The past couple of days have been the equivalent of a 7pm Channel 8 boxing drama for personal finance geeks like me. In the Red corner we have Roy “Colourful Charts” Ngerng (how do you pronounce that name?) crying foul at how our CPF funds are being used by the “gahmen”. In the Blue corner we have PM Lee “You just got Davinder-ed” Hsien Loong who just wants to come up with a retirement plan for all Singaporeans without being harassed by those ungrateful bloggers out there.
And in the audience we have the hoards of armchair activists citing conspiracy theories, economic studies, and most commonly, whining about how unscrupulous the government is, how the rich are screwing the poor, and wah, why is it so hot in Singapore nowadays ah?
Who’s right and who’s wrong? Was it right for Roy to selectively publish data that would support his controversial case? Is it unreasonable for the Prime Minister’s lawyers to threaten to sue him?
My answer: Who cares? 🙂
This debate will be going on for a long, long, time. The funny thing is, a lot of it is actually really old news. For example, this ever-increasing Minimum Sum thing? It was decided wayyyy back in 2003, yo. And published on the CPF website for all to see for years. (But of course, no one reads that shizz because reading the CPF website is like reading a calculus textbook. In Arabic.) This article from Dollars and Sense explains it really well though.
I don’t like debating over the morality of stuff that isn’t going to change. (Trust me, the CPF policy isn’t going to change no matter how many people turn up at Hong Lim Park on 8 June). Instead, I’d like to focus on what we can actually DO about this CPF thing. I totally get the fact that many people are confused by it, and that misinformation is the primary source of all the angry comments out there.
But posting a pissed off “Stop stealing my money!” Facebook status isn’t going to help anyone. Instead, here’s what I believe you can do to make the most out of a policy that’s been in place for over a decade:
1. Understand the Facts
Okay, let’s stop whining or hypothesising about conspiracy theories and look at the issue objectively. As my favourite personal finance blog MoneySmart puts it: “CPF is a system that, like it or not, is there to help you with the three biggest financial situations you’ll ever face – healthcare, retirement, and property.”
Let’s talk about the primary purpose of CPF: your retirement. I know it’s hard to believe, but you can totally use your CPF to help you out here. Think of your CPF as your own personal pension fund. And like any pension fund, the more you put into it now, the more you’ll have when you retire. I know right, this is like, crazy news.
Yes, I know that “retirement” sounds like it’s a billion years away, but here’s what most people don’t realise: When you turn 62, you’ll have to live for another twenty years on your savings. And you’ll have to deal with all the things that old people care about like hearing aids and walking sticks and playing Bingo on Star Cruise. Where do you think all that money’s going to come from?
That’s right – your pension fund, aka your CPF account. Now, a lot of things can be said about how it’s managed, the returns we’re getting, blah blah blah. But the reality is that it gives us a way better interest rate than any savings account that we’d ever be able to get on our own. I mean, try finding a bank that will consistently pay you 2.5% or 4% on any balance you have. Not to mention the 16% of FREE MONEY that our employers deposit into it every month! (Dear Employer, if you’re reading this, thank you!)
2. Minimise Borrowing From Your “Pension Fund”
Let’s face it – many of us are gonna use at least a part of our CPF funds to fund our houses. That’s totally cool. After all, CPF is here to help us with our housing needs.
But here’s where I think most people are completely misguided: They’ll say things like, “Aiyah, CPF cannot use for anything else one lah, just use as much as you can for house lor!”
WRONG. Remember what we said earlier: The primary purpose of your CPF is for your retirement, jackass!
When you take a loan to buy a house, how you choose to repay that loan is a personal choice. In Singapore, you have two options:
- Option 1: Use cash from the salary you earn, which is what the rest of the world does
- Option 2: Use your CPF, so you have more cash leftover to buy overpriced cars, Prada bags, or selfie sticks
Unfortunately, many Singaporeans use more of Option 2 instead of Option 1. But by doing that, they’re getting hit by a double whammy:
- They forego the 2.5% interest that they could have received on the CPF funds they used
- When they sell their house, they’ll have to pay back the amount they “borrowed”, plus the accrued interest that they should have earned!
Added together, that’s at least 5% in “lost” returns they could have gotten from their CPF funds! We can debate about whether this is fair or not, but that’s just the way it is, folks.
Instead, be prudent. In my opinion, everyone should try to use as much cash as possible to service their housing loans. Some of you might say, “But I can’t afford the mortgage payments if I don’t use CPF!” Uhm, then maybe you should stop buying houses that you can’t afford? I mean, do you REALLY need to live in a condo with a built-in waterfall in the swimming pool that you only use once a year?
It’s totally cool if you wanna use a part of your CPF for your house, but do it knowing that you’re actually borrowing from your “pension fund” – leaving you with less for your retirement.
