Imagine that your gross salary is $3,000. You contribute to CPF, give a portion to your parents, pay for the household expenses and other expenses. As a responsible adult, you try very hard to cut down on your expenses, work hard to bring home the dough, but you realise there is only so much you can save.
What if you have an additional $1,110, of which $690 can be invested in the equity and bond markets for your retirement, earning a higher return for your retirement?
This $690 that I am talking about is not imaginary: it is CPF, arguably the most neglected part of our net worth.
Why do we not think of investing our CPF?
Forget about CPF investing - as Singaporeans, we are conditioned to not treat CPF monies as part a of our wealth. From the very first paycheck we receive as an employee, 20% of our gross salary is automatically deducted. Along with the 17% employer contribution, 37% of our gross salary goes into our CPF. Within certain thresholds, any pay increment, any bonuses will be subjected to CPF contributions. We do not have the opt-out option for CPF monies. As such, we don't feel like we "own" our CPF monies.
Using CPF for housing vs investing our CPF
The first tangible use of our CPF OA balance is housing. As we deliberate purchasing our first home, we start to realise how much money we need, even if it's just for the downpayment - if you intend to get a bank loan, 5% of the purchase price has to be in cash, with another 20% of it to be made in either cash, CPF, or a mixture of both. A very modest $500,000 resale HDB will require at least $25,000 in cash for downpayment if you were to take a bank loan. We could also choose to take up a HDB loan.
Since most of us can't afford to pay off our first home using cash, we are forced to look at our CPF balances.Our CPF OA monies, a sum of monies that was previously distant, unaccessible and irrelevant to our daily life, can be used to pay for the brick and mortar that make our home.
However, if we do not or are not planning to use it for housing, then shouldn't we try to get higher returns for it through CPF investments?
Growing your CPF monies by investments
You can get $1.3 million in your CPF OA at the age of 55, just by investing your CPF OA monies, even with a starting salary of $3,000.
The above chart is based on the assumption that you start work at 25, with a monthly pay of $3,000 with 4% annual pay increment.
Even though our CPF OA account has grown by $230,000 compared to our OA contributions, we can still do more with the money, such as doing the CPF OA to SA transfer to maximise returns, or taking risk and investing in the equities market (7% returns assumed here).
As there is a limit to how much CPF monies we can transfer to our SA, the incremental benefit when we do the OA to SA transfer is limited, at an additional $100,000. This pales in comparison to what we can achieve when we investing our CPF, with risk.
Risk of CPF Investment Scheme
There is definitely risk with CPF investing through the CPF Investment Scheme (CFPIS). The short-term price volatility involved in CPF investing matters a lot less than that with cash investments. We can frame it like buying a house that we are staying in - as long as we are confident that long-term property prices will appreciate, and that we cannot use the money in the short term, then there is no point tracking and actively managing that money.
With cash investing, you have a hundred and one other things you can do with the cash if you don't invest; for CPF, you can only use a significant sum of the money for housing. In that sense, it is easier to hold and stay invested for the long-term to secure your retirement.
Our CPF is ultimately a part of our wealth, even though we may not feel it. Every night we slog at work and every promotion and bonus we fight for, a sizeable chunk of it is passed on to CPF. What is in our CPF is our money, and we should evaluate how it should serve our lives better. As we can only withdraw CPF monies when we turn 55, inevitably CPF monies are best used for wealth accumulation and retirement purposes, even though there is an opportunity cost involved.
Now that we have established that investing CPF money has a meaningful impact to retirement, let us look at how best to maximise our chances of beating the 2.5% OA rates, or you can head on to our Youtube webinar as we speak to our viewers on how to maximise your CPF monies.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.