The hunt for your nest egg, living to 100, and the hidden jewels of CPF

The original version of this article first appeared in The Business Times.

My kids, who are under the age of five, have been dying to go on an Easter egg hunt. It seems innate in us humans to desire a good hunt — for food, for entertainment, or just for the sake of the hunt and being gratified.

Many of these hunts happen online — trying to validate a product or service, a good restaurant, or even a potential mate. We scour websites, online reviews, and images at insane thumb-scrolling pace, to come to a quick decision on what to do.

We humans have been conditioned to want immediate gratification for our successful hunts — same-day shipping, instant payments, rapid validation.

But investing does not work this way, and never will, because life will span nearly 100 years for many of us, and cannot be rushed. And not doing things today will affect your quality of life in the future.

No one likes thinking about a nest egg.

It's boring — it's something to deal with later.

OCBC's 2020 Financial Wellness survey stated that of 2,000 working adults, only 28% have regular passive income, and only 37% have a plan for retirement. People acknowledge that they are not prepared for the future, but don't feel the urgency to do anything about it.

This is worrisome for an educated, ageing population with one of the highest GDP per capita and longest life expectancies in the world.

I personally don't want to live out my last years with a lower quality of life.

Living to 100

If you reach the age of 65, the average life expectancy is an additional 21.3 years, or over 86 years in total. This average is up from 73 years in 1960, and 82 years in 2000. These are averages, and we are living longer. (Source: Statistics Singapore 2019)

If you are 40 today, is it unreasonable to expect the average among us to live to 92? Which means many of us would live well beyond that?

I think our own assumptions for life expectancy and the quality of life we want to pursue must be assessed.

Read more: Retirement planning: Chickens, eggs, and investing for retirement in Singapore

Hidden benefits of CPF

I've always been confused when people say "I treat my CPF Ordinary Account (OA) earning 2.5% as a high interest cash account", or "CPF is the cash portion of my investment portfolio".

This logic does not hold because cash by definition is meant to be liquid — you need to be able to draw down your cash immediately, and have the flexibility to use it in the real world to buy goods and services.

CPF by design is illiquid. Even if you are past the withdrawal age, which is currently 55, you have to redeem all of your higher interest earning CPF Special Account (SA) before you can start redeem your CPF OA. Therefore it is probably in your best interest to spend your real cash first, then your CPF SA, then your CPF OA.

If you are efficient, you will use your CPF OA last. As your oldest money, you should be investing wisely to grow this money. Investing is a bumpy ride to wealth, but one that can pay off handsomely as long as you invest properly — stay diversified, patiently avoid trying to time the market, and manage your costs.

In financial jargon, given the longer time horizon of this money, you can afford to take on the volatility of the equity risk premium to target higher expected returns. In any given year, the returns of global markets could be as large as plus or minus 40%. Losses are heartwrenching to experience, but over the long term, investors are rewarded by being diversified in owning the stock of companies that produce the world's goods and services.

Since 1970, despite all the craziness in the world, the index had major ups and downs but would have grown in value by +5,204% versus +254% if it were earning a stable 2.5% per annum. That means S$200,000 would have grown into over S$10.5 million.

Although 51 years sounds long, if you are 40 today, you will likely see five more decades, and you will want your CPF to be there with you, all the way.

What to do today, for a better tomorrow

Turn your hunt online into long-term gratification. Take the time to do your research and hunt for a long-term passive investment strategy for your CPF. Invest wisely, in globally diversified portfolios at a low cost, at a risk tolerance suitable for you. Contribute automatically and monthly as and when you and your employer top up your CPF account.

Endowus, as the first digital adviser for CPF, has exclusive access to low-cost index funds that track the MSCI World and S&P 500 managed by Vanguard. With a diversified, passive strategic asset allocation, Endowus' 2020 CPF portfolios returned +15.7% for 100% equities, and +6.7% for 100% fixed income, outperforming the average returns of CPFIS-included funds by 2.2% and 0.4%, respectively. (Source: Endowus Research, Refinitiv-Lipper report for CPF, 16 Mar 2021. Past performance is not indicative of of future performance)

The egg has been an ancient symbol of new life throughout human history, across many cultures and religions. It is time to hunt for a nest and start growing some well-invested eggs for your future.

Explore the Endowus Fin.Lit Academy to pick up tips on investing, wealth building, personal finance, CPF and SRS, and retirement planning. Take charge of your CPF investments with Endowus.

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