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Do You Know How CPF Interest Are Computed and Compounded? Hint: Not as straightforward as I thought - YouTube
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If you have checked your CPF account recently,
you would have noticed that your CPF’s interest
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for last year has been credited to your
respective accounts by 1 Jan this year.
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The computation of CPF’s interest is
not as straight-forward as I thought.
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Continue watching this video to find out
how CPF’s interest are being calculated
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and how you can use it to your advantage
when planning for any CPF transactions.
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Remember to click the like and subscribe
button if you find the content useful.
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Let’s start with the information from CPF’s
website which I will highlight the key points
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• CPF interest is computed monthly.
• It is then credited to your
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respective accounts by 1st Jan of the
following year and compounded annually.
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• contributions (including refunds) received
this month start earning interest next month
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• And withdrawals/deductions in this month
will not earn interest from this month onwards.
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If you are confused by what it really means,
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watch on as I will explain step by step
how CPF’s interest are being calculated.
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Let’s just look at an example on contributions
to CPF using the ordinary account
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as the calculation will be the same for SA
and MA, except at a higher interest of 4%.
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At the start of the year, on 1st Jan 2021,
Ken has $100K in his OA and his monthly
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CPF’s work contribution to OA is $690.
At the end of the month, i.e 31st Jan,
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his OA balance will be $100,690.
For month of Jan, his interest will be $208.33.
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This is calculated by 2.5% (which is the
interest per annum for OA) *$100,000 /12 months.
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You will notice that interest is being calculated
using $100,000 instead of $100,690 because per
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CPF’s definition, contributions received this
month will start earning interest next month.
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Another way to look at it is that interest
is calculated based on the lowest balance in
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the month, which is $100,000 instead of $100,690.
The starting balance in February will be $100,690.
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Note that the interest from Jan is not
added because CPF interest is computed
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monthly but compounded annually.
Likewise in February, $690 is credited to his
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OA account for work contribution and now the month
end balance on 28 Feb will be $101,380. February
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interest will then be $209.77, calculated based
on the lowest balance of $100,690 in the month.
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The same calculation repeats
until end of the year in Dec,
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where the interest computed from each month
is being added up, which comes up to $2594.88
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This interest is then credited to
OA account at the end of the year
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before 1 Jan of the following year.
Hence on 1st Jan the following year,
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the starting OA balance will be $110,874.88,
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taking into account the total interest
of $2,594.88 from the prior year.
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For simplicity, I have not included the additional
1% interest for the first $60K in this example.
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We have seen how interest is computed in scenario
where funds are deposited to CPF accounts.
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Let’s look at the reserve scenario when
funds are withdrawn from CPF accounts.
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Using the same example, assume $500 was deducted
from his OA account in June, the interest earn
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for the month of June will be calculated based on
the lowest balance in the month, which is $103,450
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minus $500 which gives $102,950. The interest
earned for the month will then be 2.5% of this
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amount divided by 12 months, which is $214.48.
This is what CPF means by “withdrawals/deductions
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in this month will not earn
interest from this month onwards.”
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The interest calculation for the rest
of the year will be the same as before.
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In Summary, there are three key take
aways on computation of CPF’s interest
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1) Top up to CPF early in the
year to capture the most interest
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2) If you are topping up funds to your CPF,
you can do it nearer to the end of the month,
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since it is not going to earn you
interest until the following month
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3) If you are withdrawing from your CPF, you
can withdraw it near to the start of the month,
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since the withdrawal will be taken
into account in the current month.
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I hope you find this information useful.
Remember to click the Like and Subscribe
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button to support my channel.
You can also visit my website at
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www.investingtoolkits for more resources on CPF.
Thank you for watching!
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