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 networth.

Why do we “neglect” our CPF monies?

Based on a $3,000 gross salary, with no bonus or other benefits assumed

Forget about CPF investing, as Singaporeans, we are conditioned not to treat CPF monies as part 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 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. We don’t feel like we “own” our CPF monies if we cannot manage it.


The main use of CPF OA monies

The first tangible use of CPF monies is housing. As we deliberate about getting our first home, we start to realise the huge amount of money needed 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 can also choose to take up a HDB loan as well. Since practically none of us can afford to pay off our first home using cash,  we are forced to look at our CPF balances.

Finally, 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 makes our home. If we do not use it for housing, then should'nt we try to get higher returns for it?

The impact of managing your CPF monies

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 have 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 to take risk and invest in the equities market (7% returns assumed here)

As there is a limit to how much CPF monies we can transfer to the SA account, the incremental benefit when we do the OA to SA transfer is limited, at an additional $100,000. This pales in comparison with we can achieve when we investing our CPF, with risk.

Volatility in CPF investing can feel less painful

There is definitely risk with CPF investing, just that short term volatility matters a lot less than volatility with cash investment. 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 the a hundred and one other things you can do with the cash if you dont 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 long term to secure your retirement.

Final thoughts

CPF is ultimately part of our wealth, even though we may not feel it. Every night we slog at work, every promotion and bonus we fight for, a sizable chunk of it is passed on to CPF.  CPF is our money, and we should deliberate on how it should serve our lives better. As we can only withdraw CPF monies at 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 engage our viewers on how to maximise your CPF monies.