Retirement Funding Optimization

[NYY1]

Do people use their OA for monthly mortgage payment even if you don't need to do so?

[smoulder]

Do people use their OA for monthly mortgage payment even if you don't need to do so?

I don't use it for mortgage. I prefer to invest it in more S&P 500 index funds through Endowus.

[malcontent]

Do people use their OA for monthly mortgage payment even if you don't need to do so?

People I know who do this earn a 4-figure monthly salary. Once you earn 5-figures, it usually makes sense to transfer OA to RA up to FRS and then CPFIS after that… this is what I’ve been doing with my wife’s CPF account (she lets me manage her CPF because she believes she’ll never get anything back… she thinks it’s like donating to a charity, LOL).

[NYY1]

Example (marginal differences, ignores the minimum required in the OA):
CPF OA: $1,000 per month
Mortgage: $5,000 per month
Amount to Invest: $10,000 – cash used for mortgage

Scenario A: Don’t use CPF OA for mortgage

Monthly Allocation:
CPF OA: $1,000
Mortgage: $5,000
Investments: $5,000

Value at the End of 30 Years:
CPF OA: Future Value (FV) of $1,000/month at 2.5% (or 4.0% if swept to the SA)
Mortgage: Value of the property (no loan remaining), whatever return that is
Investments: FV of $5,000/month at X%

Scenario B: Use CPF OA for mortgage

Monthly Allocation:
CPF OA: $0 (need to repay amounts with interest when you sell the property)
Mortgage: $5,000 ($4,000 cash + $1,000 OA)
Investments: $6,000

Value at the End of 30 Years:
CPF OA: $0
Mortgage: Value of the Property (no loan remaining), whatever return that is
Investments: FV of $6,000/month at X%

Difference (B – A):
$1,000/month at X% - $1,000/month at 2.5% (or 4.0% if swept to the SA).

For a horizon of 20-30 years and reasonable values of X%, the difference adds up.

[NYY1]

Do people use their OA for monthly mortgage payment even if you don't need to do so?

I don't use it for mortgage. I prefer to invest it in more S&P 500 index funds through Endowus.

Understand. I think you get a similar result to the example I posted above (edited). There will be a slight difference in fees and flexibility/restrictions on what can be done with the money (before 55).

[NYY1]

Do people use their OA for monthly mortgage payment even if you don't need to do so?

People I know who do this earn a 4-figure monthly salary. Once you earn 5-figures, it usually makes sense to transfer OA to RA up to FRS and then CPFIS after that… this is what I’ve been doing with my wife’s CPF account (she lets me manage her CPF because she believes she’ll never get anything back… she thinks it’s like donating to a charity, LOL).

I think a lot of people do this (OA to SA if you don't need the monthly contributions and can settle the mortgage from your remaining pay). However, is locking up money for 20-30 years at 4% the best option? See the example I posted above.

Of course, if someone wants to max out the SA at the FRS first, they can certainly do that (some sense of safety/base, and I'm sure they'll still be OK).

If one uses the OA, the key is to not squander the extra cash on current consumption. One should still have SA contributions, and the balance will grow with interest. I don't think you'll hit the FRS over 30 years, but you can always top it up at the end (age 55-65).

[NYY1]

Example (marginal differences, ignores the minimum required in the OA):
CPF OA: $1,000 per month
Mortgage: $5,000 per month
Amount to Invest: $10,000 – cash used for mortgage

Scenario A: Don’t use CPF OA for mortgage

Monthly Allocation:
CPF OA: $1,000
Mortgage: $5,000
Investments: $5,000

Value at the End of 30 Years:
CPF OA: Future Value (FV) of $1,000/month at 2.5% (or 4.0% if swept to the SA)
Mortgage: Value of the property (no loan remaining), whatever return that is
Investments: FV of $5,000/month at X%

Scenario B: Use CPF OA for mortgage

Monthly Allocation:
CPF OA: $0 (need to repay amounts with interest when you sell the property)
Mortgage: $5,000 ($4,000 cash + $1,000 OA)
Investments: $6,000

Value at the End of 30 Years:
CPF OA: $0
Mortgage: Value of the Property (no loan remaining), whatever return that is
Investments: FV of $6,000/month at X%

Difference (B – A):
$1,000/month at X% - $1,000/month at 2.5% (or 4.0% if swept to the SA).

For a horizon of 20-30 years and reasonable values of X%, the difference adds up.

