In our earlier articles (click here to refer), we looked at the projected CPF savings of a new joiner to the workforce with plans to get his own place after 5 years as well as a middle-aged profile looking at upgrading their property. In this article, we explore how a pre-retiree can balance between children education financing and retirement needs.
Profile 3: Eng Seng has a fully paid up home. As his son will be entering university soon, he is considering using $45,000 from his OA savings to fund it. However, he has also heard the benefits of transferring his OA savings to SA to earn the higher interest. He would like to know which is a better option for him.
Age: 50 years old
Annual Bonus: 2 months
Avg annual increment: 1%
CPF Balances: OA = $100,000, Special Account (SA) = $120,000, MediSave Account (MA) = $57,200
Likewise, for the purpose of retirement planning, we will examine the inflows and outflows of the OA and SA until he turns 55 years old in the table below.
Eng Seng asks,
Should I transfer my OA to SA or use it for education?
|Opt 1: Withdraw $45,000 from OA for education||Opt 2: Transfer $45,000 from OA to SA|
|Current OA + SA Balance in 2019||$220,000||$220,000|
|Total OA + SA Contributions||$128,928||$128,928|
|Total OA + SA Interest Earned||$47,994||$55,875|
|Total OA + SA Withdrawals (for DPS and education)||($46,140)||($1,140)|
|OA + SA Balance at 55 years old (A)||$350,782||$403,663|
|Retirement Sum set aside (B)||$306,000||$306,000|
|Withdrawable CPF Balances at 55 years old (A – B)||$44,782||$97,663|
|Estimated CPF LIFE Payout||$2,449/month||$2,449/month|
The consideration between financing our children’s education versus our own retirement is a perennial struggle for parents. In the case of Eng Seng, if he chooses to withdraw his CPF OA savings to pay for his son’s university tuition fees, compared to transferring that same amount to his SA to earn higher interest, he would be $7,900 worse off over a short span of 5 years.
The good news is that he can probably get the best of both worlds. Instead of immediately drawing from his OA to finance his son’s tuition fees, he can take a tuition fee loan first from any of the 3 local banks. These loans do not accrue any interest during the course of study which is usually an average of 4 years. In the meantime, he can transfer his OA savings to SA up to the current Full Retirement Sum to earn the higher interest. When he turns 55, he is eligible to withdraw about $98,000. He can then to help his child pay off his tuition fee loan, if he chooses to do so. In any case, he has gained an additional $7,900 in interest with this simple decision.
We had fun working on these profiles using our CPF Analyser and we hope these case studies are relevant to you while helping you realise that there is more to your CPF than money stuck in the accounts. As with all financial decisions, the choices you make today will affect what your future looks like.
Nevertheless, money is just an enabler and we must look beyond the hard numbers in our life choices. At MoneyOwl, other than leveraging on technology to crunch the data, our financial advisers help you make sense of them to arrive at a decision that is most comfortable for you at a personal level through our Comprehensive Financial Planning process. And this is what makes us truly bionic.