Friday, April 20, 2018

CPF Musings

Figure I want to do a write-up on CPF after thinking about its usage and my planning for long-term goal.

First, let's start with reviewing the benefits we receive in CPF.

  • CPF-OA gets a 2.5% guaranteed interest rate.
  • CPF-SA, CPF-MA and CPF-RA gets a 4% guaranteed interest rate.
  • First 60k in CPF gets an extra 1% interest rate, of which up to 20k is contributed by CPF-OA.
  • CPF-RA will get an additional 1% on top of the first 60k
  • We can transfer funds in CPF-OA to CPF-SA (however this will not be tax deductible.). This is irreversible.
Next we look at some limitations we have for CPF
  • First 20k in CPF-OA cannot be used for investment.
  • Only 35% of the funds in CPF-OA can be used for investment instruments barring gold or gold ETF.
  • Only 10% of the funds in CPF-OA can be used for purchasing gold or gold ETF.
  • First 40k in CPF-SA cannot be used for investment.
  • Any CPF grants taken will be subjected to also compounded interest needing to be paid back to CPF Board when returning the amount (e.g. selling your home which you took a proximity grant for).
It is mentioned most investors loses money or is unable to beat CPF-OA's 2.5% interest rate using CPFIS to invest their CPF-OA money, and that if one is not confident of outdoing the CPF-OA interest rate or is generally risk-averse, it will be better to park the money in CPF-OA.

It is still my opinion, however, to have a CPFIS Account set up so as to be ready to take advantage of any bottoming of the market (risk management to limit downside).

Remember, the general rule of thumb is still the amount of effort, time and risk management put in is proportionate to your rate of returns.

If one is confident he or she will no longer touch your CPF-OA, he or she can consider topping up CPF-SA to earn in that extra 1% of interest.

Using rule of 72 (divide 72 by the percentage of interest you get annually to approximate the amount of year taken to double the initial amount), an amount subject to the 5% interest rate will compound to double in ~15 years.

Time is a resource and compounding should be put to work as early in your life as possible (within reasons).

Myself personally, although I have just started out on my investment journey, there is a few reasons why I would like to take more control of how I get returns on CPF-OA money.
  • I enjoy a do-it-yourself  approach.
  • I strongly believe I can get a better rate of return than 2.5% based on my risk tolerance for my CPF money. This is especially crucial as I would like to beat inflation rate.
  • I would want to have the flexibility to put funds back into my CPF-OA after I used up my CPF-OA balance getting my first home.
(Of course, bearing in mind I sold Singtel shares from my CPF-OA, if it weren't for the HDB purchase, I would have hold for at least a few years as I remain confident it will remain resilient amidst the Telco fears. Haha.)

Come end-May I will see my CPF-OA zeroed out and unable to accumulate any more money as it will all go to mortgage unless I see performance bonuses over the years. I do not intend to top up my CPF with cash either. Guess beyond all that, I can only hope to get the top ups from reservist. :P

With CPF-SA, besides the interest rate being already decent, we are much restricted in the instruments we can invest, not to mention most of the instrument you are allowed to use probably will hit nowhere near 4% rate of return or the reward-to-risk ratio loses out. Let's look at the instruments one can invest in using the CPF-SA (link here). There's next to no reasons to using your CPF-SA monies to invest.

One thing's not sure though - I'm very sure relying on CPF alone is not going to go well for retirement planning.

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