating!

Find out more here:

1. https://investmentstab.blogspot.com/2015/09/singapore-markets-growing-etf-choices.html
2. https://investmentstab.blogspot.com/2015/08/etf-funds-hedge-funds.html
3. https://investmentstab.blogspot.com/2015/05/how-much-can-i-invest-in-etf-using-my.html
4. https://investmentstab.blogspot.com/2015/04/key-take-aways-from-edge-etf-forum-2015.html

Source: https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes

3. CPF Nomination Scheme

We might be thinking we are so young, filled with hope and energy. Death might be the least of concern. This is especially so after the recent hoo-hah, where CPF stated that CPF funds are not covered under a will.

For more info: https://www.straitstimes.com/forum/letters-in-print/cpf-monies-not-covered-by-a-will

The nomination procedure is very simple.
All you have to do is fill in a form found on the CPF Nomination Website.
Download the form, fill it up and submit it to CPF Board.

Here are some other information that are useful to you!

What does a CPF Nomination cover?

Covered under CPF Nomination	Not covered under CPF Nomination
CPF savings in your Ordinary, Special, Medisave and Retirement Accounts Unused CPF LIFE premiums, if any Discounted SingTel shares	Properties bought using your CPF savings Payouts from Dependants’ Protection Scheme (DPS) Cash and investments held in the CPF Investment Account under the CPF Investment Scheme-Ordinary Account (CPFIS-OA) Investments held under the CPF Investment Scheme-Special Account (CPFIS-SA)

More information can be found here: https://www.cpf.gov.sg/Members/schemes/schemes/other-matters/cpf-nomination-scheme

Conclusion

CPF is definitely not an organisation for the elderly. In fact, youngsters should harness such national scheme, especially since it affects us for the long term!

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NSF Private's Pay on Li Ka Shing Advice

In our previous post, we shared how we can adjust Li Ka Shing's advice on money management to Singapore's version and circumstances.
The link is here: Li Ka Shing's Advice - SG Version

Being an NSF, I think it is only fair that I break down my salary and how I match it to Li Ka Shing's advice on money management!
Of course, I did it with some adjustments to my circumstances.

MORE LINKS
Difference using Cash or CPF to pay Housing Loan?
Accrued Interest More than Housing Profits?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest

Basically, I'm in an everyday book-out unit, so only lunch is provided.
I have to settle my own breakfast and dinner.
My pay as a Private is $480.
The breakdown is as per below

81.3% ($390) - LIVING - transport, food, cabs (late for work), groceries etc.
                         $62 goes to transport. Basically left with a budget of $10 per day for 2 meals.
8.3% ($40) - SOCIALIZING - bulk of it goes to pay bills. Where got pay to treat! Furthermore, I won't promote faster or earlier even if I treated my officers/Enciks, so let's save that cost.
0% ($0) - LEARNING - took up no courses, but went to the library to borrow books to read.
0% ($0) - TRAVELLING - where got excess pay to save for travelling.
10.4% ($50) - SAVE/INVEST - saved in my bank account.

Depending on you are in a stay-in or stay-out unit, it will vary.
But, if possible, it's always best to save more than less, spend less than more.


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Li Ka Shing Advice - SG Version

http://e27.co/li-ka-shing-teaches-buy-car-house-5-years-20150408/

There was an article in the past that went viral.
It talked about the advice given to young people by Hong Kong's richest man - Li Ka Shing.
In the article, he talked about splitting our pay into 5 parts, each for a different purpose

MORE LINKS
Difference using Cash or CPF to pay Housing Loan?
Accrued Interest More than Housing Profits?
Fine Print of CPF Money Withdrawal
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Repaying CPF Accrued Interest - Why?
Reducing CPF Housing Accrued Interest

30% - Living Expenses, paying for food etc
20% - Socially, paying of phone bill + creating connections
15% - Learning, buying of books or signing for courses/training
10% - Travelling, go overseas once a year to broaden your horizon
25% - Invest, SAVE to INVEST or start a Small Business

He used a guy earning RMB 2,000 (roughly SGD $400) as an example of how to split the money.
His example is for a people living in HongKong or in China.
In my perspective, there are some parts I think we can change to suit it to Singapore's context.

The allocation below is for a Singaporean whose take-home pay is $1,500 after CPF deduction.
Some adjustments were made to the allocation and I do not recommend following strictly to the guideline because every individual is different and every month is different.
If you spend more on 1 month, make sure to balance it back the other month.
I think a little flexibility in the allocation is okay, but not too big a difference, less than 5% movement range for each category.
But do try and keep the last part (INVEST) intact or increase if possible, because that is for the future, YOUR FUTURE!

55% ($825) - Living Expenses, paying for food, transport etc (a)
10% ($150) - Socializing, paying of phone bill + creating connections (b)
10% ($150) - Learning, buying of books or signing for courses/training (c)
10% ($150) - Travelling, go overseas once a year to broaden your horizon (d)
15% ($225) - Invest, SAVE to Invest or Start a Small Business (e)

a) The unfortunate part of not earning much is that a huge portion of our pay goes into necessities, rendering us with minimal for other things.
Items like groceries, utilities, meals etc often take up a huge portion of our pay.
Find ways to cut cost and keep them within the 55% budget!
DO NOT OVERSPEND!

b) Li Ka Shing advised us to treat 2 people who are able to help us in our career to a meal each month. Allocating about 3% of your pay to treat each person sounds reasonable. And hopefully, if your phone bill is not too expensive, it would probably be less than 5% of your pay

c) Singapore's National Library has got a good variety of books, thus there is not really a need to buy books. Save that money for other use, go to the library to borrow more books to read and learn.
There are also a lot of e-courses online that are free, some even available via Youtube. Do make use of these sites to learn and save on the learning expenses.
Of course, if a certification is required, then go for the paying courses that provide certificates.
The government is also providing a $500 subsidies for qualifying courses, make good use of it!
Money saved here should go to the 'Invest & Save' portion

d) Depending on your income, travelling every year might not be possible, unless its to neighbouring countries. Either it is travelling every 2 years OR you could roll over your money to the 'Invest' or
'Learning' portion.

e) Read up on basic investments, long-term investments. Read up on our post on investment under our 'Investment' tabs to learn more!

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