Why you should invest your CPF savings

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

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Can you lose money by doing nothing with your CPF OA? 

From 1961 to 2024, Singapore’s average inflation was 2.6% and in the past 4 years 3.9%. This is the pace at which the cost of living is rising and it is often greater than the 2.5% threshold of the CPF Ordinary Account (CPF-OA). 

Put another way, the value of your OA balance in real terms, if left alone, has been declining by -1.4% on average for the past 4 years. That is a sobering thought. 

In 2023, as interest rates spiked, CPF members pulled an unprecedented S$5.9 billion into their CPF-Investment Scheme. The total net amount withdrawn for CPF-IS from 2022 to the second quarter of 2024 is S$9.6 billion – the largest in its history. The total balance stood at S$27.2 billion at the end of that period, a growth of 58% in less than two years. 

CPF members have been smart to use their OA balance to take advantage of the higher interest rates offered by investment options such as the Singapore Savings Bond (SSB) or T-bills and fixed deposits.

However, as these fixed-term investments matured and with interest rates falling from their highs, we saw S$1.1 billion flow back into OA accounts in Q3 2024 alone. Since the end of 2019 when Endowus became the first digital advisor for CPF, there have been 81,000 newly created CPF-IS accounts that have started investing and seeking more than 2.5% returns.

Is investing a sure way to make or lose money? 

While many caution about investing your CPF money, we have already seen many invest in SSBs or T-bills. Many have taken more risks and have been rewarded with greater returns in the stock market boom.  

The S&P 500 index has risen roughly nine times from March 2009 to the end of last week. We have had 13 positive and three negative years. The Endowus Flagship Portfolio of diversified equities, which has now been in existence since 2019 as an example of actual returns achievable with your OA, has returned an annualised return of more than 10% p.a. 

But what is investing? Investing is making your money work harder by taking some risk and, in return gaining a higher return for taking that risk. 

Risk is not a dirty word. It is, in fact, the only way we can get more than the meagre returns of a zero-risk bank deposit. 

Alternatives to investing

What are some of the alternatives to investing? We already mentioned deposits and a lot of people seem to be promoting insurance-linked products which also lock up your money and may not generate the returns that you desire or need. 

There are lower-risk investment options like T-bills, SSBs or money market funds with more than 3% yields or short-duration bond funds with yields of more than 4%. Investment grade or higher-yielding bond funds bring with it duration, hence interest rate risk. 

It is great if interest rates come down and give you capital gains on top of your interest income, but if it goes up then it will eat into your returns. Having said that, if interest rates are stable, bond funds have over 5% yields. 

Income or dividend funds which pay back into your OA account allow you some flexibility beyond the age of 55 to initiate regular withdrawals and you should actually keep your money in OA for as long as possible as it gives you maximum flexibility. 

Let’s get the facts straight on equities and other investment options

But what of equities? The asset class that has been our greatest friend providing great returns for many decades is ironically the most feared by investors. It is always strange to me that people warn against investing their CPF but tell people to invest in their non-CPF money. 

Yes, equities are volatile but it is the only asset class that can consistently generate higher returns. Investing over the long term can overcome the volatility. 

Besides, what pot of money is more long-term than CPF? You cannot pull it out until you are 55, but can continue to manage it there into your 80s. That means your investment horizon could be 50 years if you start in your 30s. Equities have beaten bonds, T-bills and fixed deposits over 1, 5, 10, 30, and 50 years. 

Of course, the past is not representative of the future but when have we ever known what the future holds? In the depths of the COVID-19 crisis when stock markets fell 30%, did we know equities would end the year positive and give you some of the best returns over the next 5 years? 

What about when we saw a 20%+ correction during 2022, did we know that the market will come roaring back over the next 3 years to repeatedly reach new historical highs? Did we know post-GFC, stock markets will go on to generate the best returns over the next 17 years? And what about now? Can you confidently say that markets are too expensive, too high, or bound to come down? What if it doesn’t? 

In this column, The Science of Wealth, we have always focused on empirical evidence, not fear-mongering. Historical learnings and the science behind investing and wealth management. It is important to remove all our biases, and assumptions, and always, (yes always!) avoiding the most common pitfall of trying to predict the future direction of markets. 

So what are the facts? Equities have never in its history lost money over a 15-year rolling period. If you have an investment horizon of 15 years or more, you will do very well in almost all scenarios, and even in the worst scenario, you would still make positive returns. This is the worst outcome. The average outcome is significantly higher. 

So let’s boil it down to probabilities to help grasp these concepts. Over many decades there is a 100% chance that inflation will eat into your purchasing power. The likelihood of you growing your wealth significantly without taking risk is zero. 

How much risk you take is completely up to you but there is almost a certain chance of beating inflation if you invest in low-risk bonds when interest rates are high or falling, but the same chance that you will do worse when interest rates are low or rising. If you invest in equities long enough, the risk of losing money falls to zero. The longer you invest the higher the probability that you will achieve the long-term average returns of 7-10%. 

Can you afford not to invest your CPF OA? 

People scare you by saying that if you invest you will lose money. But to be accurate, you “might” lose money. 

Whether you are comfortable investing should be a personal decision based on your financial literacy, personal risk appetite, how much your investable OA represents as a portion of your total wealth, and your age and investment horizon. 

There are people with more than S$1 million in their CPF-IS. Of course, that kind of number can only be reached by investing your OA. Not by receiving 2.9% from your bank fixed deposit. An example of how outcomes diverge when you invest S$20,000 from your OA and S$200 monthly at 2.5%, 4%, 6%, and 8% returns is shown in the chart which drives home this point. 

So the question you should ask yourself is not can you afford to invest your CPF money? It should be - can you afford NOT to invest your CPF? 

The probability of success, especially if you invest over the long term, means that you are unlikely to lose money over time. You are 100% certain to not grow your money if you do not invest. Investing is the only way to have any chance of succeeding in securing your retirement and long-term financial future.