Where's my CPF Money? [IOTW: 21 Sep 18]

In 2017, there were 929,714 CPF members who invested their CPF savings under the CPF Investment Scheme (CPFIS). Assuming that they belong to the age group of 25 – 50, that makes up about 58.7% of CPF members. If you belong to the 40% that has their funds sitting idly by, you may want to utilise it as soon as possible. In this ‘Idea of the Week’ segment, we talk about how you can utilise your CPF monies to build a retirement fund (provided you have met the requirement of SGD 20,000 in your OA or SGD 40,000 in your SA).

Start Planning Your Retirement Goals

The simplest goal would be to hit the Full Retirement Sum (FRS) at age 55. The government currently sets an increment rate of 3% per year, thus to calculate your future FRS, one can use this simple formula:

FRS= 171000 * 1.03^x, where x is the difference between 55 and your age

At age 55, if you have that sum in your Retirement Account, you are entitled to receiving about SGD 1,385 monthly in today’s prices for life from age 65, thanks to CPF Life (assuming Singapore government increases the pay-out according to inflation rate).

If you wish to receive higher pay-outs of about SGD 1,985 per month, you may change the base to 256500 for the Enhanced Retirement Sum. Using the CPF Retirement Calculator from CPF board, one can check if their retirement goals can be met.

One should also account for payments using CPF accounts, with one such payment being the down-payment for your house. For mortgage loans, you can use cash to pay off your mortgages as banks offer a more competitive interest rate as compared to HDB rates, which is an additional 0.1% of the current CPF-OA interest rate. Subsequently, you can allocate a larger portion of your CPF contributions into investments.

Going About

As CPF contributions are compulsory, one can think of them as a sort of forced savings for retirement. Including for employer’s contributions and excluding Medisave contributions, Chart 1 displays an example of allocation you can have, and there are a few ways to go about investing with your CPF account.

Chart 1: Hypothetical Management of One’s Income

1. Top Up to Enforce Discipline

If you belong to the group of people who spend first and save later, using voluntary contributions and CPFIS can be a great way to enforce saving habits for your retirement plans. Since it is not possible to draw on your CPF savings until the retirement age, this will ensure that you will not touch your retirement funds and invest for the long haul.

2. Using CPFIS to Obtain Higher Returns

We know that over longer periods of time, asset classes such as bonds and equities will produce average rates of return that are higher than returns on cash. If you have a longer term investment horizon, it is better to be invested in those asset classes to get obtain higher rates of return. Using the CPFIS could be a way generate higher returns to build a bigger retirement nest egg.

When deploying your CPF monies, you could structure a simple way of allocating assets by diversifying between bonds and equities. As bonds can be considered a more conservative asset due to their lower volatility and returns, diversification helps to reduce your losses during turbulent times but also lower returns in boom cycles.

There are two ways to go about diversifying – choosing a fund that suits your risk appetite and handing it over to the fund manager, or allocating by yourself. After allocating between bonds and equities, you can go deeper by allocating among different regions. Here is a simple guide that expands more on forming your portfolio.

Chart 2 shows an example of a balanced asset allocation using the income management in Chart 1. We allocate 50% of our total investments into the safer asset class, while having 50% into the riskier asset class. Since the Singapore government guarantees the interest rate on your CPF-OA, the interest rate on CPF-OA is the risk-free rate. In this case, you could classify it as a low risk income asset. Subsequently, you can take on riskier asset classes due to a longer time horizon. Such a fund could be the Schroder Asian Growth fund. Alternatively, you could invest more through CPFIS (up to a maximum of 35%) but on a less risky fund like the First State Bridge fund.

Chart 2: Hypothetical Asset Allocation

Think Long Term & Invest For the Long Haul

For most people under 40, retirement may be years away. This essentially means that you have the time to plan for the long term and invest accordingly. Successful investors enlist time as their ally to grow their monies and build their retirement nest egg.

Back in March, we posted an article on how to purchase CPF-approved unit trusts. Using the CPFIS scheme acts as a disciplined form of dollar-cost averaging . Furthermore, investing with CPIS through our platform comes with an extra benefit of 0% sales charge, which allows you to immediately invest your committed amount and begin compounding it.

Naturally, as time goes by, the various assets in your portfolio will vary in performance, potentially resulting in a deviation from your desired allocation. This is where you can re-assess and re-balance your portfolio. Over time, you will potentially enjoy the pleasure of seeing your retirement tree flourish and bloom.

Don’t dither any longer, start now!

The Research Team is part of iFAST Financial Pte Ltd.