(I totally recommend reading this other article from Dollars and Sense, which explains the borrowing thing way better than I do :))
3. Increase Your Return On It
A 2.5% return is better than most savings accounts out there, but there are other things you can do to get an even better return than that.
A better return = more money in your pension fund = easier to meet the Minimum Sum when you’re 55 = more money at retirement. Life win! (literally)
How can you get a better return? Well, how about investing your CPF funds? Sure, you can’t withdraw the profits you make from your investments, but I’ve been hammering home the point that you’re supposed to be investing for the long-term anyway.
Pick a portfolio of sensible investments (like an index-tracking ETF – my book Automatic Investing talks more about this), invest in it using your CPF, and hold on to it for the long-term. Bam! You just kicked ass over the vast majority of clueless CPF members out there.
Bottom Line
Some of you might not agree with certain aspects on how I view CPF, but let’s not get caught up in the details here. Here’s the bottom line: CPF can actually be used to help us (I know it’s hard to believe, but it’s true). Instead of spending our time bitching and whining about a scheme that was decided on more than a decade ago, we can take some steps to make the best of it.
Now, I’d love to hear from you. How do you think you can make the best of this CPF scheme? I’m looking for actionable insights here, not political arguments. Let me know in the comments below – I read every one.
Image: scottwillis, yellowbook, Neal Edgeworth Photography, jpctalbot
Refreshing. Yeah. Actually you are right on. And we can do something to improve on the returns.
Lionel, very nice and objective views of CPF Fund. I do see the benefits of it especially for Healthcare and Retirement.
For those who are eligible, we can make use of our CPF Fund (especially from Ordinary Account) to invest in Unit Links, Insurance e.g. Endowment Single Premium Policies and selected shares. I find that as long as we do our homework, the rate of returns can be even better than the 2.5% or 4% in the long run.
Cheers!
I’m not a huge supporter of unit links, but I suppose everyone has their own style and like what you said, as long as we do our homework, we’ll be all right 🙂
In my opinion, the 16percent employer free money is basically our rightful salary.
If cpf is indeed for our retirement, then the interest should not be so low.
Pls do not compare to bank interest rate as bank interest are intentionally depress in sg for 2 decades.
It gives the illusion that our cpf interest rate is super fantastic.
I do agree tat if we fork out cash for housing, more we have for our retirement.
But this supposedly easy money is made available for housing to give another illusion tat hdb prices are affordable. How many ppl can afford hdb without deeping into their cpf oa?
If indeed that we should not spent too much on housing, in order to save for retirement, why have a policy that state if an income earners combined salary is above a 3000sgd for example, cannot buy 3 room flat. Due to this policy, ppl who earn slightly higher have to purchase 4 room flat which are significantly more expensive and reduce thier ability to save for retirement thru cpf.
So you have these policies in place that you have to live with. The key question (and the point of my article) is like the classic 1950s phrase: What are ya gonna do about it? 🙂
You do not return ALL interest accured – only enough to top up your CPF Min Sum if it is not reached yet.
Middle income earners will mostly achieve their CPF Min Sum so the accrued interest thing actually doesn’t apply to them (otherwise, you will not have so many people upgrading from their CPF bought HDB flat to Condos if their profits were all locked up back in CPF).
i like your article! i think people always have this perception that the money in CPF is as good as not being there since retirement is such a long time away. my only thought is – locking the money up for so long, what happens when the political party changes and they can no longer give us 2.5% – what then? judging by the feelings on the ground, the next election may determine this!
There’s actually no shortage in ability to give us that 2.5% rate – from what I understand, the government has basically no debt other than the CPF monies that it owes its citizens. Their healthy level of reserves should be more than enough for them to keep providing that 2.5% rate, IMO. Whether the next ruling party decides otherwise or not is beyond our control, so there’s no point worrying about it for now 🙂
My suggestion to maximise your CPF fund for those able to generate 8-9% CAGR.
1) When you take a loan to buy a house, Use your CPF, so you have cash left to invest in undervalued stocks (Cap for usage of CPF-OA funds for stocks is only 35%, STI ETF is higher)
2) Invest to the maximum allowable of your CPF (whatever is left) in STI ETF during times of crisis. This is because the STI ETF is one of the first to recover from a crisis, given its beta.
That’s a good point. I supppose the key question is how do you overcome your psychology during times of crisis and invest when everyone else is panicking?
I do not have an exact answer- Its up to an individual’s psychology. I find stocks/STI ETF akin to “shopping items”, if they are on such great discounts and yet can provide great value over the long run, just buy them. Fyi I am a guy.
Interesting and balanced views on the use of CPF funds. I think we need to be mindful that the majority of the older population of Singaporeans who do not have the benefit of education nor access to sound financial planning advice would certainly benefit from parking their money in CPF. A return of 2.5% or 4% is definitely much better than bank interest or even most FD schemes. While we certainly can invest our money in stocks, the challenge is that most retail investors aren’t sophisticated nor savvy enough to know the fundamentals of good investing, resulting in their hard earned money being whittered away.
