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In Singapore, CPF is an almost indispensable component of our retirement. When we turn 55, savings of up to the Full Retirement Sum ($186,000 as of 2021) from our CPF Special Account (SA) & CPF Ordinary Account (OA) are transferred to our CPF Retirement Account (RA). Funds from our RA will be used to purchase our CPF LIFE plan, which provides us with monthly lifelong payouts from age 65. For higher monthly payouts, we can also choose to set aside the Enhanced Retirement Sum ($279,000 as of 2021).
This also means that how much we have in our CPF account will directly impact the income we get to enjoy during our retirement. The higher our CPF savings, the more we will have for our retirement.
Our CPF savings can earn us different interest rates depending on which accounts they are held in. Funds in our OA earn us a base interest rate of 2.5% p.a. while funds in our SA earn us a higher interest rate of 4.0% p.a. Clearly, this makes our CPF SA the better place to grow our retirement savings compared to our OA.
In That Case, What Can We Do With The Savings In Our CPF Ordinary Account (OA)?
In general, there are three things we can do with our CPF OA savings for our own financial needs:
1) Pay off our home mortgage (or other expenses such as tertiary education)
2) Transfer funds from our OA to SA to earn higher interest
3) Invest in the financial markets for higher returns
Using OA savings for our home mortgage: By using our OA savings to pay off our home mortgage, we reduce our monthly cash outlay for home instalment and keep more cash on hand for other expenses. Our OA savings can also be used for the down payment of our home. However, using our OA savings in these instances take away our opportunity to earn the base interest rate of 2.5% p.a.
Transfer funds from our CPF OA to SA: Savings in our SA can earn us a base interest rate of 4.0% p.a. compared to 2.5% in our OA. While this seems like an ‘obvious’ move to make, there is a trade-off. Transfers are irreversible. Even though our retirement savings will grow more quickly in our SA, we no longer have the option of using the funds for our home mortgage or child’s tertiary education in future – even when the need arises.
Invest our OA savings for higher returns: If we want higher returns that can exceed what our OA (2.5% p.a.) or SA (4.0% p.a.) can give us, we can consider investing our CPF OA savings to yield higher returns. Besides potentially earning higher returns for our retirement, we also continue to retain the flexibility of being able to use our OA savings for home instalment in future since the funds invested are still part of our OA.
Investing Our CPF Savings, Yay Or Nay?
There has always been a debate over whether or not CPF members should invest their CPF savings. And both sides have valid points worth looking into. Let’s start with some of the reasons why we may want to think twice about investing our CPF savings.
The risk-return tradeoff is a simple investment concept that we must all understand – higher expected returns come with higher risks. Returns and risks are correlated. If we are looking for higher returns, we must accept higher risks in our investments. For some, accepting higher risk for their CPF savings while they are already earning at least 2.5% p.a. (or 4.0% p.a. if they transfer it to their SA) is not something that they are comfortable with taking.
Unlike our CPF investments that earn us a slow and steady return each year, investing comes with volatility. As any stock investor would already know, the financial markets doesn’t go up in a straight gradual line (unlike CPF). Thus when investing our CPF savings, we want to ensure that we have a minimum holding period of at least 10 years or more so that our investments can ride out both the ups and downs of the market.
Finally, while the CPF Board allows us to invest our CPF savings in certain CPF approved stocks, we will need both the knowledge and time to choose the right companies to invest in, and also keep an eye on the agent bank charges. If we lack investment knowledge, or time required to do research, we may end up making poor investment decisions. The above-mentioned reasons are good points to note if we are considering whether to invest our CPF savings. However, as standalone factors, they are not deal-breakers. If we want higher returns but share concerns about some of these aspects, there are ways we can mitigate them.
Read More On Endowus: Evaluation of CPF investment returns & benefits
Just because we are investing our OA savings doesn’t mean we need to take the same risk as everyone else. Depending on our risk tolerance, we can choose to take lesser risks with our CPF investments. When we invest through a robo-advisory platform such as Endowus, we can select a suitable risk level that is aligned with our preference.
Minimise Fees To Optimise Our Investment Returns
By choosing to invest our CPF OA in a low-cost robo-advisor like Endowus, we can minimise miscellaneous fees that we need to pay. With Endowus’ CPF investment portfolio, the all-in management fee is just 0.40% p.a. This includes access to the underlying products used, investment advice, portfolio creation and rebalancing, brokerage, and transfers. Any trailer fees the fund managers pay are also automatically given back to investors to lower their cost of investing. As a fee-only digital advisor, Endowus will only be paid by their clients. This is important because it means there are no conflicts of interest. In other words, Endowus is always incentivised to only do what’s best for the client.
For those of us who want to invest our CPF savings in overseas markets, Endowus is the first and currently the only digital advisor allowed for the CPF Investment Scheme. They help us invest our CPF OA in passive low cost funds that track the S&P 500 Index and MSCI World Index. The advantage of using Endowus is that they can help us build a suitable and cost-efficient portfolio even if we lack investment knowledge or the inclination to conduct research and invest our CPF monies ourselves.
How Much More Can We Accumulate For Our Retirement If We Invest Our CPF OA?
As mentioned above, investing our OA savings is suitable if we are investing for the long-term as it gives us sufficient time to ride out the ups and downs of the market. Endowus believes that over a long time horizon, our investment portfolio should (with no guarantee) perform better than the 2.5% p.a. interest offered for the OA.
In fact, in this article written by Gregory Van, CEO of Endowus, he shared that “if you invested in diversified global stocks (such as the MSCI ACWI), you can expect that for almost 80% of 10-year rolling periods you would have beaten the CPF OA by being invested. Over any 20-year period, that number goes up to 100% certainty.”
As a 35-year old, if I invest $500 a month for the next 30 years (assuming an annualised return of 6% after fees), I will have $486,757 in my CPF OA at age 65. In contrast, if I left my money in the OA to earn the base interest rate of 2.5% p.a., I will have only $265,922 – or $220,835 less.
Do note that the above example is based on the assumption that the investment generates a return of 6% p.a. after fees. This could be higher or lower, depending on the market conditions and the risk that we are willing to take.
For example, according to Endowus, the return for the Endowus’ CPF portfolios in 2020 is 15.7% for 100% equities, and 6.7% for 100% fixed income. This isn’t to say that we should expect such returns every year (likely not), but simply to expect that prevailing market conditions and the amount of risk we are willing to take will determine our returns for most investments. Ultimately, there is risk of loss with investments.
Read More On Endowus: 5 things to note before you invest your CPF
Although we cannot touch our CPF savings, we have to remember that the funds in our CPF account is still our money. Considering our SA savings can earn us a decent risk-free return of 4.0% p.a. while our OA savings give us comparatively lower returns, the question to ask is: how can we make the most out of it?
Do we use it to fund the purchase of our dream home, at the expense of building up our retirement nest egg? Do we transfer it to our SA for higher returns, accepting that such a decision is irreversible? Or can we consider taking a little risk to invest it in a low-cost global portfolio such as the ones offered by Endowus for higher returns, while having the flexibility to use it when we need to?
If you like to get started on CPF investing today with Endowus, you’ll be happy to know that DollarsAndSense readers can have their first $10,000 managed for free for 6 months, which translates to savings of $20 in fees. Sign up using this link to claim this special offer. Terms & conditions apply.