We spend the bulk of our lives working hard to build wealth for our retirements. We should want our money to work hard for us too.
To this end, the Central Provident Fund (CPF) system serves us well as a form of “forced savings”. For those who are not inclined to set aside part of their salary, the CPF automatically does this for you.
Every month, a part of our salary is squirrelled away into the three CPF accounts, which includes the Ordinary Account (OA), Medisave Account (MA) and Special Account (SA).
Of the three, the OA is more flexible in its usage as part of it can be used for various purposes such as education, housing and even investments.
Safety of principal
The monies in our CPF are as good as guaranteed, as the Singapore Government is one of the few that enjoys a triple-A rating by the three renowned rating agencies.
The Government also has reserves to fall back on, just like when it announced the Resilience Budget last week to help businesses with the Covid-19 pandemic.
With the government’s backing, we have the assurance that our monies are safe and that we will not suffer unexpected losses.
A steady return
The CPF OA currently earns a base interest rate of 2.5%.
What’s more, the first S$20,000 earns 3.5%, while any amount above that will earn the base 2.5% rate.
In short, the money accumulated there is compounding steadily at a rate between 2.5% and 3.5%, almost risk-free!
However, it should be noted that this rate barely keeps up with the inflation rate, which hovers between 3% to 4% over the long-term.
Trying for a better return
The CPF OA provides the option of setting up a CPF Investment Account (CPFIA).
This account can be used to purchase a variety of investments such as shares and unit trusts.
With share prices hovering near multi-year lows due to the economic turmoil brought about by Covid-19, this presents an opportunity to buy companies that provide a return higher than the CPF OA rate.
Some examples that come to mind are OCBC Ltd (SGX: O39) and VICOM Limited (SGX: V01).
Both are strong companies in their respective industries and should be able to sail through the crisis.
OCBC provides a dividend yield of 6.2% while VICOM’s shares offer a 5.4% dividend yield.
Get Smart: Put your CPF monies to work
With such attractive yields available at low risk, interested investors can consider putting some of your money to work.
The dividend yields offered by these companies far exceed both the inflation rate and the interest rates paid on the CPF OA.
By growing your money more quickly, you can achieve a better compounding effect.
Over time, the CPF IA can enable you to retire earlier as the pot of money grows.
So, don’t hesitate if you have the interest. Your future self may thank you in a few years time.
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Disclaimer: Royston Yang owns shares in VICOM Limited.