What we need to know about CPF Investing

Some people will say that CPF contribution is like paying a monthly premium of an insurance savings plan from an insurance company. You get decent (2.5% to 5%) returns on your contribution, you can get some basic coverage (Dependant Protection Scheme), and most of the money is locked up until the age of 55, like a maturity payment. 

CPF members can invest the money in their CPF Ordinary Account (OA) and Special Account (SA) in various investment products such as stocks, bonds, unit trusts (mutual funds).

But before you proceed to invest your CPF savings, you should first understand a few important things about the CPF Investment Scheme (CPFIS).

How much of your CPF can you invest?

You can only invest through the CPFIS if you have more than S$20,000 in your CPF-OA. You must also be at least 18 years of age and not an undischarged bankrupt.

After setting aside the minimum amount, you can invest the balance of your CPF OA monies (or investible savings, as CPF like to define it as), as shown in the following chart:

Can you beat the hurdle rate of 2.5%?

CPF currently pays 2.5% interest on savings in your CPF-OA. With up to S$20,000 from your CPF-OA being eligible for the additional 1% interest, these are essentially risk-free returns guaranteed by a government entity. If you have short term needs for your CPF OA monies (such as for housing) then you should not invest them.

Over a long time period, your investment portfolio has a high probability of performing better than the guaranteed interest rates in your CPF account. 

Source: Endowus Insights

From the table above, even though inflation and savings deposit rate have a 0% chance of beating inflation beyond 15 years, a balanced portfolio made up of globally diversified equities and bonds will be able to beat CPF OA rates 100% off the times, based on historical data from Jan 1990 and Sep 2019.

Your investment gains are returned to your CPF account, after fees

The final thing to know is that any gains you make in your investments using funds from your CPF accounts will be returned to your CPF accounts. For example, if you invest $10,000 into a stock today using your OA funds and sell it for S$12,000 a year later, the entire amount, inclusive of profits, will be returned to your CPF account. This means that every investment which is made from your CPF account is truly geared towards your retirement adequacy.

Similarly, any dividends or interest you receive on your CPFIS investments will be channelled to your CPF accounts rather than be paid out to you. These funds can then be used to make further investments if you wish.

Watch out for investment fees as well. Most investment instruments you can invest in will charge some form of fees. These include sales charges, management fees, wrap fees and brokerage fees. As mentioned in a previous article we wrote, even a 1% difference in fee can amount to significantly lower returns over the long run, even though you bear the same risk. 

At Endowus, we are committed to your retirement adequacy and we want to offer you a low cost, globally diversified investment option for your CPF, SRS and Cash in a fully digital investment experience. Sign up through this link and get $20 off your access fee!

Written in collaboration with Endowus.

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