Financial Planning | Personal Finance | Article

The $16k Mistake Singaporeans Make at Age 55

by YuanDuan | 21 May 2020 | 4 mins read

According to CPF’s trend report6 in 10 Singaporeans withdrew their CPF funds at the earliest opportunity, which is at age 55.

While there is nothing wrong with tapping on your CPF funds, it is concerning what most pre-retirees do with their withdrawals.

The report details the common use cases, and the top 3 are:

  1. 13% used the funds to service loan payments
  2. 27% used the funds for household expenses
  3. 51% parked it in their bank accounts and did not spend it

Thank goodness Batam is not on the list.

You might be thinking that using it for short-term financial needs or saving money are good financial practices – to avoid debts and have accessible funds in the bank account.

While it is concerning that CPF funds are used for short-term financial needs to service loans and even supplement household expenses (especially nearing retirement age), what we find more concerning is that 51% made CPF withdrawals just to park in their bank accounts, unspent.

Withdrawing your CPF funds unnecessarily can be a costly, and irreversible mistake.

Impact of Withdrawing Your CPF at Age 55

The problem with parking your CPF funds in the bank account means you are effectively losing money that could have been generated from higher interest rates in your CPF accounts.

Once you set aside a CPF Life retirement sum at age 55, any balances left in your Special or Ordinary account can be withdrawn at any time – with PayNow support, it’s almost instantaneous.

So the crux of the matter is this, why would one withdraw from a higher-interest account, only to park it in a lower-interest account?

In fact, most Singaporeans don’t realise that CPF withdrawals are first taken from your Special Account (SA) that yields 4% per annum1, and then your Ordinary Account (OA) that yields 2.5% per annum1 (once your SA is depleted). This means you will likely be losing 4% in interest per year if you withdraw your CPF funds unnecessarily.

To compound the issue, once you are 55, you will not be able to put money back to your SA or OA. Any cash top-ups to your CPF account after age 55 will instead go to your Retirement Account — which provides you lifelong payouts from age 652.

High-interest Savings Accounts Are Not Designed for Retirees

With the prevalence of high-interest savings accounts (HISAs), such as DBS Multiplier, one might think the ‘loss’ in CPF interest rates can be mitigated. After all, one can enjoy up to 3.8% interest with HISAs.

These are the common categories required by HISAs to unlock higher interest rates:

  • Monthly salary credit
  • Credit card spend
  • Mortgage payments
  • Investments

But do a quick scan and you will understand why these accounts are unsuitable for retirees:

  • Retirees don’t have a salary
  • With no salary, there will be difficulties applying for a credit card
  • At age 55 onwards, mortgages are likely to paid-up (or close to being so)
  • Investment activity will be low, as investments will be withdrawn for retirement – investment purchases would also be minimal.

The “Unnoticeable” Mistake of Losing $16,000

Now, you might be wondering how we arrived at Singaporeans making a $16,000 mistake.

The median withdrawal sum from CPF made by 55-year-old Singaporeans is $8,000.

If that $8,000 was earning 4% interest in the SA from age 55 till the ripe old age of 83(the average Singaporean life span) that $8,000 would earn an interest of $15,990 after 28 years.

But if this $8,000 was instead put into a standard bank account that yields 0.05% interest, that sum would only earn you a paltry interest of $113 after 28 years.

The difference between the two methods would be close to $16,000 (rounded off to the nearest thousand).

Making Better-Informed Decisions

True, the above might not be a realistic scenario to you.

After all, why would you want to keep your money parked in your CPF account until your deathbed? (Though it would still be relevant to those that want to bequeath their CPF funds to their loved ones.)

But the point is this, with time, a few digits of interest can make a huge difference – and at 55 you still have a good three decades ahead of you.

So it’s simple, only draw on your CPF funds when you need to use it.

We are not saying that you must keep your CPF untouched at 55, while it is arguably the optimal solution, but different people have needs. Splurge if you want to celebrate your retirement, because you truly deserve something nice for working hard all those years.

But this article aims to address the phenomenon of people withdrawing CPF funds only to let it sit in bank accounts, virtually untouched.

So when your turn finally comes to withdraw your CPF funds, you know your options and can make a better-informed decision.

1As at 1 April 2020 to 30 June 2020

2Accurate as at time of publishing