Why I did not top up CPF with cash?

The first week of 2024 has passed!

The market has not continued with the momentum from the last two weeks of 2023. At the end of first week, ES3 is down by 1.7% and SPY is down by 0.8%. Since I am not into shorting and do not use options, my portfolio in general tracks the market movement, and is down 1.7% for the first week.

While it might not feel pleasant, especially after enjoying the euphoria over the past two months, such movement is very common in the stock market. I reckon our brain is playing trick to us as it tags the gain to 2023 and loss to 2024.

Imagine if 2023 has 53 weeks, and yesterday is the last trading session for 2023, we will probably be celebrating a good performance this weekend. It is still early days, so don’t let the drop in just 4 trading sessions affect your mood and/or plan.

Reporting period is coming up, with some companies releasing their results as early as end January. This is the real deal and what we should be paying attention to.

Topping up CPF

This is also the time of the year here you see many people, especially in the finance community sharing their top up to CPF. There are real benefits to it, such as getting an interest of 4% from SA account, and tax relief for $8,000 for self; $16,000 if you also top up for your loved ones.

Of course, if you intend to do the top up, it’s definitely better to do it as soon as possible, given that CPF interest is computed (on the lowest amount of the month) on a monthly basis. You can refer to CPF Website for more information on the top-up.

Why I did not top up CPF?

The obvious reason now is I already hit Full Retirement Sum (FRS), so I can’t top up to CPF-SA anymore. But why didn’t I top up my CPF in the past?

The main reason for me is I don’t like my money to be locked up! The top up goes to CPF-SA and the earliest I can have access to it is at 55. So when I was in my 30s, we are talking about 20 years in which I can’t have access to it!

Don’t get me wrong, in general I do like our CPF system. However, locking up 37% of my gross pay for the future is more than enough. I would like to have more control over how I use the remaining amount.

The second reason is with such a long runway then, I stood a good chance to get a better return than 4%, and that made the savings from income tax relief a lot less attractive. That was probably because I did not have a very high income. Coupled that with the other reliefs, I did not pay a high amount of income tax for most years.

To be honest, I did not run through the numbers then. Given that I treasured the liquidity, I did not need the numbers to convince me otherwise. Nonetheless, I am curious now and did some computation to see how much time is required to recoup the tax relief for different rates of return.

As shown in the above computation, for a $8k top up and 7% tax rate, one will save about $560. If one can achieve an average return of 6%, it requires 4 years to earn back this relief. Up the return to 8%, it requires only 2 years to earn back the tax relief!

What is more important though is for longer term, one will definitely benefit more from the higher return. The catch is unlike the 4% interest from CPF-SA account, the higher return is not guaranteed. Having said that, with a long runway, getting a 6% return is quite doable.

Of course, tax relief becomes more attractive if one earns a much higher income. While it is no longer relevant to me, I now think that it might be good to top up CPF only when one is being hit by a higher tax rate.

As mentioned earlier, tax relief at a lower rate isn’t that attractive. Also, topping up in the earlier years means more likely to hit FRS earlier. What that means is one cannot top up to enjoy the higher tax relief when income is higher!

Looking back, I don’t regret not topping up my CPF. I thank my younger self for taking a calculated risk to go for a higher non-guaranteed return.

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