Just to build on the other replies:

If you want to invest the amount of your monthly OA contribution, I think using the OA for housing (even if you don't need to do so) allows you to invest that amount at a lower fee. You also have more flexibility with the funds should something happen before age 55.

If you don't need the funds and want to build some safe component of your portfolio, you can certainly sweep the amount into the SA for a higher interest rate. However, the reason for safety is when you may need to use the funds in the near-term. But when someone is younger (20s, 30s, perhaps even early/mid-40s), unfortunately the SA doesn't allow you to do that. If you have some emergency expenses (medical, house reno, moving, etc), you still need other liquid funds.

Hence, it is probably better to hold safe instruments/liquidity buffers in cash accounts where you can access them if needed. For money that cannot be touched for years/decades, it is probably better to invest in long-term assets (equities), to the extent you can (above OA/SA minimums, etc).

That being said, I think the trade-offs probably change a bit once you cross 45-50 years old (or so). One could say 65 is still 15-20 years away and you'll probably do better in equities than the SA/RA (just invest and top up the SA/RA at the end). On the other hand, with each year that passes, you are a year closer, and some people may give up (i.e. bail out at the wrong time). Additionally, you can get the excess funds over the FRS back at 55 (i.e. within 5-10 years) if needed, so the liquidity profile is better. I guess a lot may depend on your employment picture at that time; both how long you want to work and job security.

Anyways, any savings/investing/compounding is good, so do whatever you are comfortable with. But if we are talking optimizing funding, I think the above is worth considering.

[malcontent]

I fully agree that “safe” money is best held in liquid form, and long-term investments should be in riskier vehicles rather than the safe returns found with CPF. When I read about some people topping up their children’s CPF accounts up to the max, it made no sense to me. Kids have the longest runway and should be chasing the highest risk adjusted returns possible. For our kids, I opened brokerage accounts many years ago and they are fully invested in broadly diversified low-cost index ETFs. It’s not a huge amount of money, but at least it’s growing a lot faster than if it were sitting in a CPF account.

My wife and I have a much shorter runway, and we could withdraw some of her CPF in the next several years if needed. Overall, I maintain an aggressive posture with 75% equity exposure. I feel like that is already more than most people would be comfortable with in their 50’s, but I see it as actually lowering the risk of us exhausting our retirement funds prematurely.

[NYY1]

For SRS, I agree that additional expenses, the difference in tax rates (saved now vs. expect to pay in the future), and time horizon are all factors. Over the years, the options available for these investments have probably improved.

Anyways, the amount of additional expenses (and inefficiencies) that one can absorb to break-even is a function of the difference in tax rates, time horizon, and assumed return. This figure is not fixed.

Variables:
R = Annual Return %
F = Additional Expenses as a %
T = Years
TRC = Tax Rate Current
TRF = Tax Rate Future

Invest after tax with Cash:

$1 x (1 – TRC) x (1 + R)^T

Invest in SRS with Tax Deduction:

[ $1 x (1 – 0% Tax) x (1 + R – F)^T ] x (1 – TRF/2)

Simplifying and rearranging you get:

F = (1 + R) x (1 – ((1 – TRC)/(1 – TRF/2))^(1/T))

Accordingly, the amount of additional fees you can absorb is increasing with R and the difference between TRC and TRF/2 while it is decreasing with T.

For example, Y = 25, R = 8%, TRC = 20%, TRF = 15% --> F = 0.625%*. If you change TRF = 0% (local that spreads withdrawals out over 10 years, subject to limits), F = 0.96%.

The above only considers Singapore taxes. Further, it does not consider the restrictions on withdrawing the money (or hassle for people that may leave Singapore).

*Note: 20% - 15%/2 = 12.5% and 1.125^(1/25) = 0.47% overestimates the impact of add’l fees

[malcontent]

On a whim, I did top off my SRS account this year with an extra $5k which will save me $1k… but will that really pay off? If the $5k doubles to $10k and I end up paying $1k later, seems like it will all be for naught. Doubts, I have a few.

[NYY1]

On a whim, I did top off my SRS account this year with an extra $5k which will save me $1k… but will that really pay off? If the $5k doubles to $10k and I end up paying $1k later, seems like it will all be for naught. Doubts, I have a few.

We can't compare absolute dollars of taxes paid across time (either way, the amount gets multiplied by (1 - a tax rate) and doing this later will usually result in more absolute dollars paid). For example, if you invested outside of SRS, you would only have $4k to invest. Assuming the same double, you end up with $8k. $10k less 7.5% is still ahead. Even if the investment tripled, $4k x 3 = $12k, $5k x 3 = $15k less 7.5% =$13.875k, which is a greater amount even though you paid more in tax ($1.125k vs. $1k).

