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

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.

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.  

CPF accounts earn up to 5% interest (Below age 55)

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 $104,878. 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;

Optimising OA and SA

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 $195,084 in 30 years’ time if we transfer the $50,000 from our OA to SA. This is $145,000 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.

Continued use of CPF savings for housing payments after turning 55

This is a common question which people have. Some are shocked when they realise they don't have enough money in their CPF to pay for housing after turning 55. As most housing loans will stretch for 25 years, if we buy a house after the age of 30, there is a high probability that we will still have to continue paying the monthly housing mortgage after the age of 55.

55 years old is the time where we can take out our CPF money subject to the basic retirement sum. However, there are a lot of people who have concerns whether they can use their CPF to continue paying for their housing loan after 55 years old.

Yes, we can use our Retirement Account (RA) savings (excluding top-up monies, interest earned, and any government grants received) above the Basic Retirement Sum and OA savings (including future contributions to the OA) to pay for our property, subject to the applicable housing limits.

When we turn 55, an RA will be created. The savings from our SA and/or OA will be transferred to the RA. If we wish to continue using CPF savings to pay for housing loan instalments, there are three options we can explore:

1. Apply to reserve some savings in our OA from being transferred to our RA before we turn 55, so that we can use them for housing after turning 55; 
2. Use our new CPF contributions to our OA (if we continue working after 55);
3. Apply to use our RA savings above our BRS.

The BRS is in place to ensure we have enough for retirement. We do not want to end up having a house to stay but no food to eat. This is known as asset rich but cash poor. 

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:

Loan From	Type of Home	Applicable Limits	Conditions to use CPF beyond VL
HDB	New flat	No limit	None. You can use your CPF until the loan is fully paid.
	Resale HDB flat/DBSS flat	VL	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.
Bank	New HDB flat/Resale HDB flat/DBSS flat	VL and WL

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

Conclusion

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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