Navigating CPF Changes: What to do With Closure of Special Account at Age 55 – Part 1

It’s been around a month since Budget 2024 announced the impending closure of Special Accounts for all CPF members aged 55 and up. The dust has more or less settled and here’s how we can move ahead with what’s our current reality.

What has happened

If you haven’t been following the news, all CPF members who reach age 55 will have their Special Accounts closed from 2025 onwards. This also applies to those who are already past that age. Read more details here:

What NOT to do because of this change

In some quarters of the internet, the immediate reaction to the CPF change was swift and boisterous. Among the negative response and derision were ways to try overcome the drop in interest from the Special Account’s 4% p.a. to the Ordinary Account’s 2.5% p.a. Topping up to the new Enhanced Retirement Scheme (ERS) is one such solution. Some others suggested investing to reap higher returns to make up for the lost interest.

Overreacting may do more harm

While these are viable and perfectly good strategies, I think it is worth taking a pause to see whether a knee-jerk reaction can cause more harm than it does good.

Just about everything in life comes with trade-offs. Topping up to ERS results in a loss of liquidity while investing in the financial markets with your CPF money exposes your funds to an increased level of volatility. That’s not to say that we shouldn’t embark on either because of the downsides, but we certainly have to take some time to make a judgment call whether it is indeed something we have to do in light of the new circumstances.

Don’t rush to making a hasty decision

Before we can make good decisions, it is useful to have a look at how much a drop is from 4% p.a. to 2.5% p.a. is.

Based on my calculation, if someone has S$200,000 shielded in their 4% p.a. Special Account, drawing down S$24,000 from this pot yearly from age 55 to 65 would last almost the entire 10-year period or 118 months to be more exact. This gives you a S$2,000 monthly income between the time you turn 55 and 65 when your CPF Life payouts start.

After the change, with funds now in the Ordinary Account earning a lowered 2.5% p.a, the same drawdown will last 110 months. 2.5% p.a. is definitely lower than 4% p.a, and 110 months is definitely shorter than 118, but I think it should put things into perspective whether or not it is worth taking added risk to mitigate the impact of the Special Account closure.

If your plans are scuppered as a result of this reduction in interest rate, perhaps you should consider investing to make up for the lost interest. But if it’s a slight dent to your overall retirement plans, is there really a need to take on the added risk of investment as well as the fees and mental bandwidth that would involve?

SA Shielding benefits the more affluent

When I described this in my video, there were people who are displeased with the way I framed the drop in interest rate by drawing down the amount. If left untouched, S$200,000 in the Special Account will generate some S$96,000 in interest while the Ordinary Account will only get S$56,000.

“Too young.” 🥲

This is indeed true, but I think we have to consider the profiles of people who can not only set aside S$200,000 above the Full Retirement Sum in their CPF to be shielded but also have enough liquidity for their daily needs between 55 and 65 to simply let their Special Account funds sit idle for 4% p.a. for 10 years.

These people would tend to be the more affluent, and while they are definitely most impacted by the Special Account closure, it is also likely that their retirement plans are barely affected as a result in the drop of interest. At the same time, such individuals are also in a good position to either sacrifice liquidity for more returns in their Retirement Accounts, or indeed take some added risk and investing their funds in financial markets, and they should and probably would explore such options.

Don’t rely on CPF 100%… or 0%

For the rest of us who aren’t so affected perhaps due to our younger age (like those who are too young 😉) or the lack of CPF funds to be shielded in the first place, it’s probably wise not to rely on CPF entirely for our retirement needs. While the returns are predictable, policy changes can sometimes be anything but and this shift is a prime example.

Even if this loophole wasn’t closed, a retirement plan resting mainly on CPF is also overly conservative for younger folks with longer time horizons who may benefit more with investments. This is especially true for folks who don’t have the largest of capitals to meet their financial goals of raising a family and retiring in future.

At the same time, ignoring our national pension scheme is another extreme we should avoid since its benefits are hard to ignore. Between the steady returns and the tax incentives for topping up you and your loved ones’ accounts, it’s a great tool to use to prepare for retirement.

The obvious thing to do would be to take a healthy middle ground between the two polar ends and use CPF as a supplementary tool as best as one can. You can tap here for a video on how I manage my own CPF accounts.

Don’t listen to agents, banks, finfluencers etc. 100%

Lastly, this piece I’m writing is yet more noise in the cacophony of articles, videos and hot takes on this issue over the past month. Agents will no doubt have products to sell you, banks will probably step up their marketing calls, and finfluencers – including yours truly – will release content after content to grab your eyeballs.

Being aware of each person’s vested interest is paramount as you navigate your own financial journey because few people take your financial interests as seriously as yourself.

But if you do want to know from me more about how to navigate the CPF changes – including whether or not topping up to the ERS or investing your CPF is a good idea – stay subscribed for Part 2 to this article. You’d definitely get more updates as well as great deals along the way.

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