The difference is the additional fees or inefficient investment choices that eat up the tax savings (i.e. reduce what $5k compounds to so you don't end up with $10k or $15k).

As mentioned, I think the investment options have improved over the years, and most locals will likely come out ahead if the invest in a similar product (vs. what they'd invest in with cash).

That being said, for some foreigners there are probably still a lot of add'l fees and frictions. If you withdraw quickly, you should still be ahead. However, over time it may not be all that much.

[malcontent]

I would have never opened an SRS account if my company hadn’t coerced me. It was either that for forgo $30k annually in contributions.

My goal is to just breakeven versus had they given me the cash outside SRS. If I can do that, I will be a happy camper.

I do feel incredibly fortunate for SGX listed S27, because as a US person, I don’t have a lot of tax appropriate options. No way I could do units trusts for example, which are PFICs under U.S. tax.

[NYY1]

If you withdraw the balance at the 10 year mark, the amount of add'l expenses you can absorb is slightly more than 1.5% per year (8% return, 20% tax rate saved, 15% on half on the way out). I can't imagine the drag is that high?

[malcontent]

If you withdraw the balance at the 10 year mark, the amount of add'l expenses you can absorb is slightly more than 1.5% per year (8% return, 20% tax rate saved, 15% on half on the way out). I can't imagine the drag is that high?

Let’s do an example. For simplicity, assume all investments will double in 10 years and tax rate is 20% both on the way in and the way out. I will likely hit 20% because for SRS, it’s 15% nonresident rate or the resident rate, whichever is higher.

$100 SRS contribution ($200 after 10 years)
$20 tax savings ($40 after 10 years)
-$10 tax payment (20% on $100)
$230 net

$100 invested ($200 after 10 years)
$0 tax savings
$0 tax payment
$200 net

In this case we end up with 15% more after 10 years assuming the same investment and same expenses. I had ChatGPT calculate what % compounded would reach 15% in 10 years and it’s 1.41%. I do believe I can keep it well under that level, assuming these assumptions and calculations are correct.

[NYY1]

If you withdraw the balance at the 10 year mark, the amount of add'l expenses you can absorb is slightly more than 1.5% per year (8% return, 20% tax rate saved, 15% on half on the way out). I can't imagine the drag is that high?

Let’s do an example. For simplicity, assume all investments will double in 10 years and tax rate is 20% both on the way in and the way out. I will likely hit 20% because for SRS, it’s 15% nonresident rate or the resident rate, whichever is higher.

$100 SRS contribution ($200 after 10 years)
$20 tax savings ($40 after 10 years)
-$10 tax payment (20% on $100)
$230 net

$100 invested ($200 after 10 years)
$0 tax savings
$0 tax payment
$200 net

In this case we end up with 15% more after 10 years assuming the same investment and same expenses. I had ChatGPT calculate what % compounded would reach 15% in 10 years and it’s 1.41%. I do believe I can keep it well under that level, assuming these assumptions and calculations are correct.

Two things:

#1. I see that you are adding the tax savings to the investment. I would suggest that it be looked at the following way instead (marginal dollars vs. investing the same amount and the tax payment. I know you are saying you still have the taxes saved and could invest them but that is adding two different piles of money. Think about a situation where you have no extra money and were then given an add'l $100 on the last day of the year; you can either invest $100 in SRS or reserve $20 for taxes and invest $80):

A:
$100 SRS Contribution
$200 After 10 Years (R = ~7.2%)
$200 x 20% / 2 = $20 tax
$180 net (12.5% more compared to B)

B:
$100 income less 20% tax = $80 after tax to invest
$160 after 10 years (same double)

The break-even fee is 1.255%. Check:
$100 SRS Contribution x 1.05945^10 = $178.2
$178.2 x 20%/2 = ~17.82 tax
Net = $160 (some rounding but if you do the calcs in a xls you can get the exact figures)

You should get the same answer if you put the inputs into the F equation I wrote above (it's just setting two equations equal to each other and solving for F).

#2. For the tax rate on the way out, I think it's 15% on the total or the progressive rate? I.e. the amount corresponding to a 20% marginal rate is only a 13.9% average rate (in which case they'll still charge you 15%).

Anyways, you should be OK and come out ahead if you withdraw the money as soon as you can. At the same time, I understand the simplicity of just receiving after tax cash and investing it in the same spot as your other assets (with no restrictions and no time spent getting the money back, etc).