Marksman's Investment Corner is returning soon!

Marksman's Investment Corner is currently on a short break - expect activities to pick up from July 2018 onwards!

Update 01-09-2018: Looks like my break took more time than expected... Things has been pretty busy over the last few months on a personal front, but are slowly settling down and I can look to get a bit more posting done on Marksman's Investment Corner once again. :)

Thursday, February 15, 2018

CPF-OA versus Inflation rate

Ever since I started my investment journey, I have emphasised a core rule both to myself and my friends that must not be broken no matter how risk-adverse one is:

"No matter how you achieve it (savings plan, bonds, stocks, bank accounts with high interest rate etc), hedging must be done against inflation, with the minimal eventual goal of having all your money and asset beat overall inflation rate of 3% p.a." This would include your CPF monies.

For the sake of this discussion, I would decouple CPF from non-CPF rate of returns and treating CPF-OA as a separate entity instead of considering it in conjunction with CPF-SA, which will become your CPF-RA when you hit 55.

(This discussion assumes CPF guaranteed risk-free interest rate is unchanged, you do not do and do not intend to do any investments with CPF including housing, and you are not anywhere near age of 55 yet.)

That brings me to the next bit. As we know, CPF-OA has a base guaranteed risk-free interest rate of 2.5% p.a, and up to 20k of your first 60k in CPF overall can earn extra 1% p.a. Your CPF-SA has a base rate of 4% p.a., and can earn an extra 1% p.a. as part of the first 60k in CPF, which means your CPF-SA is always ahead of the inflation rate.

If we look at the CPF-OA alone, this means the first 20k will beat inflation rate, at 3.5% interest rate. However, past a certain amount of savings in CPF-OA it will start to decrease, and then start to lose out to inflation.

Based on calculation, the tipping point in CPF-OA is 40k (3%). Having a more detailed breakdown into this, you can observe how the average rate of return decreases:



3.50%
2.50%
Avg ROR
20000
0
3.50%
20000
5000
3.30%
20000
10000
3.17%
20000
15000
3.07%
20000
20000
3.00%
20000
25000
2.94%
20000
30000
2.90%
20000
35000
2.86%
20000
40000
2.83%
20000
45000
2.81%
20000
50000
2.79%
20000
55000
2.77%
20000
60000
2.75%
 
What this translate to is if the savings in CPF-OA is to beat inflation, any amount accumulated in your CPF-OA after the first 40k needs to be diverted to instruments with returns of at least 3%. Next, you can start to consider the effect of the other factors specific to you surrounding your CPF-OA savings (e.g. housing loan, your retirement sum).

Just some food for thoughts.

Enjoyed the short read? Have your opinions and thoughts to share? Feel free to share it in the comments section!

Oh, and Happy Lunar New Year to all! Marksman, signing off.

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