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Sunday, 18 December 2016

Turning 55 - and enjoying financial freedom

Read? Turning 55 - and enjoying financial freedom

 ....  Some of the happiest middle-aged people I have encountered are those who have planned creatively for other options later in life...  But it is the way they manage their finances that intrigues me. Rather than continue to accumulate assets, their chief priority is to preserve whatever they possess and allow the magic of compounding to grow their assets.

Reflecting on their experience, one major decision now that I have reached the threshold of autumn myself is to change the manner I invest in order to enhance my financial well-being. What simplifies matters is that I have no outstanding loan to pay off, so the objective is to ensure that capital preservation takes precedence over merely aiming for a high investment return.


In the end, I find that the Central Provident Fund is the best option in offering me financial security while giving a level of return I am comfortable with, unless inflation takes off in a big way.

As I turned 55 this year, a sum of $161,000 - the so-called Full Retirement Sum - was transferred from my CPF Special Account to the newly created CPF Retirement Account. After this sum has been set aside for my basic retirement needs, I can choose to take out whatever remaining balances I have in my CPF Ordinary and Special Accounts if I want to.

I also took up the option to top up my Retirement Account by $80,500 to raise the sum there to $241,500, which is the Enhanced Retirement Sum (ERS) this year. The carrot in doing so is to get an attractive risk-free return of 4 per cent on the additional money that I put in.

Assuming that the ERS is raised by about 3 per cent a year, that will enable me to make further top-ups to my Retirement Account by that quantum every year for the next 10 years. It will enable the sum in it to escalate to almost $500,000, including accrued interest, by the time I turn 65.

That, I thought, was the end of the story where beefing up my financial security using CPF is concerned.

Then I found out that I could put money into my CPF Ordinary Account by making a partial or full refund of the CPF savings which I had withdrawn to buy my home, as well as the accrued interest on the withdrawn sum, even though I haven't sold the property.

That opened up an entirely new ball-game for me. If I find myself with surplus cash, should I keep it in the bank where the best fixed deposit rate I currently enjoy is 1.4 per cent, or use it to repay CPF in order to enjoy the much higher 2.5 per cent interest that I can get in my Ordinary Account?

There is another attraction: Since I am past 55 and I have already set aside the Full Retirement Sum in the Retirement Account, I have the flexibility to withdraw the money any time if I need it. This effectively turns my CPF Ordinary account into a high-yield savings account.

Of course, the best option would be to continue to keep the money liquid in a bank if there is a possibility of interest rates going up sharply after Mr Donald Trump takes office as US president. This is because Singdollar interest rates closely track US interest rates.

But I have an awful hunch that interest rates will continue to stay low for a long time, as the ageing population and declining birth rates across the developed world combine to depress economic growth and consumer spending.

This is despite any short-term boost to interest rates from the fiscal stimulus in the form of big tax cuts and huge infrastructural spending promised by Mr Trump when he takes office.

In that case, I may be better off just keeping any excess cash I have in the CPF Ordinary Account. Even at a relatively paltry interest rate of 2.5 per cent, the money in it would have grown by almost 30 per cent in 10 years after compounding.

So, in the end, for better or worse, I find myself writing out another cheque to CPF - this time to refund part of the CPF savings which I had withdrawn to buy my home.

One interesting upshot is that after doing all these various adjustments to my finances, I feel liberated financially as I get ready to enjoy the autumn of my years. Like the gorgeous fall colours I saw in Arashiyama, the best season in life may lie in my autumnal years.


21 comments:

  1. Congrats Uncle CW. More good years ahead!!!:)


    Your long-time quiet supporter,
    DW

    ReplyDelete
    Replies
    1. CPF OA is good place to park our war chest after 55; but it will require 5 working days to activate it if one hasn't touch his CPF OA for that year.

      Delete
  2. Hi Uncle CW,

    If already touch OA before, still can withdraw?

