Two startling statistics regarding the CPF scheme were reported two months ago.
The number of members who topped up their own or their loved ones’ CPF retirement savings jumped nearly 40% year on year for 2020.
In addition, people who made voluntary housing refunds almost tripled over the same period.
Voluntary housing refunds refer to members who used CPF savings to pay for their property, but who are now refunding the amount withdrawn.
The pandemic had resulted in more people parking their money into CPF accounts as they are viewed as a safe haven.
As the CPF Ordinary Account (CPF OA) can be used for a wider variety of purposes such as housing and education, most people choose to make voluntary contributions to this account.
While this is a positive sign as it shows that households are still flush with cash, there is more you can do if you want to enjoy a secure retirement.
After all, the CPF OA pays just a 2.5% interest rate while the Special Account (SA) pays a 4% interest rate.
Let’s take a look at how you can make your CPF money work harder for you.
Investing in shares
One effective method of growing your CPF balance is to invest it in promising businesses listed on the stock exchange.
A good place to start is to look at the list of CPF-approved shares which you can find HERE.
As a start, you can open a CPF Investment Account (IA) with one of the three local banks — DBS Group (SGX: D05), United Overseas Bank Ltd (SGX: U11) or OCBC Ltd (SGX: O39).
Another important thing to note is that you can only invest 35% of the amount in your CPF OA after setting aside the first S$20,000.
As a simple example, assume you have S$100,000 in your CPF OA. After deducting S$20,000, only 35% of the remaining S$80,000, or S$28,000, can be used for shares investment.
Caution is warranted
Now, before you invest, here’s another sobering statistic you should know.
Of the 534,000 people who invested their CPF money from October 2019 to September 2020, only less than half, or 265,000, of the group earned a return higher than the default 2.5% interest rate.
Of the remainder, 222,000 members even lost money with their investments over this period.
Granted, the period does cover one of the worst pandemics in the last century.
But the point we’d like to make is that you should exercise prudence when investing your CPF money.
Making the wrong moves could see your retirement fund getting eroded.
Select safety and dividends
The solution is to select investments that are resilient and also pay out dividends.
Companies such as Singapore Exchange Limited (SGX: S68) have a natural monopoly and have remained relatively insulated from the economic downturn.
A long track record of dividends implies that a company still generates healthy free cash flows, which offer some measure of safety against the tough challenges.
REITs such as Mapletree Industrial Trust (SGX: ME8U) and Frasers Centrepoint Trust (SGX: J69U) have continued with their distributions despite having to dole out tenant relief measures.
Businesses such as Sheng Siong Group Ltd (SGX: OV8) have also thrived due to more people telecommuting or studying from home.
In a nutshell, you should tread carefully and only select strong, stable companies to invest your CPF money in.
Get Smart: Sailing through turbulence
The path to retirement is not always smooth sailing.
Along the way, it’s anticipated that you may encounter obstacles or turbulence arising from external factors and events.
The CPF scheme offers a safe refuge for your money, though it should be noted that once you make a voluntary contribution, you cannot withdraw the money.
Parking our money in the CPF alone will not ensure we can enjoy a comfortable retirement.
It’s important to invest the money to grow it at a rate that can exceed the long-term inflation rate of 2% to 3%.
By allocating some money to such investments, you can look forward to enjoying that well-deserved retirement!
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Disclaimer: Royston Yang owns shares of DBS Group and Singapore Exchange Limited.