When planning our retirement in Singapore, we can't disregard the CPF system.
In a nutshell, the CPF system safeguards our basic retirement adequacy by giving us having a stable income for as long as we live, after we are no longer within the workforce within our golden years.
How The CPF System Safeguards Our Retirement
During our working years, we contribute a fixed proportion in our salary to our CPF accounts – Ordinary Account, Special Account and MediSave Account.
While we build this nest egg over time, we're paid interest on our balances:
- Ordinary Account (OA): 2.5% per annum (p.a.)
- Special Account (SA): 4.0% p.a.
- MediSave Account (MA): 4.0% p.a.
In our retirement, we will be in a position to tap on a part of our CPF balances to get an ongoing monthly payout via the CPF LIFE scheme.
However, we might have the ability to boost our retirement amount of money by investing our CPF Ordinary Account and CPF Special Account balances. Before investing, we need to know that people can only invest anything over the first $20,000 in our CPF Ordinary Account and also the first $40,000 in our Special Account.
To Invest Or Not To Invest? Unfortunately, That isn't A Question We Typically Ask
Despite being able to invest our CPF OA and CPF SA balances, this is not a subject a lot of us consider. Based on CPF, you will find 3.9 million CPF members, having a combined $391.1 billion within their CPF accounts.
However, as at the end of December 2021, there were about 940,000 people who invested a combined total of approximately $17.4 billion of their CPF Ordinary Account balances and about 310,000 individuals who invested a combined total of approximately $5.A million their CPF Special Account.
Even though merely a fraction people are investing our CPF balances, the choice to invest (or not to invest), ought to be a decision – and never we do because someone who has sold us a product offered on the CPF Investment Scheme (CPFIS) or because we are really not aware such a strategy even exists.
When considering to invest our CPF OA and/or SA balances through the CPFIS, there are key pros and cons we have to know.
Why Investing Your CPF Is Important
#1 Grow your retirement funds by more than the base interest rate
As previously stated, funds in our CPF OA earns 2.5% p.a., while funds within our CPF SA earns 4.0% p.a. To develop our retirement amount of money to some bigger and much more comfortable amount, we can either transfer our CPF OA to our CPF SA, to earn an additional 1.5% p.a., or we can decide to invest one or both our CPF OA and CPF SA.
For some perspective, the average 3-year annualised returns on unit trusts and ILPs we can invest in through the CPFIS is 7.88%. This is much better than the 2.5% p.a. we earn on our CPF OA balances, as well as much better than transferring our CPF OA balances to our CPF SA to earn 4.0% p.a.
Of course, we are able to also see that the 1-year return is simply 2.21%, which we'll discuss more in the disadvantages segment below.
#2 Retaining the flexibility to come back funds to your CPF Ordinary Account
When we invest our CPF Ordinary Account balances, we are able to sell them off and away to channel the cash back into the account.
However, if we choose to transfer our CPF Ordinary Account balances to our CPF Special Account to earn a much better base rate of interest, we won't be able to refund our CPF Ordinary Account.
This could be important if we desire to grow our funds but retain the flexibility of returning funds back into our CPF Ordinary Account in unforeseen circumstances, especially when we are not able to continue mortgage payments if we lose our salary because of retrenchment, becoming injured or are diagnosed with a vital illness.
#3 Protecting your CPF Ordinary Account when you buy a home
Firstly, it has absolutely nothing to use the returns you are receiving.
If we want to protect our CPF Ordinary Account balances when buying a house, we can make use of this strategy to ultimately retain a lot more than $20,000 within our CPF Ordinary Account.
Just think about this scenario, if we have $100,000 within our CPF Ordinary Account, and that we wish to buy a home for $400,000, we can only leave up to $20,000 within our CPF Ordinary Account under the current rules.
By investing $40,000 in our CPF Ordinary Account balances, we are able to decide to contribute only $40,000 to the home down payment. After spending money on the deposit, we are able to sell the investments, and channel back the $40,000 to our CPF Ordinary Account, to retain up to $60,000 rather than the $20,000 we originally could retain. This can be used to cover the house loan in emergencies or by choice.
Why NOT Investing Your CPF Is Important
#1 Knowning that returns are not guaranteed
While we may have the ability to substantially boost our retirement amount of money in the long-term by compounding our funds at a higher rate of interest, this is not guaranteed.
In the table above, we saw that the average 1-year returns on unit trusts and ILPs we can purchase via the CPFIS is 2.21%. This really is obviously less than the two.5% p.a. we are able to earn on our CPF OA balances.
We need to understand that when we invest in anything, we are taking a chance. While that risk may lead to the long term, we might face some volatility in the short term by earning a lesser interest return or perhaps face losses.
While there exists a pretty good possibility of outperforming the CPF base interest rates if we invest within the long-term, there is no guarantee of that either.
#2 If you have important short-term goals
Investing our CPF monies ought to be for long-term goals such as boosting our retirement amount of money.
If we've short-term goals for example funding our child's education or buying a home, we might not be able to take much risks with this CPF balances. This is because we can't manage to see our investments shrink by having an important upcoming expense.
Many research has also shown that although our investments should grow within the long-term, very few people can predict what's going to take place in the short term. We have to ask ourself when we can withstand a fiscal crisis that may see our investments halve in value.
You Need to comprehend Why You Are Investing Or otherwise Investing Your CPF
We need to give ourselves the very best opportunity to grow our retirement funds, and also the earlier starting, the better our chances of achieving a better outcome. By investing our CPF balances, we might be able to earn a higher interest return compared to base CPF rates over the long-term and boost our retirement funds.
At the same time, we ought to not blindly jump into any investments, regardless of what anyone informs us. It may be better to stay out of the best investment when we don't completely understand what we are doing.
Investing or otherwise investing should be a decision, instead of for sale a product or being unaware of such an opportunity.