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Should We Use All Our CPF for Housing Or Save It for Retirement?

Posted on the 27 January 2016 by Sgyounginvestment

Most of us know CPF can be utilised for housing. Now comes the question if we should use all our CPF for housing? I have written a few articles on CPF before and got interested in it when a colleague shared with me how he manage to amass quite a huge sum of money in his CPF accounts by the time he was age 55. The irony was, he was not really a high income worker, earning an average of about $2k-$4k a month throughout his lifetime. He had more than $600K in his CPF accounts just before the age of 55 and he has recently just retired from work once and for all. Furthermore, he has a fully paid up HDB flat in Bishan and is still able to accumulate a significant sum in his CPF accounts.

Some of us may say its impossible to have more money for retirement now because housing prices have risen by a substantial amount. Some of us may say it's impossible to have more money for retirement now as compared to the 1980s or 1990s because housing prices have risen by a substantial amount. According to HDB's website, the price index of HDB resale flats have risen by about 2.5-3 times. It's true that housing prices are higher now but our salary have also risen much more than the past. It's true that housing prices are higher now but our salaries have also risen.

The CPF system was created to help Singaporeans take care of their retirement, housing and healthcare needs. If we empty it, we will certainly not have enough for retirement. Let's see what we can do to balance between paying for a house and saving up for retirement.

Most people max out their Ordinary Account (OA) monthly savings in their CPF for housing. Is this a wise thing to do? Our CPF savings earn us a risk-free interest of 2.5% per year on our OA, and 4% on our SA & MA. The first $60,000 of the combined balance (of which $20,000 comes from OA) will earn an additional 1% interest per year. If I just do a simple calculation and take $50,000 and grow it in the OA, how much would the amount be 30 years later? The answer, about $119,000. The amount which was left inside the OA and not used for housing would have grown more than 2 times. We don't even have to contribute more and the money just grows by itself. This is the power of compound interest.

CPF accounts earn up to 6% interest (Age 55 and above)

Furthermore, CPF members aged 55 and above will also earn an additional 1% extra interest on the first $30,000 of their combined balances (with up to $20,000 from the OA) from January 2016. This is paid over and above the current extra 1% interest that is earned on the first $60,000 of their combined balances.

You can refer to the below infographics to know how much interest you can earn from your CPF accounts;

Should We Use All Our CPF for Housing or Save It for Retirement?

One thing we have to take note is when we buy a house using a HDB loan, the savings in our OA will be wiped out to pay for housing. If we have $50,000 in our OA, all will be wiped out to pay for our house and the remaining will be paid in instalments monthly. We will have lesser for retirement and the amount can be quite a significant amount due to the power of compounding. $50,000 earned in the OA at 2.5% for 30 years would have grown to $104,878. This is more than twice of the initial amount.

There is an easy way to build more money for our retirement. If we take a HDB loan for our house, the required down payment is only 10%. Let's say we buy a $300,000 HDB flat, the down payment is $30,000. If we have a combined OA balance of $80,000 with our spouse, and we take a HDB loan, all our monies will be wiped out to pay for the housing cost if we do nothing. However, if we decide to build more for retirement and we transfer $50,000 to our SA and leave a combined balance of $30,000 to pay for the down payment, we will easily have more money for retirement.

Just by doing the above, the $50,000 would have grown to about $205,000 in 30 years' time if we transfer the $50,000 from our OA to SA. This is $155,000 more for our retirement which is quite a significant sum of money. However, do take note there is a limit to the amount that can be transferred from OA to SA, and that the transfers are irreversible and we cannot use the savings in our SA to pay for housing.

Limits on using CPF for housing

Before we even think about using all our CPF for housing, it would be good to know that there are limits on the amount of CPF savings we can use. Using all our money in the OA for housing would possibly mean lesser for retirement. Hence, the housing limits, Valuation Limit (VL) and Withdrawal Limit (WL), are in place to ensure we have enough for retirement. Let's take a closer look at what VL and WL are.

Below is a table from CPF website to show the application of VL and WL:

None. You can use your CPF until the loan is fully paid.

Resale HDB flat/DBSS flat

Below 55 years old
To set aside the current Basic Retirement Sum (BRS) in your Special Account (SA)* and Ordinary Account (OA).
55 years old and above
To meet the BRS in your Retirement Account (RA), SA* and OA.
* including the amount withdrawn for investment.
For bank loan, you can only use your CPF up to WL.

New HDB flat/Resale HDB flat/DBSS flat

Here's a nice info graphic to help you calculate VL and WL:

Should We Use All Our CPF for Housing or Save It for Retirement?

CPF can be used for housing but there are certain limits to how much we can use so as to ensure we have sufficient for our retirement needs. The power of compounding interest is what makes a lot of people richer and if we just have a little knowledge and leave some money in our CPF accounts, we would surely have more money for retirement.

To me, it is pointless to be asset rich and cash poor. If we buy a big house but have nothing left for retirement, it would be a very sad thing at the end of our golden years where we are supposed to be enjoying life more. Plan ahead, think far and our lives could be much better in the future.

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