Saturday, 14 January 2017

Should I transfer money from OA to SA account?

One of the key aspect to achieving early Financial Independence is to optimise the returns of your wealth. However, many people focuses primarily on building up their cash bags and neglect the other bulk of their savings, the CPF.

Although our CPF savings cannot be withdrawn before the age of 55, it is important to start acting early, to take advantage of the risk-free interest rate on our CPF savings. One of the available CPF schemes is to transfer OA savings to SA account (OA-SA transfer).

What is the difference between OA and SA account?

Unless you have just started receiving periodic contributions to your CPF, you deserve a knock on the head for asking this question. Nonetheless, Max has created a simplified poster below to highlight the main differences between the two accounts.

In the discussion to accelerate growth of your retirement savings, the higher interest rate earned by the SA account is the key variable to the equation. In return, we give up flexibility as the SA account cannot be utilize for Housing and Education, which are two big expenses we cannot ignore. 

In case I need it (ICINI)

Stop using 'in case I need it' as an excuse, this is the main killer to optimisation of wealth. The same meaning as 'in case' is 'I did not plan'. 

If you do not plan, you plan to fail. Okay, cliche, but it's true. 

Will you pay for something you don't need?

I am quite sure the answer is no. That is why we picked a suitable phone mobile plan that offers sufficient but non-excessive free data plan. Similarly, we cancel credit cards that we do not use to avoid paying the subscription fee. 

In both cases, we are unwilling to pay for unnecessary services/ conveniences because we can evaluate our needs, to decide an appropriate level of comfortable sufficiency

Then why should we 'pay' for excessive flexibility to utilise our CPF savings? If we can take some time to evaluate our demand for the OA savings now, the excess savings can then be transferred to the SA account to earn a higher interest. It's all about advanced planning to get more out of our retirement money

How much more interest? (2.5% to 4% only, not much right?)

This extra 1.5% makes all the difference, especially if time is on your side. The earlier the transfer, the additional interest will be (increasingly) higher.

If you are interested to know the amount of additional interest you can receive at age 55, take a minute to study the graph below. A typical 30 yo working adult will earn an additional $16k in interest by age 55, if he transfers $20k from OA to SA account today. This is effectively a 80% 'returns' on your unused OA savings. If the transfer is done earlier, the amount will be higher, and vice versa.

As you can see, as your age increases, the additional interest decreases more quickly if you delay the transfer by a year. This is the power of compounding. So, to get more out of the transfer, act early, don't procrastinate.

In the graph, 55 yo is used as the reference because that is the age we can withdraw our CPF savings, after setting aside the Minimum Sum. That means, the additional interest you received can be withdraw as cash when you hit 55 years old. These are 'free' money with just a few clicks on the CPF website.

CPF website has a calculator to compute how much more interest you can get from a OA-SA transfer. Check it out here.

What is stopping us?

Okay I exaggerated, the process might be simple, but the planning behind the decision to transfer money from OA to SA account requires more brain juice. Indeed, it is not a simple decision, even Max took a few days to consider before transferring $25k of his OA savings to SA account in 2016.

So, what is making the decision so difficult. Max thinks that it all boils down to the lack of knowledge in two areas:
  1. Not knowing the benefits of such transfer
  2. Not knowing how much OA savings is required for longer term purposes (such as housing and education for kids)

If you fall under the first group, I suggest you read the previous to convince yourself on the power of compounding. For the second group, who is also the ICINI group, it is important to carefully evaluate your personal needs for the money in CPF OA account. This is important because the OA-SA transfer is irreversible, which is the main difference with downsizing your phone plan or cancelling a credit card.

How much OA savings do I need?

While the aim is not to allow your unused CPF savings to sit in the OA account earning a lower interest rate, do not also fall into a situation with insufficient OA savings to meet your needs.

To avoid that, we must know what we need, so we plan to ensure sufficiency. To understand your personal needs for OA savings, do consider some of the questions below:
  • At what age do you expect to purchase/ finance your property/ education?
  • What is the cost of the property/ education?
  • What is the upfront payment and monthly payment required? 
  • Financing through CPF OA, cash or a combination of both?
  • Decide whether you plan to invest using CPF? (considering that the investment product applicable for CPF SA is more limited)

Remember to also cater buffer to your plans; things does not always go according to plan. For example, if you are planning for a $300k BTO purchase at 35 yo, it's better to budget for $350k by 33 yo. 

At the same time, try to give a more certain plan by avoiding vague answers such as 'maybe', 'not sure' or 'between 30 to 40 yo'. The more certain you are, the less money you need to set aside as buffer. This means less money can be transferred to SA account, and less additional interests to be earned. Get the idea?

So, should I transfer now?

There is no step by step guide out there <let me know if there are any>, but it is as straightforward as understanding your personal needs, work out the yearly expected contribution and withdrawal from the OA account, before transferring the excess to SA account. Simple, yet not so simple.

In fact, considering all aspects, it is complex enough to need a model for such computation. Max is currently working on a model to answer such questions related to wealth optimization, do subscribe to the blog to be informed when it is ready. It should take another 1-2 more weeks.

Meanwhile, why not take 10 minutes to read the CPF links at the end of the post. It will give you a better idea of how much you need for OA savings. It may give you more cash withdrawal at age 55.

Don't wait, optimize your CPF savings now.


CPF overview

Interest rate for CPF savings

CPF Public Housing Scheme

CPF Education Scheme

Upcoming posts

1. More about myself - posted on 6 Jan 2017
2. Do you have a plan for early retirement - posted on 21 Jan 2017
3. My financial philosophy
4. Review of my 2016 stock investing performance
5. Why do I top up my CPF SA using cash
6. Big spending - Invisalign


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