CPF SA Shielding hack - RIP (Obsolete)

[reddevil0728]

no need to gist, can see the full reply here:
Written Answer by Minister for Manpower to PQ on Special Account Shielding

Answer:

1. We are aware that some members invest their Special Account (SA) savings shortly before age 55 and liquidate it after age 55, to retain more CPF savings in their SA. In 2021, about 2% of CPF members turning 55 invested their SA monies under the CPF Investment Scheme-Special Account (CPFIS-SA) within six months before they turned age 55 and liquidated their investments within six months after they turned age 55. Some of them may have done so to prevent their SA monies from flowing into the Retirement Account at age 55.
2. We would like to reiterate to CPF members that the investment of SA monies comes with costs and investment risks – there are transaction fees involved and members may lose a portion of the amount invested. Financial advisers and insurance brokers who promote this practice without highlighting the costs and investment risks may be guilty of mis-selling, and should be reported to the Monetary Authority of Singapore.
3. We will continue to monitor this trend closely and take action if necessary.

just now dun have ma.

 

[rizhal]

no need to gist, can see the full reply here:
Written Answer by Minister for Manpower to PQ on Special Account Shielding

Answer:

1. We are aware that some members invest their Special Account (SA) savings shortly before age 55 and liquidate it after age 55, to retain more CPF savings in their SA. In 2021, about 2% of CPF members turning 55 invested their SA monies under the CPF Investment Scheme-Special Account (CPFIS-SA) within six months before they turned age 55 and liquidated their investments within six months after they turned age 55. Some of them may have done so to prevent their SA monies from flowing into the Retirement Account at age 55.
2. We would like to reiterate to CPF members that the investment of SA monies comes with costs and investment risks – there are transaction fees involved and members may lose a portion of the amount invested. Financial advisers and insurance brokers who promote this practice without highlighting the costs and investment risks may be guilty of mis-selling, and should be reported to the Monetary Authority of Singapore.
3. We will continue to monitor this trend closely and take action if necessary.

2% of of the 55 age cohort is really very few people.
Either non-savvy or too low SA OA to bother with.

 

[celtosaxon]

2% of of the 55 age cohort is really very few people.
Either non-savvy or too low SA OA to bother with.

One of the 2% was a guy in my office, he also dunno about it until I told him. I checked with him this year and he confirmed to me that he successfully shielded last year, no loss either because the thing he invested in went up, more than covered the transaction costs.

 

[Value.Matrix]

I think it was St columnist tan oei boon that provided a numerical illustration.

I will provide that later


Read HWZ Forum Rules!

I believe money mind have discussed and already shot down ST columnist.

You want to believe a ST columnist whose rice bowl is to generate eyeball instead of people who went through calculation tediously? I also need to retrieve what was shotdown. Basically he invested over a long period instead of shielding only. W the F buy unit trust and hold long term to shield. Only ST columnist.

Edit: found errors in his 4th July 2021 Article on Shielding. His calculations is wrong. You want to believe, go ahead man. https://seedly.sg/posts/st-article-how-to-use-the-cpf-ordinary-account-for-retirement/

 

[buaytuckchek]

Previously, people do shielding to OA to prevent HDB from swiping out the OA. Subsequently came the option of keeping $20k in OA.

I hope CPF can give members the option for how to fund RA, so that members don't have to manually shield SA

 

[CaptainWu]

2% of of the 55 age cohort is really very few people.
Either non-savvy or too low SA OA to bother with.

I believe one of the low percetage reason being lots of people already learned and transfer as much as possible from OA to SA gradually.

 

[Okenba]

I believe one of the low percetage reason being lots of people already learned and transfer as much as possible from OA to SA gradually.

55 yr old leh. How many of that generation have a large enough SA to make this worthwhile?
How many have a large enough OA or cash reserve for FRS if they don't use SA?
How many of that generation know how to invest or would feel comfortable investing?

I think the group itself is small. As the years go by, that 2% will increase. Those currently in their 40s are more investment savy than those in their 50s. And the younger generation even more so.

 

[Guojing88]

I believe money mind have discussed and already shot down ST columnist.

