In 2020, the CPF Retirement Sum is $181,000. However, just 10 years ago the sum was $117,000, nearly 54.7% more today.
The savvy worry that the interest rate offered by the CPF Board of 2.5% and 4.0% for our Ordinary and Special accounts respectively – albeit relatively attractive and risk-free – is too minuscule to grow our retirement basket. Here’s where CPF Investment Scheme (CPFIS) can help us. The CPFIS provides us with the option to invest CPF savings in various instruments for potentially greater returns.
If we look closely, the interest rates enjoyed by our SA is significantly greater than the OA. Simply moving our OA to the SA would earn us better returns instantly. However, this transference is irrevocable and you would not be able to transfer the SA funds back to the OA which is commonly used for housing and education. It is locked in until retirement at age 65 where your CPF LIFE payout commences.
Herein comes the allure of CPFIS – you can possible get a better return than the risk-free 2.5% without locking it up. As with all investments, the potential to earn much greater returns is also met with the possibility of interests lower than 2.5% due to market and liquidity risks associated with most investments. At a Glance, The CPFIS gives us both flexibility and control of deciding where to invest our CPF savings for greater potential returns to fund a more comfortable retirement.
Your CPF money is generally locked in till you are 55, there is plenty of time to grow your investments if invest in a well-diversified, well-managed portfolio. As your Special Account funds cannot be used for property, mortgage or education, many Singaporeans generally feel the impetus to invest it over a longer period. This insulates them against short-term fluctuations and makes long-term gains.
Balanced funds and bond funds are the two primary investment options used for Special Account investments. Balanced funds invest in bonds and equities of a rough (“60-40” mix) where fund managers actively manage the allocation between both asset classes. Millennials Finance recommends balanced funds over bond funds as they also invest in equities, allowing for a better potential capital gain as compared to simply investing in bonds. While balanced funds are usually riskier than bond funds, the aggressive fund makes for a sounder long-term investment strategy.
Am I eligible for CPF Investment Schemes?
Apart from having a CPF account, one must be
Does CPF Investment suit my needs?
My general rule of thumb is to avoid investing your CPF funds if you fit one of the three criteria mentioned below:
a. Very Low-Risk Tolerance
As with all investments, there are no guarantees. Should you unable to tolerate the possibility of some capital loss, you should contact your financial advisor to walk you through a Risk Tolerance Questionnaire to assess your risk appetite and suitability towards investment. Investors with Low-Risk Tolerance are highly likely to not benefit from such investments as they might surrender the plans prematurely during market downturns instead of keeping their investments and switching funds.
b. Short-term immediate goals requiring CPF funds
CPF funds are primarily used for retirement savings. However, the Ordinary Account (OA) balance may also be used for housing instalment and education through the CPF Education Scheme. Should you foresee plans to use CPF Ordinary Account Funds in the next 3 to 4 years, we do not recommend investing it. You may be forced to sell your investments at an unwise time because the funds are needed urgently during an economic downturn.
c. Too close to retirement age
At age 55, your OA and SA balances will be funneled into a newly created Retirement Account (RA). Investing your CPF funds too late might give you insufficient time to recover from losses in the event of a market downturn or if the funds happen to be underperforming when you urgently need it.
If you are unsure about your suitability, drop us a message and we will advise you accordingly.
Our CPF money can be invested in a wide range of financial products:
If you are either too busy or have no knowledge in investing, consider engaging the help of a financial adviser like us here at Millennials Finance. The benefit of getting professional help is the ability to advise on your risk appetite, determine your financial goals and build a suitable CPF investment portfolio.
With the broad range of products available for us to invest our OA and SA into, this is highly subjective. For instance, unit trusts are generally riskier while bonds carry lower risks. Our potential returns depend on our risk-return appetite. Ideally, our investments should strive to beat the CPF legislated OA and SA rate after factoring in charges. As all investments involve charges of some sort, it is important that we do not allow them to erode our returns as we try to gain more. Hence while choosing where to invest, take note of the loading fees involved (front-end load or back-end and the charges involved).
How do I apply to invest my CPF funds?
The process to apply for CPFIS investments slightly differ with our CPF-OA and CPF-SA:
To invest your CPF Ordinary Account, you require an Investment Account with DBS, OCBC or UOB. As the fees are the same across the banks, we recommend you go with the bank you use every day! The account is purely for administration of funds. Following which you may approach a financial advisor/ investment manager.
Investing your CPF Funds into a portfolio of funds helps you remain disciplined and accumulate monies towards retirement. As your funds can only be withdrawn at age 55 (at best), profits and losses cannot be used to fund your yearly Europe tours nor purchase properties and cars. That said, investing allows you to accumulate wealth at a possibly better return than the state legislated interest rate of 2.5% (OA) or 4% (SA) per annum. We can invest as a lump sum, or take up a regular investment plan that invests into the portfolio on a monthly/ annual basis on a averaged basis.
We hope this article sheds some light on CPF Investment Schemes. Millennial Finance’s process begins with reviewing your financial circumstances, concerns and goals before recommending a suitable plan for you. Contact us today to schedule an appointment to learn more about investing your CPF funds with us.
Something about this article that was not clear or do you have a question pertaining to the CPF Investment Scheme? Let us know below or drop us a message.