Your CPF account consists of 3 accounts: Ordinary Account (OA), Special Account (SA), and your Medisave Account (MA). The OA is primarily used for providing housing, while SA is used for retirement. MA is used to pay for healthcare.
The interest rate on your OA is 2.5%, while the interest rates on SA and MA are 4%. There is an extra 1% interest upon reaching the first $60,000, combined across all three (with at least $20,000 in your OA).
In order to optimize your CPF account, the key is to move the lower interest OA money into your SA, to take advantage of the compounding effect of that extra 1% per year.
1. Once you begin working, transfer your OA account into your SA account only a monthly basis, as CPF interest is calculated monthly. This is an irreversible process, but it forms 1 part of your retirement portfolio.
2. Voluntarily contribute to your CPF SA account for tax deductions. I wrote about it here.
Once you hit the SA maximum of $171k (based on 2018 figures) the funds will automatically be channeled to your OA account. I didn’t do this early on, and I regret doing so, but I’ll hit the SA maximum next year at age 36, and will have a fully paid property in next year as well.
For example at the age of 25, you transfer $20k from your OA to SA, you would have a guaranteed $22,917 more at the age of 55 compared to the default scenario of doing nothing and leaving it all in the OA. This is the beauty of compound interest.
The interest rate and SA maximum will likely change, but the principle to optimize your CPF funds still holds. If you need funds to buy a property before you’ve hit the SA maximum, that’s where your cash stash will come in, and I hope you’ve been building that up.