CPF investment – Is it suitable for you?
Client A : Hi Hau Eng! I have some idle funds sitting inside my CPF account long enough, and I have been thinking what to do with them.
Me: I see. Have you thought of investing them?
Client A: Well…yes…but I am not sure how.
Me: Pretty easy though. You just have to open an CPF Investment Account with any one of the 3 dedicated local banks. I can then help you to invest your savings into professionally manage funds using our investment platform Navigator.
Client A: How long does it take? Will I have to go through a lot of hassles?
Me: Not quite. The application for account opening can be done online nowadays. After that, once we have confirmed with the funds selection, it will just take under a week for the final approval and your CPF investment will start rolling.
Client A: Swee..I’ll go and open an account now.
People fight inflation in many ways. Some invest their cash savings, some hop between jobs in search of higher pay every other year, and some take up part-time jobs for that extra income. However, many people are not aware that we can actually fight inflation by investing our CPF savings too! In fact, our CPF savings are often neglected as part of our assets, simply because they are inaccessible for spending until years later.
From a financial planning perspective, this means tons of potential is being wasted because CPF savings usually make up a fair amount of our total assets. Before diving deeper into CPF investment planning, let’s go through some of the basics first.
CPF Investment Scheme
This scheme allows you to invest your Ordinary Account and Special Account savings into wide range of investments options to further enhance your CPF savings for future needs. For a person to be eligible, you must meet the following criteria:
- Must be a CPF member
- Age 18 and above
- Not an undischarged bankrupt
- Have more than $20,000 in your OA
- Have more than $40,000 in your SA
- Have completed the CPFIS Self-Awareness Questionnaire (if you are new to CPFIS)
What should you do to start investing?
For OA savings investment, you are required to first open a CPF Investment Account with any one of the three dedicated CPFIS agent banks locally:
- DBS
- OCBC
- UOB
For SA investment, a CPF Investment Account is not required, but you will have to complete the CPFIS Self-Awareness Questionnaire if you have yet to open a CPF Investment Account or haven’t invested with your SA before.
To understand more about the Self-Awareness Questionnaire, please visit the CPF website here.
Can I invest 100% of my CPF Savings?
No, you cannot invest all of your CPF savings. For OA savings investment, you must keep a minimum of $20,000 in the account before you can invest the rest. Additionally, only up to 35% and 10% of your investible savings can be put into stocks and gold-related assets, respectively.
For SA savings investment, you can invest all of it after setting aside $40,000 in the account. However, the investment options for SA are rather limited compared to OA investment because we are generally encouraged to keep our savings in the SA to enjoy the risk-free 4% per annum returns.
To view the full range of available options under CPFIS, please visit the CPF website here.
Is it a good time for you to invest right now?
There are two parts to this question: “Is it a good time?” and “Should you be investing?”
To address the former, investing is always a game of psychology. It’s not that it doesn’t require us to possess relevant knowledge and information for good decision making, but rather, it requires us to contain our emotions, exercise absolute discipline, and execute logically for better outcomes, regardless of the market condition. When we can do this, every day is a good time to invest. Investing is not speculating, nor is it trading, which means we don’t have to make fast decisions. Take your time, make a good decision, then be consistent and stick to your conviction for as long as the fundamentals still make sense.
Be fearful when others are greedy, be greedy when others are fearful. – Warren Buffet
What causes a bear market is a bull market, and what leads to a bull market is a bear market. In a bull market, people invest to make a reasonable return on their money by riding on the rising economy. During a bear market, people invest their spare money to further enhance potential growth by exposing themselves to short-term high volatility.
The best opportunity for a savvy investor to invest in the stock market is during an economic recession, when many good companies are selling at bargain prices. Entering the market at a low point also provides a larger room for growth once the economy recovers.
Disclaimer- investment is not suitable for a person who is already tight on cashflow and/or having unstable income, especially during the bear market.
The question of whether you should invest is a tricky one to address. The short answer is ‘It depends’ because everyone comes from different backgrounds and holds different goals in life. However, in general, it is recommended that everyone invests for at least one of the following reasons:
- Wealth preservation – to preserve the purchasing power of your hard-earned salary.
- Unleash the potential of your savings – to take advantage of market growth and grow your wealth at higher returns than bank interest or fixed deposits.
- Accelerated wealth accumulation – to expose oneself to a manageable amount of risk and benefit from long-term capital growth, which may not be achievable through low-risk returns or salary increments.
Reasons to invest your CPF Savings
Even though we are already rewarded with risk-free interest rates of 2.5% per annum for CPF-OA and 4% per annum for CPF-SA savings, some people still choose to invest their CPF savings. These individuals generally have a good understanding of the rules of the CPF system, which include a long lock-in period until age 55, took up a huge portion of our total assets, and a non-guaranteed interest rate.
Yes that’s right. Not many people are aware that our CPF interest rate is not guaranteed. The rate is subject to quarterly review and may be adjusted in the future. Currently, there is a “floor of 2.5% for CPF-OA and 4.0% for CPF-SA” provided by the government.
CPF investors typically invest their savings to gain some control over their returns and take full advantage of a long investment horizon due to the long lock-in period. They seek to invest in assets that have the potential to generate greater benefits over the long term, since the money cannot be withdrawn before the age of 55. While the default interest rate is sufficient for fighting inflation during normal market conditions, investing in assets can offer the potential for higher returns and greater control over the growth of one’s savings.”
One last consideration
While the option to invest your CPF funds is a compelling choice for many, it is not a default choice for all. There are some people who, in my opinion, is not suitable to invest their CPF.
They include:
- Those who are comfortable with their 4% per annum SA interest rate.
- Those who are struggling to pay off their monthly housing mortgage with their monthly OA inflow.
- Those who are already near retirement and plan to withdraw their CPF savings soon.
If you don’t belong to the 3 groups mentioned above, you should at the very least explore and consider CPF investments options.
To help you start off with your CPF investment journey, I have prepared this guide which contain a list of top performing funds that can be invested with CPF savings via our funds platform Navigator.
Article by Moo Hau Eng
Email: haueng.moo@gen.com.sg
The writers are financial adviser representative representing GEN Financial Advisory Pte Ltd.
