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Why Is CPF (And The Interest Accrual) Important For Our Retirement?

Don’t forget the interest accrual of the CPF. It is critical.

We often come across questions pertaining to planning a healthy retirement. While there are various ways to go about ensuring your retirement is comfortable, two common factors, time and discipline, play a vital role to a favorable outcome.

Time & Discipline

When planning for our retirement, time is our biggest ally (or greatest foe). The power of compounding interest is something we must use to our advantage. While some people only start planning for retirement when they are in their 40s or 50s, the best time to start thinking about it is when you get your first job.

Time by itself is not enough without discipline. To plan for a successful retirement, discipline to consistently save and invest over the long run is required.

Using The CPF For Retirement

In Singapore, the Central Provident Fund (CPF) acts as the country’s pension scheme to assist all Singaporeans for their retirement.

The save-as-you-earn element employed by the CPF ensures that both time (employees and employers start contributing as soon as a person begin working) and discipline (contributions to CPF are meant for retirement and a few other essential items such as housing and medical bills only) are incorporated.

CPF For Housing

In order to encourage homeownership among Singaporeans, CPF members are allowed to use money from their CPF Ordinary Account (CPFOA) to assist them in their home loan mortgage repayment.

According to the Ministry of National Development, more than 80% of Build-To-Order (BTO) homebuyers pay no cash for their monthly mortgage repayment.

That means these homeowners are able to pay for their mortgage repayment solely through their CPFOA contributions. It also means a lot of people out there are relying on their CPF money to fund their home purchase.

Retirement Planning 

Even as we enjoy living in our home without any additional monthly cash outlay, it is important for us not to forget that the primary purpose of CPF is to ensure that we have enough to cover our basic retirement needs.

When a person uses money from his or her CPFOA for mortgage repayment, the person takes away money from their own retirement fund, money that would otherwise be earning a risk-free return of 2.5% to 3.5% per annum.

In other words, money that was meant for tomorrow is being used today.

Here is an illustration to better understand how CPF can be used for our housing needs and what this usage entails for our retirement plan.

Warning: Things might be a little technical as we go into the detailed calculations. You are advised to follow closely…

For the purpose of illustration, we will make some assumptions. Do note that the assumptions are NOT meant to be a reflection for everyone.

1) Couple buys a flat at age 30. Couple earns wage of $2,000 per person per month, totaling $4,000 as a family unit.

2) Couple takes a HDB housing loan of $200,000 for 20 years at 2.6% per annum. Monthly mortgage payment is $1,070 per month.

3) Couple uses ALL the money in their monthly CPFOA for mortgage. This amount WILL NOT be enough, hence couple top up remaining mortgage payment in cash.

4) Assumption of zero wage growth and zero inflation. Assumption of CPFOA interest rate fixed at 2.5% and CPF Special Account (CPFSA) interest rate fixed at 4%. In actual fact, interest rates can go up to 3.5% and 6% respectively for CPFOA and CPFSA.

5) At age 50, sells HDB at $300,000 (fully paid up) and right size to a smaller HDB flat, which costs $200,000.

What We Will Be Comparing…

What we will do is to compare the difference in retirement if a couple only returns their CPFOA without interest accrual upon selling the flat at age 50, against the amount earned if they returned the amount used with the accrual interest earned.

Scenario A: Amount Returned Without Interest

When the couple sells their HDB flat at age 50 for $300,000, they will return the money (no accrual interest) they have used from their CPFOA. This amount adds up to $201,600.

The amount here does not tally with the actual mortgage repayment of the property. The couple only returns back the amount that they have used from the CPFOA (without interest). The part of the mortgage repayment that was paid using cash does not go back to the CPFOA.

The remaining balance of $98,400 will be given to them in cash. We assume the couple keeps the cash proceeds, and reuse their CPFOA to pay for their new home. Since their new home costs $200,000, their CPFOA (they returned back $201,600), would have enough to pay for their new flat.

At the age of 55, the couple will have the following assets (excluding Medisave)

CPFOA CPFSA Cash Home Total Assets
$45,401 $259,278 $98,400 $200,000 $603,079
$304,679 (Combined)

* Before we confuse the heck out of you. Remember that the abovementioned scenario is not possible in reality. This hypothetical scenario is just for illustration purpose.

The couple has a combined total of $304,679 in their CPF Accounts. This amount will allow one of them to choose the Full Retirement Sum ($161,000) for a monthly payout of $1,220 – $1,330 from age 65 and the other to choose the Basic Retirement Sum ($80,500) for a monthly payout of $660 – $720.

In total, they will allocate $241,500 to their Retirement Accounts if they choose to get one Full Retirement Sum and one Basic Retirement Sum. They can withdraw the remaining amount ($63,179) they have in their CPF account at the age of 55 after setting aside the money for their Retirement Account.

Scenario B: Amount Returned With Accrual Interest

Upon selling their flat, the couple returns the money they used from their CPFOA along with the accrual interest that it should have earned. This amount works out to be $266,544.

Similar to scenario A, the remaining balance of $33,456 will be given to them in cash. Once again, we assume that the couple reuses their CPFOA to pay for their new home that costs $200,000.

At the age of 55, the couple will have the following in assets.

CPFOA CPFSA Cash Home Total Assets
$120,843 $259,278 $33,456 $200,000 $613,577
$380,121 (Combined)


Unlike the earlier scenario, the couple now has enough money for both of them to choose the Full Retirement Sum ($161,000 each), which will provide them a monthly payout of $1,220 – $1,320 per person from age 65.

In total, they will allocate $322,000 to their Retirement Accounts. They can withdraw the remaining amount ($58,121) in their CPF Accounts.

Summary Analysis

In Scenario A (no interest repayment), the couple will only be able to afford for one of them to choose the Full Retirement Sum, while the other person has to choose the Basic Retirement Sum. In Scenario B (with interest accrual repayment), both of them are able to afford the Full Retirement Sum.

Remembering That CPF Is Meant For Our Retirement

As homeowners who use CPF to pay for mortgage repayment, it is important for us to remember that the usage of CPF money does have an effect on our retirement.

Our CPF, ultimately, is meant for our own retirement. We should avoid, at all cost, short-changing our own retirement funds by ensuring that our retirement plans are not compromised by housing or financing decisions made in our earlier years. The point of returning the interest along with the principal sum is for that very purpose.

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