Get tax relief, higher interest with top-ups
You are at the point where you may have been working for more than 10 years, have gotten married, there's a child or two and you are not too stretched with the mortgage. So what next?
Well, it might be time to look at maximising your Central Provident Fund (CPF) monies, a social security savings plan that helps with retirement, health care, home ownership, family protection and asset enhancement.
Note, too, that the composition of your Ordinary Account (OA), Special Account (SA), and Medisave Account (MA), changes after 35 and 45.
In this second of a four-part series on CPF, The Sunday Times looks at various ways those aged 35 and above can maximise their CPF funds.
1 Take care of your housing loans, needs and wants
A home is one of the big-ticket items that take up a hefty sum, especially for those in their 20s and 30s.
Many use Ordinary Account (OA) funds to pay their mortgage, but after working for 10 years or so and earning a bigger pay cheque, you can now consider planning ahead when it comes to home loan payments.
This is important as how much you pay into your OA from your CPF contribution changes from 23 per cent to 21 per cent after you turn 35.
It continues to decrease - to 19 per cent after 45 and 13.5 per cent after 50, and so on.
Financial advisers say you should review your mortgage periodically.
Eternal Financial Advisory chief executive Viviena Chin says if you signed up for a loan package a few years ago, ask yourself if it is still competitive to carry on with it or if there are better options.
She adds: "Ask the banker to refinance (your loan) to enjoy the same benefit, where you can save the interest and reduce the loan commitment."
Ray Alliance Financial Advisers managing director Raymond Ng says that it is time to set aside a fixed sum like your year-end bonus to pay off part of the mortgage periodically, "should the interest rate increase".
You can also aim to pay off your housing loan before you turn 55.
Mrs Nyang-Ngiam Su Ying, the CPF Board's senior deputy director of housing schemes, says: "Buying a home is not only a big financial commitment for most CPF members but also a long-term commitment which should be carefully planned upfront.
"To better enjoy their retirement years, CPF members are advised to finish paying off their housing loan before they retire."
To reach that goal, buy only within your own repayment capability and do not stretch the housing loan beyond 25 to 30 years, Mr Ng advises.
He adds that downgrading may also help.
Those thinking of upgrading their home or buying a second property should limit their total housing loan and other debt payments to 35 per cent of gross monthly income.
Note that the more money you spend on housing, the less you will have for retirement, so in order to maximise your CPF funds, exercise careful planning.
Also, use the CPF Housing Withdrawal Limits Calculator to find out when you will reach the CPF housing withdrawal limits.
2 Boost your CPF savings
Now that you probably have a stable and higher income, make annual CPF top-ups for your parents and grandparents to enhance their CPF savings. By doing so, you get to enjoy tax relief.
Ms Chua Hwee Leng, CPF senior deputy director (retirement schemes), says: "CPF members may enjoy up to $7,000 tax relief for cash top-ups to family members, including to one's spouse, siblings, parents, parents-in-law, grandparents and grandparents-in-law.
"Together with cash top-ups into one's own CPF account, members can enjoy up to $14,000 tax relief."
Once your mortgage is a thing of the past or you have set aside enough OA funds for mortgage loan repayments and other payments, consider transferring additional funds in OA to SA to earn higher interest.
For example, if you are 35 this year and transfer $10,000 from your OA to the SA, after five years, you will earn an additional $800 in interest. The SA pays at least 4 per cent interest a year.
So with a yearly interest of 4 per cent, the top-up of $10,000 will increase to $21,000 in 20 years.
The CPF interest rate on the OA is 2.5 per cent.
CPF's Ms Chua adds that "the higher interest rate can help to boost retirement savings".
Use the Ordinary Account-Special Account Savings Transfer Calculator to estimate the additional interest that you can earn from such a transfer.
Note that an extra 1 per cent interest will be earned by the first $60,000 you have in your CPF savings, of which the OA savings eligible for the extra 1 per cent interest are capped at $20,000.
3 Health and wealth after 35
Make sure you are well-covered with health and mortgage insurance and ensure your OA has enough for the annual premiums of the Home Protection Scheme (HPS).
Mr Christopher Tan, chief executive of financial advisory firm Providend, says the most important policies to get are those for medical expenses such as the Shield plans.
"Buy for the entire family so that in the event there is a hospitalisation, you don't have to come up with cash."
Also make sure you purchase the critical illness plan, and "buy the sum assured that is equivalent to two to three times of the annual gross income".
This will help to replace the loss of income, in case of major illnesses.
Mortgage insurance is another must, say financial advisers.
Mr Tan suggests HDB dwellers get the HPS scheme because "you can use CPF to pay the premiums of the mortgage insurance", while only cash is allowed for private mortgage reducing insurance plans.
However, you can consider private insurance plans as they can be more competitive compared with HPS, he added.
4 Invest using the OA funds
Having settled all the major loans and insurance matters, it is now time to look into investing using your OA balance to grow your retirement nest egg.
Ray Alliance Financial Advisers' Mr Ng says it is possible "if the investment can give reasonable returns above OA rates" and to choose investments that suit your risk appetite, tolerance and capacity.
"In addition, they should only consider investing with OA after setting aside enough for their housing loan repayment," he adds.
You must first save $20,000 in your OA and can only invest any additional savings beyond that.
The returns from your investment will go back into your CPF savings.
Eternal Financial Advisory's Ms Chin says: "For a person aged 30 to 45 who is able to take some risks and has no time to track stocks, the unit trust is a good alternative and a fund that is available and approved under the CPF Investment Scheme - Ordinary Account (CPFIS-OA)."
She also suggests exchange-traded funds (ETFs) for those considering a lower cost investment and who prefer to track the index of Singapore stocks.
While there is no guarantee that your investments will see better rates than the OA's 2.5 per cent interest, Ms Chin notes that some good funds performed better over time.
She says: "It is advisable to diversify some of your OA funds into good selective funds with good track records as a start, and review them in two to three years to see if the funds have met your expectations."
In order to choose the right funds, she suggests you "check the track record for the specific unit trust that you wish to invest in, what is the annual return for the last three years, and whether it's worth to take that risk on that particular fund to get better returns, or seek advice from a financial adviser".
This story was first published in The Straits Times on Oct 20, 2013
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