You want to believe a ST columnist whose rice bowl is to generate eyeball instead of people who went through calculation tediously? I also need to retrieve what was shotdown. Basically he invested over a long period instead of shielding only. W the F buy unit trust and hold long term to shield. Only ST columnist.

Edit: found errors in his 4th July 2021 Article on Shielding. His calculations is wrong. You want to believe, go ahead man. https://seedly.sg/posts/st-article-how-to-use-the-cpf-ordinary-account-for-retirement/

I have read that post.

The ST article has this point

"While shielding gives you $2,190 more initially, this is not sustainable, unless you don't withdraw any money from CPF for your own use, which is a ridiculous notion. So if your plan is to always spend the interest, over $20,000 a year, your balances in the SA will drop and cannot last beyond 10 to 15 years.

From then on, your options are left with either $700,000 or $554,000 in your OA (assuming MediSave balance and interest stay the same for this exercise)."

That rebuttal did not really address the 10 to 15 years time period. That is why I said in the long run.

Of course, if you feel your lifespan will be short, then shielding SA is better, that I can agree.

 

[Guojing88]

This is the entire numerical example from the above link, for those that are keen

Let's look at one such scenario for a member who has $700,000 in his OA, $250,000 in his SA and $63,000 in MediSave now. (Only standard interest rates are used here).

At his 55th birthday this year, $186,000 will be deducted from his SA, leaving him with $64,000. Despite this, he will still earn $17,500 interest from his OA, $2,560 from his SA and $2,520 from MediSave, giving him a total of $22,580.

If he shields his SA, he will have these balances and interest: OA $554,000 ($13,850 interest), SA $210,000 ($8,400) and MediSave $63,000 ($2,520), giving him a total of $24,770.

While shielding gives you $2,190 more initially, this is not sustainable, unless you don't withdraw any money from CPF for your own use, which is a ridiculous notion. So if your plan is to always spend the interest, over $20,000 a year, your balances in the SA will drop and cannot last beyond 10 to 15 years.

From then on, your options are left with either $700,000 or $554,000 in your OA (assuming MediSave balance and interest stay the same for this exercise).

If you have $700,000 in your OA, you can withdraw about $20,000 in interest annually for life without affecting your capital sum and about $16,000 for the lower sum. This means that if you do not shield your SA and instead choose to preserve your funds in the OA, you stand to gain in the long run, with more interest earned.

 

[Guojing88]

This is the learning point I got from the above ST article, after 10 to 15 years after 55.

If you shield your SA, your OA is left only with 554k instead of 700k.

It only earns 16k in interest a year, compared to 20k in interest a year for the larger sum.

Hence you earn 4k more interest per year, and the lovely thing about this is you can take out that 4k more every year and not impact the principal sum in OA at all.

To put the same point in a different manner

If you allow the 700k to remain in OA, instead of taking it out so that you can shield your SA, you earn more than $4000 interest more every year.

This will exceed the $2190 extra interest you earn from shielding

Hence in the long run, there is more interest earned, compared to the initial $2190 you gain from shielding.

I would appreciate if readers could examine whether my summary is incorrect.

 

[Okenba]

I'm already engaging this same issue in another thread so I think I will let someone else here explain why 4% > 2.5%...

 

[CaptainWu]

If he shields his SA, he will have these balances and interest: OA $554,000 ($13,850 interest), SA $210,000 ($8,400) and MediSave $63,000 ($2,520), giving him a total of $24,770.

While shielding gives you $2,190 more initially, this is not sustainable, unless you don't withdraw any money from CPF for your own use, which is a ridiculous notion. So if your plan is to always spend the interest, over $20,000 a year, your balances in the SA will drop and cannot last beyond 10 to 15 years.

Sorry for my ignorance. If you are withdrawing 20000 a year and the SA/OA interest should be good enough to cover that yearly as the sequence is 8400 (SA) then 13850 (SA) which is more than 20000, there is no impact to either OA/SA original balances.

 

[Mephist0pheLes]

This is the entire numerical example from the above link, for those that are keen

Let's look at one such scenario for a member who has $700,000 in his OA, $250,000 in his SA and $63,000 in MediSave now. (Only standard interest rates are used here).

