1 in 2 who uses CPF to invest ends up worse off
04 Jul 2021
The Straits Times
If the odds say there is a 50 per cent chance that you will lose money, would you still go ahead and invest?
Most of us will likely hesitate since this looks like a pretty risky bet. Of course, if you are an eternal optimist, you might still accept the odds because you prefer to see that you have a one-in-two chance of winning.
But would you change your mind if the odds now say that you will definitely win if you just stay put and don't do anything with your money?
This roughly sums up the position of around 534,000 people here who have been using money in the Ordinary Account (OA) of their Central Provident Fund (CPF) to invest.
Data for the financial year from October 2019 to September 2020 shows that 269,000 people, or just over 50 per cent of the total group, ended up worse off by taking their money from CPF to invest. If they had just left their money in the OA, the same amount of money would have earned 2.5 per cent annual interest.
To underline the point, 222,000 or 41 per cent of members who used money from CPF to invest actually made losses. There were about 50,000 more people incurring losses in this financial year than in the preceding 12 months to September 2019. But that is not a great surprise given that the latest year included seven months of economic downturn caused by the pandemic.
Another 47,000 members, or close to 9 per cent of the total, made money in their investments but the profits were less than or equal to the 2.5 per cent interest earned if that sum had remained in their OA.
The rest of those who invested CPF money, or just over 49 per cent, made returns that were more than the OA's interest rate.
It is not known how much these people made as the CPF Board does not keep track of earnings beyond the 2.5 per cent return mark. There are no figures on whether those who invested money from their Special Account (SA), which earns 4 per cent a year, made or lost money.
Work your cash harder
You should know that the cash you keep in your savings account at the bank earns practically nothing. For fixed deposits, you get about 0.05 to 0.7 per cent.
So if you are looking to invest, use cash and not the money in your CPF accounts.
Just because you cannot use the money in CPF freely before 55 does not mean that it is more expendable than your cash.
Indeed, the CPF is the safety net for your old age because it earns a decent interest rate that is hard to match today.
As the latest investment data shows, half of those who used CPF for investment ended up worse off than those who did not. Yes, the other half made money but you can actually have your cake and eat it too, if you use cash.
Assuming you can use $100,000 in your CPF to invest but you choose to use cash. If your cash investment makes a 3 per cent return, you will have an extra $3,000, as well as another $2,500 in interest from the $100,000 which you had kept in your OA.
Even if you incur a 1 per cent loss in your investments, you are still up by $1,500 for the year, thanks to the risk-free CPF interest.
This is better than an outright loss of $3,500 if you use CPF, because you not only lose $1,000 of your capital sum, you also miss your chance to earn the 2.5 per cent interest.
What you also do not want is for your CPF to be stuck in a failed investment.
Readers have written to Invest to relate their predicament of having their CPF investment "trapped" - their shares have been suspended for a few years due to company business failures.
These investors cannot sell those shares even if they want to put the money back to their CPF accounts.
To add salt to the wound, the financial institution would deduct an administrative fee of $2 every quarter from the investors' CPF accounts for the suspended shares. No such fees need be paid if cash is used to buy the shares.
So instead of earning the CPF's decent interest, they get a reminder that costs $2 every three months for their painful investment decisions.
Back-up plan for retirement
There is a reason why planes have at least two engines - this is to ensure that they can still fly even if one engine is down.
You should view your CPF as your second engine; even if your cash investment goes belly up, you can still rely on your back-up fund for retirement. Here are three reasons why you should contribute and let the money in your CPF grow:
1. Your CPF funds are invested in Special Singapore Government Securities, which provide stable, risk-free returns that are higher than that of many financial products in the market.
This is because these bonds are guaranteed by the Government, so even if the global market is topsy-turvy and all other bonds have cut their interest rates drastically, the rate for CPF remains unchanged.
How is this possible? This is what the business of governing is all about - the Government wants to encourage all Singaporeans to do their part to plan for their retirement by ensuring that they get safe and fair returns for their CPF.
It will be money well spent if more citizens are financially independent at old age and do not require any government aid.
2. The CPF can allow ordinary workers to have up to $1 million or more in cash by the time they are in their 50s if they are diligent in contributing to it from the day they start working as young adults.
But it is not aimed at benefiting only high-income earners. Rather it is an inclusive scheme because everyone stands an equal chance of achieving this if they bother to find out how it works.
For instance, the maximum contribution that you and your employer can put into your CPF annually is $37,740 - this means that even if you have lots of money in your bank accounts, you cannot put in as much as you like to earn the interest.
As an employee, you are likely to hit this maximum if your monthly salary is at least $6,000 - any additional salary beyond that is not considered but your annual bonus will be eligible for contribution to make up the maximum.
What this means is that if you are diligent in preserving your funds by not expending it all on a housing loan, you stand to have the same high CPF balance as your boss, even though he may earn a few times more than you.
3. You will enjoy the full benefit of having a high CPF balance when you hit 55. After the full retirement sum has been deducted for CPF Life, the remaining sums in your OA and SA are yours to use any time. This means that your CPF is like a super savings account that earns much higher interest and with no lock-in period, unlike fixed deposits.
With these benefits, shouldn't you rethink your CPF investment strategies and start building a reliable second engine?
Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.
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