Retirement planning for Mr Loo Cheng Chuan started in his 20s. That's why at just 42 years old, the father of three has reached financial freedom – all with the help of CPF's retirement schemes, he says.
For most people, retirement signals the end of their working life, usually after decades of the daily grind. But Mr Loo Cheng Chuan sees it differently. To him, retirement means the freedom to live the life he really wants to live, and it can begin at any time, thanks to CPF.
At a tender age of 42, the father of three is financially free to pursue any career dream should he wish to. This is made possible by the financial security provided by the CPF retirement schemes.
Mr Loo started making use of these instruments when he was in his late 20s. Like many younger Singaporeans, he started feeling the financial pressures of family life when he welcomed his first child, which for him was in 2001.
That was around the time that the economy - just getting back on its feet after the 1998 Asian financial crisis - was shaken by events such as the September 11 terrorist attacks and SARS. The subsequent instability in the market, coupled with Mr Loo's low appetite for risky equity investment then, made investment decisions difficult.
Against this background, the CPF schemes – particularly the attractive interest rates for the Special and Medisave Accounts – caught Mr Loo's attention. Today, in an environment of near-zero interest rates, both accounts guarantee members returns of at least 4%, compounded yearly.
Since 1998, members have been able to transfer savings from their Ordinary Account (OA) to the Special Account (SA) to enjoy the higher returns from their SA, as long as the total amount in their SA after the transfer does not exceed the prevailing Minimum Sum.
Based on Mr Loo and his wife's income and savings in 2001, he calculated that the CPF instruments would help them to set aside a million dollars combined by the age of 65 – a discovery that he described as "phenomenal" in shaping his financial outlook.
Mr Loo opted to transfer money from his OA into his SA until he reached the CPF Minimum Sum cap for such transfers, which by 2003, was set at $80,000.
In order to leave the funds in his Medisave Account (MA) untouched - and thus able to keep earning interest at a higher rate - he paid for two sinus-related surgeries in 2004 and 2005 with cash. To Mr Loo, compared to the higher interest rate his money in the MA could earn, there was a lower opportunity cost to spend cash.
With the assurance that his CPF savings would provide a stable source of income for his future, without the need for close monitoring or active portfolio rebalancing, Mr Loo felt confident enough to diversify the rest of his wealth into riskier but higher returns investments such as stocks. Even when he lost about over $200,000 on his investments at the on start of the global financial in 2008, he remained confident and continued to plough cash to his investment portfolio, undaunted during the financial crisis.
"I slept like a log during that period," he said of the financial crisis. "You may ask why I had the guts of a lion – it's because I knew I had a million dollar safety net at retirement from the CPF." His equity investment paid off very well today, as the stock market has rebounded near to the pre-crisis levels.
Of course, Mr Loo recognised that his investment strategy may not work for everyone. The decisions of how to accumulate and deploy one's CPF savings depends on each person's different financial needs and plans.
"There is no one-size fits all. There are tough decisions. Maximizing the SA & MA fits my investment profile." he said.
For Mr Loo, one trade-off of shifting his OA savings to his SA was that he would have less in his CPF savings to invest in the property market. Today, despite his wealth, he and his family of four choose to live happily in an executive maisonette HDB flat in Jurong East.
There are many years before he reaches 55 age old to withdraw his CPF savings and Mr Loo would prefer not to withdraw the savings and let the interest compound for more years. Nevertheless, his options abound.
He expects further changes to the CPF schemes in the future, and hopes for better clarity of information to guide him in his decision-making.
But as of now, his use of CPF as an investment and retirement tool has given him years of security and helped put his "early retirement" goal within easy reach. As he put it: "I've been blessed by the CPF."
Sidebar: Growing your retirement nest egg
When a CPF member turns 55, savings from his or her Ordinary and Special Accounts will be combined and transferred to a Retirement Account (RA). Currently, members can choose to keep a Full Retirement Sum of $155,000 in their RA. Any excess money can then be withdrawn – for personal use, CPF investments, education loan repayments or housing loan repayments. The money in the RA will accumulate interest at a rate of up to 5% per annum.
Another way in which CPF members can grow their retirement savings is by topping up their personal or their loved ones' CPF account under the Retirement Sum Topping-up (RSTU) scheme. This allows them to maximise their returns through the compounding interests on their CPF accounts. By topping up the CPF accounts in cash, members can also enjoy tax relief of up to $7,000 in a year.
In order to help members better understand and plan for retirement, CPFB will be introducing a one-on-one retirement planning service for members aged 55 years and older. Pilot tests, spearheaded by the Ministry of Manpower, will be rolled out in the second half of 2015 and completed by December.
While there's no one-size-fits-all solution to investments, the RSTU is a good way to start. Consider topping up your CPF accounts to enjoy higher returns for you and your loved ones!