Deciding Whether Or Not To Invest Your CPF
The CPF system is very vital to every Singapore resident because it is the ideal retirement plan. It basically sets aside a small percentage of your salary when you get paid, and the amount is supposed to provide for you when you retire.
Did you know that your CPF earns interest?
Every person that has a CPF account earns interest from their balances. However, the interest varies depending on the type of account, and there are three account types, as shown below.
- Ordinary account, whose annual interest is 2.5%.
- Medisave account whose annual interest is 4.0%.
- Special account whose annual interest is 4.0%.
Note that the annual interest earned from the savings is risk-free, but this will be relevant for later. So the prospect of receiving monthly payouts for the rest of your retirement life sounds appealing, but CPF also provides the option of investing through both the ordinary account and the special account.
Investing through CPF accounts
Special and ordinary CPF account holders have the option of investing their savings, and this allows them to put their savings to good use since they are able to make some extra cash. However, note that you are only allowed to invest the initial $40,000 in your special account or the initial $20,000 in your ordinary account.
Is it better to invest or not invest the CPF amount?
The answer to the above question is relatively complicated. There are many factors that are there to be considered, and many advantages, as well as disadvantages to each. Let us look at those factors to get a better understanding of each.
For example, a CPF account holder enjoys a fixed interest rate on their deposits, and this happens to be a risk-free interest. However, it is quite common that every investment opportunity that has a low-risk profile also has low returns. Some argue that the interest rates offered by CPF accounts are quite low and cannot sustain significant profits, but then again, it depends on the savings amount.
It is thus safe to conclude that this is not an ideal investment option for those that have relatively low savings and anyone that has a high-risk appetite. On the flip side, CPF accounts are ideal for those that simply want to secure their future with minimum risk exposure.
The first thing you should consider when thinking of investing your CPF is that you are putting your retirement savings at risk. You must also identify whether the rate of return is significant compared to the low-risk or risk-free interest rate that comes with the type of CPF you choose. Anyone with a huge amount of savings deposited into their account on a regular basis gets to earn higher interest. Let us first explore the nature of investing your CPF.
How do people invest their CPF?
You can invest your CPF through a CPF Investment Scheme (CPFIS). The latter allows traders to invest their CPF amount in various financial instruments such as unit trusts, government bonds, and fixed deposits, among others. CPFIS thus provides the flexibility of investing in a wide range of financial instruments, including those that have been known to be relatively low risk. In other words, you can still invest your CPF with a low-risk approach.
Then again, the value derived from this approach depends on how much marginal profits one can generate above the annual interest rates offered by the CPF accounts. Remember that low-risk investments are usually characterized by relatively low rates of return.
Can one actually make decent returns by investing their CPF as opposed to just leaving it alone?
I suppose the answer to that question would be yes. However, it largely depends on factors like whether you are investment savvy. Most of the experienced successful traders are able to achieve success where others fail because they manage to see the opportunities, and they know how to maximize their potential earnings while minimizing risk. They also know which opportunities to invest in and which ones to avoid.
The above factors contribute to investment success, but unfortunately, not everyone is that investment savvy. Even the numbers demonstrate this. Singapore had a total of 3.9 million CPF members in 2018, but at the end of that year, only 940,000 of them invested their CPF. $17.4 billion was invested from ordinary accounts, while $5.1 million was invested from special accounts. This means that only a fraction of the CPF account holders invests their money, But nonetheless, it is a significant number.
The necessary question would be whether those investing their CPFs are actually making decent returns from their investment that are significantly more than what they would have earned in CPF interest. 2015 findings indicated that only 15 percent of all those who invested their CPFs managed to make gains that were significantly higher than what they would have earned in CPF interest. However, that was then, and things may have changed. For example, there might be more investment opportunities now than there were back then and less friction for entry into the various investments. However, that still does not mean that profits from investments are guaranteed.
Going by logic, the decision on whether or not to invest your CPF should largely be guided by a multitude of factors. You should obviously ask yourself whether you are willing to risk your retirement funds or whether to play it safe. A wise investor would factor in the local economic condition in Singapore, as well as the health of the international markets. Often times, the international market performance also has a significant influence on the local market. Savvy investors look at such market data and many other factors before investing.
If you are not comfortable with the extra level of risk that comes with CPFs, or the fact that you have to do some market analysis, then perhaps it is better to play it safe and not risk your CPF. On the other hand, if you are a shrewd investor, maybe it is worth giving it a try because you might give your retirement savings that extra boost that will allow you to live even more comfortably in retirement.