This article was contributed to us by Sheng Shi Chiam, CFA, Personal Finance Lead at Endowus.
Getting started on investing your CPF monies can be a lot more intimidating than investing your money in cash. After all, less than one-quarter of CPF members have invested their CPF monies (as of December 2020), making CPF investing an unfamiliar experience for many. Here are 5 tips for you before you start your CPF retirement planning journey through CPF investing.
#1 You Don’t Have To Pay Back Any CPF Interest Lost
Many of us are familiar with the concept of CPF accrued interest for a property purchase. Any CPF OA monies withdrawn for a property down payment or monthly mortgage has to be paid back to CPF, with interest, upon the sale of our property. This accrued interest is effectively the interest that we should have earned if we were to leave our CPF untouched.
As we likewise “borrow” our CPF monies to invest, it may seem intuitive that CPF investments should also be liable to accrued interest. All CPF investments, be it CPF Investment Scheme (CPFIS) OA or Special Account (SA) investments, are not liable for interest accrual.
#2 You Cannot Withdraw Any Dividends Or Capital Gains Made On Your CPF Investments
Some of us invest to create passive income for ourselves: we specifically pick high dividend yield stocks to generate cash flow. Unfortunately, deploying this strategy is challenging with making investments through CPFIS, as any dividends received or capital gains realised must be transferred back into our CPF accounts.
We will then only be able to withdraw our CPF OA and SA monies at 55. Moreover, CPF SA monies have to be withdrawn first, before OA monies can be withdrawn. Given that we cannot access OA monies first, we may prefer to hold on to our CPF OA investments for a longer period of time.
#3 You Have To Pay Agent Bank Charges For Your CPF Investment Account
Before you can even use CPF monies for investing, you would have set up a DBS, OCBC or UOB CPF investment account. As agent banks, the three local banks facilitate transactions of CPF monies for your investments with the brokerages or fund investment platforms.
This service unfortunately does not come for free. DBS CPF Investment Account, for example, requires you to pay $2.50 per 1000 shares purchased. This is on top of any brokerage charges or any platform fees that you are paying.
If you were to invest $10,000 into Singtel at $2.54 per share, you would need to pay $10.00 (not including GST) for agent bank charges. You are also subjected to a quarterly agent bank charge of $2 per share counter you own. If you were to diversify your CPF investments into different stocks, your agent bank charges will increase as well.
There are two simple ways to reduce your agent bank charges:
Consolidate your holdings with a CPF Investment Administrator
Agent bank charges can be minimised as some of the transactions are consolidated by the CPF Investment Administrator (CPFIA). CPFIAs are unit trust distribution platforms that allow you to invest in diversified funds.
With UOB Kay Hian as Endowus’ CPFIA partner, you will be able to invest in a multi-fund portfolio at a fixed agent bank charge of $2/$2.50 per transaction. Similarly, the quarterly charges are fixed at S$2-2.50 on a portfolio basis per quarter. Both transactional and quarterly charges are regardless of the size of the transaction.
Invest a larger amount and minimise your trading frequency
As agent bank charges are a fixed amount, investing a larger amount will make it lower cost on a percentage basis. If you were to invest only $100, the $2.50 agent bank charge is like an immediate 2.5% loss on your investment. Conversely, a $1,360 investment will only be a loss of 0.18%.
Therefore, try to minimise your investment frequency so that you are able to invest a bigger amount each time. Setting a recurring investment amount of above $500 using a CPFIA is a good way to minimise unnecessary agent bank cost. Also, being able to commit to investing a bigger amount over a longer period of time will also help to minimise quarterly agent bank charges.
#4 Your CPF Withdrawals Cause You To Incur Rejected Trade Charges
Some of us are willing to invest all available CPF monies as we are not able to use CPF monies until retirement. We may set up our recurring CPF investments in such a way that any CPF contributions from work may be fully used for investments.
There may be other CPF withdrawals that may cause you to have insufficient balance for CPF investments. These can be
Insurance premiums from your Dependent Protection Scheme
- Agent bank charges for CPF investments
- Mortgage or housing-related withdrawals
- Platform or access fees for your CPF investments
You should estimate your agent bank charges so that you will not pay any rejected trades penalties.
#5 The Financial Markets Are Volatile
While we expect to get a positive return on our equities investments above the 2.5% risk-free return per annum, this is not guaranteed, and the markets can be highly volatile in the short term. For example, between February and March 2020, the S&P 500 fell more than 30% in this short span of time, before recovering fully within the next 2 quarters.
During market declines, we may be tempted to sell our CPF investments to cut losses, but the market has historically recovered from financial crises. By committing to a long term investment plan, you have a greater chance of doing better than the 2.5% p.a. returns of CPF.
As seen from the table above, over a short investment horizon of 1 year, there is a fair chance of us doing worse than CPF OA rates (only 67% chance that MSCI ACWI doing better than CPF OA rates). However, over a time frame of 10 years and above, the chance of success is much higher.
With these 5 tips at hand, you should be better prepared to start investing your CPF monies. At Endowus, there are exclusive access to low-cost, globally diversified Vanguard funds that have provided strong performance in 2020, and it should be able to give you the best chance of success for investing your CPF monies. Find out more about CPF investing offerings at Endowus here.