At his 55th birthday this year, $186,000 will be deducted from his SA, leaving him with $64,000. Despite this, he will still earn $17,500 interest from his OA, $2,560 from his SA and $2,520 from MediSave, giving him a total of $22,580.

If he shields his SA, he will have these balances and interest: OA $554,000 ($13,850 interest), SA $210,000 ($8,400) and MediSave $63,000 ($2,520), giving him a total of $24,770.

While shielding gives you $2,190 more initially, this is not sustainable, unless you don't withdraw any money from CPF for your own use, which is a ridiculous notion. So if your plan is to always spend the interest, over $20,000 a year, your balances in the SA will drop and cannot last beyond 10 to 15 years.

From then on, your options are left with either $700,000 or $554,000 in your OA (assuming MediSave balance and interest stay the same for this exercise).

If you have $700,000 in your OA, you can withdraw about $20,000 in interest annually for life without affecting your capital sum and about $16,000 for the lower sum. This means that if you do not shield your SA and instead choose to preserve your funds in the OA, you stand to gain in the long run, with more interest earned.

u gong simi?

u shift ur money from a lower interest account to a higher interest account but in the end earn lesser interest? how does that even make sense?

suggest u use excel and compute how much interset u earn each year, including the interest from SA that u conveniently excluded in ur 20k, 16k comparison, and see the figures urself.

 

[Guojing88]

Sorry for my ignorance. If you are withdrawing 20000 a year and the SA/OA interest should be good enough to cover that yearly as the sequence is 8400 (SA) then 13850 (SA) which is more than 20000, there is no impact to either OA/SA original balances.

So my original point was, if your only aim is to leave a large bequest, then yes that is ideal.

But for most of us, we look at our entire wealth and we decide how to efficiently draw it down to zero when our lifespan expires.

That means our aim should not be this silly rule "never touch the principal sum".

 

[item2sell]

So my original point was, if your only aim is to leave a large bequest, then yes that is ideal.

But for most of us, we look at our entire wealth and we decide how to efficiently draw it down to zero when our lifespan expires.

That means our aim should not be this silly rule "never touch the principal sum".

if the end game is 95 yo. how much can one withdraw for each scenario?

 

[CaptainWu]

So my original point was, if your only aim is to leave a large bequest, then yes that is ideal.

But for most of us, we look at our entire wealth and we decide how to efficiently draw it down to zero when our lifespan expires.

That means our aim should not be this silly rule "never touch the principal sum".

Okay I see your point now, practically it depends on usage as if this eats into SA original then for long run this could affect the outcome.

 

[Okenba]

Okay I see your point now, practically it depends on usage as if this eats into SA original then for long run this could affect the outcome.

You can only compare if you withdraw the same amount from the two shielded and non-shielded account.
In that case, shielded will always win.

If someone thinks it makes sense to w/d 20k/yr from non-shielded and compare with w/d 22k/yr from shielded, AND THEN still complain that shielded run out first...
Then I got nothing to say loh.

There is no universe where 2.5% > 4% lah.

 

[CaptainWu]

You can only compare if you withdraw the same amount from the two shielded and non-shielded account.
In that case, shielded will always win.

If someone thinks it makes sense to w/d 20k/yr from non-shielded and compare with w/d 22k/yr from shielded, AND THEN still complain that shielded run out first...
Then I got nothing to say loh.

There is no universe where 2.5% > 4% lah.

This is Logic!

 

[Okenba]

So my original point was, if your only aim is to leave a large bequest, then yes that is ideal.

But for most of us, we look at our entire wealth and we decide how to efficiently draw it down to zero when our lifespan expires.

That means our aim should not be this silly rule "never touch the principal sum".

touch or don't touch, 4% > 2.5%
Doesn't mean that if we touch principal, suddenly 2.5% > 4%

 

[celtosaxon]

You shield SA because it is the highest interest rate you can earn on money that you can access immediately - i.e. emergency fund.

Of course, you hope to never have an emergency, and if you don’t… it can become a bequest. But where else can you park funds you might need in an emergency that can be withdrawn immediately and pays 4% interest?