Totally agree with you. At the end of the day, it’s a scheme that’s meant to help the entire population. It might not be the best for those who -think- that we can make better use of it, but it’s certainly helped to save many people from themselves.
Generally good article by Lionel. I have just a point to make. The 2.5% return on CPF balances is reasonable or can even be considered low. Why ? This is called behavioral finance. The balances in CPF are usually very long term. I don’t know on average how many years the balances are there for. If it is say 20 years, then I think 2.5% is way too low.
i understand the 2.5% applies to all members by default (except for some other conditions). Let’s say someone starts working at 22 years old (buys a 4-room hdb at 32 under the BTO scheme) for 40 more years, and is consistent in his cpf contribution (irrespective of his income). How would you rate the 2.5% as a long term investment, in the view of someone who doesn’t actively do other investments (other than basic protection plans)? And do you have other comments on that?
In this case, 2.5% is low. CPF should tweak the return based on tenor of the funds placed.
I personally think cpf should not be compared to bank deposits due to the different natures of their liquidity. Rather, it is more like a long term risk free govt bond that offers much greater, but not unlimited liquidity. When the liquidity is taken into account, the interest rates seem more reasonable. Of course, it’s just one way of looking at it.
Run faster than your government…..It is life…It is evolution in every aspect of your life till you decide to stop.
I don’t know what you mean but your comment was hilarious so I decided to approve it 😀
Can explain something to me please? If I can’t withdraw my money due to min sum then how to use it? Will the monthly payments be enough? How to compute how much monthly we’ll get?
http://mycpf.cpf.gov.sg/CPF/my-cpf/reach-55/Reach55-3.htm
Great! Something positive & actionable. Lament does not change situation. Yes, start with a property within yr budget. Invest rest in stocks esp those that pay dividend. Would be wonderful if cpf allows dividend reinvest. So far the dividend of the stocks I bought had exceeded the 2.5% if left in CPF.
I have read both sides of this debate. As a PR here for ten years I have a dog in this fight. I feel that Roy’s perspective is exaggerated and limited in perspective. It is true that the rate of return on CPF money is low compared to the profits made by those like Temasek that manage the funds. However, in every other developed nation income tax runs about 3 to 4 times what Singapore levies. So if the Sg Government does not utilise the profits from CPF investments to pay for schools and subsidise hospital bills, income tax will inevitably rise. Having lived in both systems of taxation, I know which one I prefer.
Hi Paul, as a fellow PR & someone who has lived in 4 countries over the past 20 years, I totally agree with you, especially on Roy’s article.
Those who like to complain should have a more objective & global view.
Many young people just don’t get it and they wont until when they are about to retire . That’s when you go down on your knees to thank God for inspiring someone in Singapore to come up with the CPF system. Because when a person retires there is NO MORE MONTHLY INCOME … but heng ah got CPF monthly draw down. Thank God for that 🙂
Lets be honest with ourselves, and admit that THE MAJORITY WONT HAVE ANY MONEY LEFT IN THE BANK if we are left to save for retirement. Can you imagine what can happen to a society that has a million penniless retirees?
What you say makes a lot of sense, however, just one point to make: the benchmarking interest rate you mention should not be bank deposit rates. Market returns on investments is 7-8%, for example, if we invest in a basket of mutual funds. So the jury on whether 2.5-4% is high or low is still out there.
Yes, but you can lose your shirt with mutual funds. It is not possible with cpf. Lower risk is also lower reward.
Give people the option. There are many of us who know how to use the money in a more productive way. Do not assume that everyone is gonna fritter the money away. I do not need a foctatprisl state to tell me how to live. Singaporeans should learn how to manage themselves
Would it be fair to say that the govt will no longer liable for your financial well-being after the withdrawal?
I think this article is very well written but I just have to clarify one point which I might stand to be corrected.
The 2.5% hdb interest and the 2.5% accrued interest that most people have to pay back to their cpf on top of their value of their houses, all this is paid back into the cpf account so it is still their own money except that now they put more (the accrued interest) into their retirement and have less cash on hand.
So I think it’s wrong to say that they lose 5% of lost interest they could have gotten if they did not buy a house. Instead, this is a gain of 2.5% worth of savings if they did not buy a house, but which they sadly have to pay out of their own pockets?
Oh after some more reading I realized my own mistake. You were right!
will the government help me if I want to put in more money in my cpf life annuity> to generate 3K /month after I clear 62.
Retirement concern all…there are people like us who are not good with investment there we look at something safe
what are your opinion in using the cpf to invest in a second property than? taking into consideration that the property will appreciate more than 2.5% that cpf interest is giving you, that might be a better way of using it as well.