    ReplyDelete
    Replies
    1. Once a year or monthly. I will be doing once a year when it becomes necessary to do it.

      Delete
  3. Dear Uncle CW,

    After you have refund OA for the amount withdrawn for housing loan in the past, does that mean your OA is now has the balance of the same amount? If that's the case, can you withdraw the same amount at any point in time since you have already fulfilled the minimum balance in the RA. I am a bit puzzled why do we need to repay/refund the amount we withdrawn in the past for housing loan after fulfilling RA balances. Aren't those amount withdrawn belong to us?

    Regards
    Sheri

    ReplyDelete
    Replies
    1. After 55, CPF OA and SA balance after RA is our money. See for yourself as seeing with your own eyes is believing.

      Click here?Is CPF Accrued Interest for our housing loan increasing and we have to pay back one day when we sell our house?



      We can choose anytime to touch our money or leave it there to earn 2.5% and 4% CAGR respectively. Even I am full-time retail investor watching market actions closely and following financial news days and night; I still prefer CPF as my fixed income bond-like asset allocation.

      When we are over 55 and have some spare money; we can choose to place it in FD to earn 1.X% or CPF OA to earn 2.5% (but; withdrawal processing time is up to 5 working days) or invest.

      When we have spare money on hand and that will mean we don't be touching our CPF OA money in the coming years.


      Delete
    2. Thanks Uncle CW for your prompt reply. Yes, I do agree with benefit of keeping the balances in the OA after fulfilling RA at 55. It appears extra paperwork for making refund to the amount withdrawn instead of the CPF Board automatically amending it the "amount owed" to zero balance after fulfilling RA. Then it is up to the member to top up whatever he/she wishes. It gives the impression that the member will forever has the "amount owed" unless he/she writes the cheque to them. What happen if the member can't afford to make the "refund".
      Again, thanks for your blog Uncle CW. Wish you a great week and Merry Christmas.
      Sheri

      Delete
    3. Ooouch. After 55 and fulfilling RA; CPF Board automatically amending it the "amount owed" to zero balance after fulfilling RA.

      The snapshot of my CPF OA before 55 and after 55 is automatically reset to zero. Hope it clarified now.

      But; we have the option to refund this loan after reading the article from Sundaytimes. I will do it next year, Jan 2017 and update here.

      Delete
    4. Phew! I'm now very glad that my SA is twice the current minimum sum. It will help buffer when I turn 55 in 10years time. Thanks for your clarification.

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    5. From what I understand from CPF Helpline is, if you have turned 55 by 1st January 2013 and fulfilled your FRS, this top up to refund the housing loan withdrawn back to OA will NOT apply.

      Delete
  4. Actually all these after 55 regulation can change anytime...correct?

    ReplyDelete
    Replies
    1. Don't think Government will touch CPF OA. So far Govt touches CPF SA, RA and MA

      Delete
  5. I don't think government will change regulation until we cannot touch the OA and SA after setting aside the FRS at 55. There will be political repercussion. Increasing CPF Life pay out eligibility age is more probable.

    ReplyDelete
    Replies
    1. When Government touches CPF OA; I will be at Hong Lim Park too. LOL!

      Delete
    2. And make sure your opinion is made known at the ballot box. :D

      Delete
  6. Hi Uncle888,

    After setting aside the FRS, we can use 100% of the monies in the OA to fund our child's tertiary education ?

    ReplyDelete
    Replies
    1. It is interest-wise to use interest free University Tuition loan provided by MOE and then at the end of our children university study; we use either cash or CPF OA withdrawal to pay off this tuition loan in one lump sum.

      Delete
    2. Thanks for the reply. After 55 and if there are monies left in both OA and SA, can be say we want to draw our monies from OA first ? From what I understand, monies will be withdrawn from SA first then followed by OA.

      Delete
    3. Post any other questions. I will go to CPF branch to ask them personally. Face to face. :-)

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    4. looking forward to your updates here after visiting CPF branch.

      Delete

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