Financial literacy is important to safeguard our financial well-being, especially for our retirement. Throughout our lives, we will come across many opportunities to invest and accumulate wealth. Some will be great, some mediocre and others we should avoid at all cost.
In recent years, many Singaporeans have started to recognise the CPF scheme as a great tool to build basic retirement adequacy. Interestingly, in the 2022 Melbourne Mercer Global Pension Index, Singapore ranked inside the top 10 countries with the best pension system. CPF is a big component of our pension system.
Over the years, more Singaporeans are turning to CPF as we can earn a risk-free interest of 4% on our Special Account (SA) and Retirement Account (RA). Even as interest rates globally are on the rise, CPF reported over 60% increase in top-up amount of $4.8 billion in 2021 (from $3 billion in 2020).
Best of all, we can do this without much financial knowledge or taking on almost any investment risk. In addition, our CPF top-ups can also be used to offset taxes or place us in a lower tax bracket, up to $8,000 for ourselves and another $8,000 for top-ups to our loved ones each year, and also build towards our retirement sum.
But, should we always maximise our top-ups each year?
5 Reasons You May Not Want To Maximise Your CPF Top-Ups
As with most questions related to our finances, there are always further considerations we may need to think about – even when we want to make a risk-free top-up to earn a floor interest rate of 4% on our CPF.
Here are five things you need to think about before maxing out your CPF top-ups each year.
#1 There Are Other Investment Opportunities Out There
Other than our CPF, there are many investment tools available. We can consider diversifying into them to potentially earn better returns or just to keep liquid investments.
Given its volatility, stocks tend to offer us the potential to earn better returns over the long-term. We can also take on more risks, and earn even better returns, in the stock market. Stocks also tend to be more liquid, especially compared to CPF top-ups, which are irreversible.
We can also invest in bonds, which are less volatile than stocks but offer greater liquidity than your CPF. Moreover, in a rising interest rate environment, even safe bonds can offer relatively good yields – comparable to CPF interest rates.
There are other asset classes we can consider too – this includes ETFs, properties, commodities, and even cryptocurrencies. Of course, all these asset classes come with varying risks, and we should carefully research our options.
Maxing out our CPF contributions may leave us short on funds to explore these other types of investment opportunities.
#2 You May Have Other Priorities In Life
Another reason we may not want to squirrel away too much of our cash into your CPF is that the process is irreversible – and we cannot take out what we’ve put in.
This is important if we have other priorities in life such as contributing to our parents’ or grandparents’ monthly expenses and wanting to start a business, or even prefer experiencing the world or furthering our education after working for a few years.
We need our savings to afford some of these responsibilities and/or indulges. By maxing out the amount we can top-up into our CPF accounts, we may not have enough to fulfil these responsibilities and/or life goals.
#3 Saving Too Much Today May Lead To Liquidity Problems Tomorrow
While we’re able to build a strong safety net by putting the maximum amount we can into our CPF accounts, we may actually be putting our loved ones at risk in the short-term.
As mentioned, we don’t have any flexibility to take out what we’ve put into our CPF accounts. If we’re stretching our finances to achieve the maximum amount each year, we may find ourselves in need of cash if an unexpected situation arises – which can very well happen, just think COVID-19 in 2020 and 2021.
In instances where we lose our job, a family member falls ill or even if we or our spouse want to leave the workforce to take care of our child, we may find ourselves in need of cash to do so. Even if we want to take a calculated risk starting a business, we may not be able to do so if we don’t have enough start-up capital or cash buffer to tide through building up the business.
#4 You May Be Giving Up Early Retirement
Our CPF monies – up to the Full Retirement Sum (FRS) – are tied up until we’re at least 65 years-old. This means we may not be able to achieve an early retirement as both returns and balances remain locked up until we can start our CPF LIFE payouts.
In effect, we will unlikely be able to retire early, unless we’re really successful in our business or career. And as mentioned, tying our money up from a young age may also limit our ability to make higher-return investments or start a business in the first place.
#5 Potential Change In Payout Eligibility Age
Another thing we need to consider is a potential change in CPF policy to delay withdrawals. In the first place, CPF has increased its payout age since it first began, and there’s a chance it happens again – especially as Singaporeans live and work longer.
Already, there’s a re-employment age up to 67 years-old, and will rise to 70 by around 2030. Further, the current CPF LIFE scheme already encourages people to delay disbursement until they turn 70 to receive a higher monthly payout.
This article was originally published on 16 November 2017 and has been updated with new information.
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