CPF Special Account As Part Of Retirement Planning
I kept telling friends and colleagues to make full use of the CPF
Special Account (SA) for retirement planning. The special account gives 4% fixed rate which when compounded annually, it can snowball to a very big sum by the time you retire. With effect from 1 Jan 2008, there are some changes to the CPF rates.
1) The Special Account, Medisave Account and Retirement Account (SMRA) will be pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. Singapore Government Security is the Singapore Government issued bonds which I had covered quite a fair bit last year. The average yield of the 10YSGS over one year, from 1 December 2006 to 30 November 2007, plus 1% works out to be 3.9%.
To help CPF members adjust to the floating SMRA rate, the Government will maintain the 4% floor rate for two years if the 10YSGS yield plus 1% is below 4%. After two years, the 2.5% floor rate will apply for all CPF accounts. Computation illustration:
SMRA interest rates for January to March 2008
Average yield of 10-Year SGS from Dec 06 to Nov 07 --- 2.90%
Plus 1% ------------------------------------------------------------------- 1.00%
Computed SMRA Interest Rate for Jan 08 to Mar 08 ----- 3.90%
SMRA Interest Rate (Jan 08 to Mar 08) - floor -------------- 4.00%
2) An additional 1% interest will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). The additional interest received on the OA will go into the member’s Special or Retirement Account to enhance his retirement savings.
Therefore, we stand to gain on our OA (3.5%) but only up to $20,000. Not much of an impact but “no fish prawns also good”. As for the SMRA, you get to enjoy 5% rate for maximum of $60,000 (if you have $0 in your OA) since government maintained 4% floor rate for two years.
“So what happen two years later?”
This is really hard to quantify and predict. Even though government giving out 1% extra for OA and SMRA, it is only limited to $60,000 combine balances. While there is a very small gain on the OA, SMRA will be hard to forecast. It all depends on the 12-month average yield of 10YSGS. The actual result very much depends on the economic performance. It is difficult to use a financial calculator to project our retirement amount now because it is no longer fixed. Take a look on the following annual yield of 10YSGS since 1998.
1998 - 4.48%
1999 - 4.56%
2000 - 4.09%
2001 - 3.97%
2002 - 2.55%
2003 - 3.75%
2004 - 2.58%
2005 - 3.21%
2006 - 3.05%
2007 - 2.68%
From the above data, the yield fluctuates, of course. However, the yield has been quite good for most of the years except for 2002, 2004 and 2007. If we get this kind of yields again, we are actually better off 70% of the time (when you add another 1% to the yield) compare to what we are getting currently. Of course, history is not a guarantee of future performance.
I kept telling friends and colleagues to make full use of the CPF
Special Account (SA) for retirement planning. The special account gives 4% fixed rate which when compounded annually, it can snowball to a very big sum by the time you retire. With effect from 1 Jan 2008, there are some changes to the CPF rates.1) The Special Account, Medisave Account and Retirement Account (SMRA) will be pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. Singapore Government Security is the Singapore Government issued bonds which I had covered quite a fair bit last year. The average yield of the 10YSGS over one year, from 1 December 2006 to 30 November 2007, plus 1% works out to be 3.9%.
To help CPF members adjust to the floating SMRA rate, the Government will maintain the 4% floor rate for two years if the 10YSGS yield plus 1% is below 4%. After two years, the 2.5% floor rate will apply for all CPF accounts. Computation illustration:
SMRA interest rates for January to March 2008
Average yield of 10-Year SGS from Dec 06 to Nov 07 --- 2.90%
Plus 1% ------------------------------------------------------------------- 1.00%
Computed SMRA Interest Rate for Jan 08 to Mar 08 ----- 3.90%
SMRA Interest Rate (Jan 08 to Mar 08) - floor -------------- 4.00%
2) An additional 1% interest will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account (OA). The additional interest received on the OA will go into the member’s Special or Retirement Account to enhance his retirement savings.
Therefore, we stand to gain on our OA (3.5%) but only up to $20,000. Not much of an impact but “no fish prawns also good”. As for the SMRA, you get to enjoy 5% rate for maximum of $60,000 (if you have $0 in your OA) since government maintained 4% floor rate for two years.
“So what happen two years later?”
This is really hard to quantify and predict. Even though government giving out 1% extra for OA and SMRA, it is only limited to $60,000 combine balances. While there is a very small gain on the OA, SMRA will be hard to forecast. It all depends on the 12-month average yield of 10YSGS. The actual result very much depends on the economic performance. It is difficult to use a financial calculator to project our retirement amount now because it is no longer fixed. Take a look on the following annual yield of 10YSGS since 1998.
1998 - 4.48%
1999 - 4.56%
2000 - 4.09%
2001 - 3.97%
2002 - 2.55%
2003 - 3.75%
2004 - 2.58%
2005 - 3.21%
2006 - 3.05%
2007 - 2.68%
From the above data, the yield fluctuates, of course. However, the yield has been quite good for most of the years except for 2002, 2004 and 2007. If we get this kind of yields again, we are actually better off 70% of the time (when you add another 1% to the yield) compare to what we are getting currently. Of course, history is not a guarantee of future performance.
