For many Singaporeans, their Central Provident Fund (CPF) may make up a sizable portion of their retirement savings.
Besides the 20% of one’s paycheck that each individual has to contribute each month, employers are also required to contribute an additional 17%, which adds up to 37% of your stated monthly salary.
Based on these contributions, your CPF account can grow reasonably quickly.
As it stands, most Singaporeans either do not touch their CPF money and let it accrue interest, or they take the money out to pay for their Housing Development Board (HDB) home or other properties.
Some may use it to pay for their children’s education.
These are all reasonable uses of your CPF funds.
However, there are many other ways you can make use of your CPF.
The CPF Investment Scheme
The CPF Investment Scheme offers Singaporeans the chance to invest their CPF money into a variety of investment instruments such as insurance, unit trusts, fixed deposits, bonds, and shares.
CPF holders are entitled to invest their CPF money as long as they have at least S$20,000 and S$40,000 in their ordinary and special accounts, respectively.
Investing your CPF money can potentially reward you with higher returns than the fixed 2.5% annual returns the CPF currently provides.
However, there is also the risk that investors may not be able to match the 2.5% hurdle rate of doing nothing, or worse, they could end up losing part of their investment capital.
So, is investing your CPF money a good idea?
To answer this, potential investors should first consider three things.
Know what you know
How much do you know about investing?
This is perhaps the most basic question to ask before you invest your hard-earned CPF money.
A savvy investor with experience investing has a better chance of beating the 2.5% return the CPF guarantees.
On the other hand, investors with no investing background may be enticed into trading stocks, thereby “churning” their investments and incurring heaps of trading fees.
Some may also invest in assets or investment products that are unable to outperform the “hurdle” rate.
If you are new to investing, I suggest taking a step back and spending time to prepare yourself before investing your CPF money.
Fees do add up
Besides considering the investment risk and return, investors should also take the additional fees into account.
When buying or selling stocks, for example, brokers charge a one-time transaction fee.
Investors may occasionally get charged a monthly bank custodian fee for holding the shares of non-Singapore stocks on your behalf.
All of these fees can add up and erode your potential returns.
Before deciding to invest your CPF money, make sure you have taken the fees into account when calculating if you are able to beat the 2.5% annual CPF returns.
Choose your investments wisely
While there are a multitude of investment options available via the CPF Investment scheme, many of the options are unable to provide you with better returns than your CPF ordinary account.
For instance, short-term fixed deposits, government bonds, gold, and annuities have historically not been able to match the 2.5% guaranteed by the CPF.
On the other hand, some ETFs or shares have, over the long term, been able to provide investors with much higher returns.
Get Smart: Invest cautiously
Your CPF money can make a big difference in your retirement years, so it is useful to try to make the most of your CPF money.
However, before you invest your CPF money, it is important to ensure you have the financial know-how and have taken the fees and charges into consideration.
If you are not confident of beating the 2.5% annual rates, I suggest taking the time to read up and improve your skills before attempting to invest your hard-earned CPF money.
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Disclaimer: Royston Yang does not own any of the companies mentioned.