This article was written in collaboration with FSMOne. All views expressed in this article are the independent opinion of DollarsAndSense.sg. You can refer to our Editorial Policy here.
Retirement planning is one of the most essential pillars of personal finance. As a country that doesn’t provide welfare payouts upon retirement, it’s even more important for Singaporeans to start building their retirement nest egg from an early age.
For many, the most common retirement plan is the CPF LIFE scheme. Administered by the Singapore government, CPF LIFE is a national annuity scheme that provides Singaporeans and PRs with lifelong monthly income from age 65 onwards, for as long as we live.
The payouts we receive from CPF LIFE depends on how much we have in our Retirement Account, which in turn is primarily based on how much we contribute from our Special Account (SA) and Ordinary Account (OA) at 55.
This brings us to an important question. How can we maximise the savings we have in our CPF accounts today so that we can have more for our retirement tomorrow?
Our CPF Savings Earns A Risk-Free Interest Rate Of At Least 2.5%. But Is This Enough?
To begin, we should know that savings in our OA and SA and MediSave Account (MA) earns us a risk-free interest rate of 2.5% p.a and 4.0% p.a. respectively.
This means that even if we leave our CPF contributions untouched, our savings will continue to compound over time, thanks to the risk-free interest rates we earn.
The other thing that you would notice is that the interest rates you earn from the different CPF accounts aren’t the same. While our SA and MA earns us at least 4.0% p.a, our OA savings grow at a much slower pace – at just 2.5% p.a. This means our OA is a less efficient method for growing our retirement nest egg, as compared to our SA.
However, our OA provides greater freedom in how we wish to use our savings. Generally speaking, you have three main options for deploying your OA savings.
Option 1: Use it to pay for your property, either today or in the future. This is a rather common practice in Singapore, where many homeowners use their OA savings to service their monthly mortgage.
Option 2: Transfer it to your CPF SA. This is an irreversible decision. It’s suitable for those who do not need to use their OA to service their mortgage and who wish to earn a higher return for retirement without taking on investment risk.
Option 3: Invest your OA. OA savings above $20,000 can be invested in a wide range of asset classes, including stocks, bonds and unit trusts.
While option 1 is popular for homeowners who are paying for their properties and option 2 makes sense for CPF members who do not wish to take on any investment risk, there are strong advantages for CPF members who want to invest part of their OA savings.
#1 Enjoy Higher Expected Returns
CPF members who choose to invest their OA savings should expect a higher return than 2.5% p.a from their investments. By leveraging on the power of compounding over several decades, even a slightly higher annual return can make a big difference in your retirement nest egg.
For example, if you are 35, you have an investment time horizon of 30 years until you reach the retirement age of 65. At a return of 2.5% p.a, a $10,000 investment today would give you about $20,900 at age 65. However, by increasing your investment return to 4.0% p.a, you would have about $32,400 at age 65.
As a benchmark, the return on the S&P 500 since 1957 is about 8% p.a. So, it’s not difficult to see how CPF members can easily earn a higher return for their retirement nest egg if they choose to invest their OA savings.
#2 More Investment Options To Choose From
The financial markets today are more opened than ever before. Besides investing in stocks listed on the Singapore Exchange (SGX), CPF members can choose from a wide range of approved funds to invest their OA savings.
For example, on its dedicated CPF microsite – Set For CPF, FSMOne has an extensive list of unit trusts offered by various fund houses. These funds include many of the world’s biggest as well as large Singapore-based investment funds.
Within these fund houses, many more unit trusts are offered. These unit trusts allow you to gain investment exposure to diverse asset classes, industries and geographies around the world, depending on your investment risk appetite. You can also assess the funds based on its performance, risk and expense ratio.
#3 Greater Flexibility
Investing your OA savings gives you greater flexibility on its future usage as compared to transferring it from your CPF OA to your SA.
When you transfer your OA to your SA, the transfer is irreversible. Once you do it, you will no longer be able to use your savings to pay for your mortgage.
In contrast, while it’s not always advisable to sell your investment early, CPF members who invest their OA savings can still choose to sell off their investments, and to use the investment proceeds to service their monthly mortgage, if need be.
So, investing your CPF savings for higher returns may not only give you better returns as compared to transferring it to your SA, but also provides you with superior flexibility on the usage of funds for the future.
Disadvantages Of Investing Your CPF Savings
While there are excellent reasons for investing your CPF savings, investing your CPF savings do come with some drawbacks.
You Are Taking On Investment Risk: All investments come with some form of risk and investing your CPF monies is no exception. Whether you invest in equities, bonds or unit trusts, there are always some investment risks that you will need to bear. If you are adverse against taking on any kind of investment risk with your retirement savings, it would be better for you to leave your CPF savings to earn the risk-free returns.
Additional Expenses Incurred: When you choose to invest, you will always incur some form of investment cost, whether it’s one-off brokerage fees, sales charges, platform fees or annual expense fees charged by the unit trusts that you invest in. These fees, regardless of how little they may be, will eat into your investment returns. For example, if your total annual expenses for investing in a fund is 1.5% p.a, this means that to beat the CPF OA risk-free return of 2.5%, the funds need to deliver a return of at least 4.0% or more.
How To Invest Your CPF Savings Wisely
To help CPF members plan for their retirement using CPF, FSMOne has created a dedicated microsite – Set For CPF, which hopes to empower investors to make better decisions on how to invest their CPF savings.
One useful tool that we enjoyed using on the website is a performance chart, where investors can compare the performance of selected funds and benchmark the returns from these funds to what they would have earned from their OA accounts.
For those of you who wish to start investing in the various funds, FSMOne offers a simple equity portfolio starter kit to help investors construct their CPF portfolio. This starter kit allows investors to build their own GDP-weighted allocation, comprising of funds which represent the U.S, Asia (excluding Japan), Japan, Emerging markets and Europe.
One advantage with investing your CPF monies through FSMOne is that it allows you to invest a regular sum of money each month through its Regular Savings Plan (RSP). This can be from as little as $100 per month.
By investing a small sum each month, instead of a large lump sum investment, it allows you to avoid market timing. This way, you take a long-term investment approach where you buy more units when prices are lower, and lesser units when prices are high.
Investing your CPF monies through FSMOne can be done in an affordable way. There are no sales charge for unit trusts, nor any additional fee that are charged for CPFIS-OA and CPFIS-SA unit trusts.
Do note that as with all CPF IS account, there are CPF agent bank charges that members will need to pay to maintain the CPF investment accounts. If you invest through FSMOne, the fees for the agent are as such.
|Per buy transaction||You pay a flat $2.50. This is regardless of the number of units or number of funds that you buy|
|Per sell transaction||You pay a flat $2.50. This is regardless of the number of units or number of funds that you buy|
|Per fund switch||No charges incurred, whatsoever|
|Quarterly service charge||$2.00 regardless of number of funds|
Note: These fees are paid to the CPF agent bank. Fund-related fees (i.e. expenses) charged by the fund managers are deducted from the unit trust’s net asset value.
Whether you choose to invest your CPF savings is ultimately up to how comfortable you are with taking investment risk to earn a higher return for your retirement nest egg. So, you should make a choice based on your risk appetite, while weighing some of the pros and cons of doing as which have been discussed in this article.
Lastly, if you want to find out more about investing your CPF in the markets, there is a CPF investment insight page on FSMOne that you go to read up more about investing your CPF.