Our CPF Interests Are No Longer Enough?

For the recent 2 months, I have been reviewing many investment portfolios with my clients and creating new ones with new clients as well. One of the most commonly asked aspect is whether investing our CPF monies is worthwhile. As you can see in the above screenshot, which shows one of the many double digit growth portfolios, especially with CPF investments, it can be highly rewarding when the investment portfolio has been well-positioned, well-diversified, and having risk diversification measures in place to catch on growth potentials towards the retirement goal.

At this point, I wish to highlight that having double-digit growth year on year is a really bonus because what we want to achieve is to have a sustainable portfolio that grows potentially higher than what we are given by the CPF Board, while meeting each of our unique risk profile, CPF savings amount and inflows, CPF planned usage(s), and retirement needs, etc.

For many of us in Singapore, the Central Provident Fund (CPF) has always been our go-to for retirement savings. It’s been a reliable way to put money aside, with interest rates that provide some growth over the years. But as we look ahead to the realities of retirement, it’s becoming clear that CPF interest rates might not be enough to ensure the comfortable and secure retirement we’re all hoping for.

I will explain more below on why depending on CPF rates for growth is no longer enough by itself to meet our retirement needs.

The Numbers: Where CPF Interest Rates Stand Today

Let’s start with the basics. As of August 2024, the CPF Ordinary Account (OA) gives us an interest rate of 2.5% per year. The CPF Special Account (SA) does better at 4% per year. These rates have stayed pretty stable, which has been reassuring. On top of that, there’s an extra 1% interest on the first $60,000 of our combined CPF balances, and if we’re over 55, we get another 1% on the first $30,000.

At first glance, these rates might seem like they should be enough. After all, 4% per year in the SA is nothing to sneeze at. But when we start thinking about what we’ll actually need when we retire, the picture gets more complicated.

The Rising Cost of Just About Everything

If you’ve been to the grocery store or paid a medical bill lately, you know firsthand that prices are going up. Inflation has been slowly but steadily eating away at the value of our money. Even though our CPF savings are earning interest, the rising cost of living means that what we’re saving today might not stretch as far as we’d like in the future.

Healthcare is a big concern here. As we get older, we’re likely to need more medical care, and those costs have been rising faster than almost anything else. Even with MediSave and MediShield Life, we may find ourselves dipping into our CPF savings more than we expected. And once we start using those funds, the balance left to earn interest gets smaller, which can lead to a downward spiral where our savings aren’t growing enough to keep up with our needs.

Living Longer: A Blessing and a Challenge

Singaporeans are living longer than ever before. This is great news, but it also means that our retirement savings need to last longer. Life expectancy in Singapore is now over 83 years. With the retirement age moving up to 65 by 2030, many of us can expect to spend two decades or more in retirement. That’s a long time to stretch our savings.

When you think about spending 20 years in retirement, it becomes clear that we’ll need a substantial nest egg to maintain our lifestyle, cover medical expenses, and deal with any unexpected costs that come up. The current CPF interest rates, while steady, might not provide the growth we need over such a long period, especially if we’re relying on them as our primary source of retirement income.

Looking Beyond CPF: What Else Can We Do?

So, what can we do to make sure we’re covered? One option is to look beyond CPF and consider other investments that might offer higher returns. This could mean putting some money into stocks, bonds, or even real estate. Of course, these options come with their own risks, and they’re not guaranteed to perform better than CPF. But with careful planning and a good understanding of our risk tolerance, diversifying our investments could give us a better chance of growing our retirement savings.

It’s also important to remember that retirement planning isn’t just about saving money—it’s about managing it well. That means being mindful of our spending, planning for unexpected expenses, and staying informed about the financial tools and resources available to us.

The Bottom Line: Taking Control of Our Retirement

CPF has been a reliable part of our retirement planning for years, but as the world changes, so do our needs. The interest rates that once seemed sufficient might not be enough to cover the rising costs of living and the longer lifespans we’re enjoying. By taking a more active role in our retirement planning—exploring other investment options, managing our expenses, and staying informed—we can better prepare for the future and ensure that our retirement years are as secure and comfortable as we’ve always hoped they would be.

How Do We Invest Our CPF Properly?

Investing your CPF savings can be a powerful way to grow your retirement fund, but it’s important to do it wisely. Here are some key tips to consider:

First, make sure you understand the CPF Investment Scheme (CPFIS) and the options available, like stocks, bonds, and unit trusts. Each has its own risks and potential returns, so choose what fits your comfort level.

Second, know your risk tolerance. If you’re more conservative, stick with safer options like bonds. But if you’re open to taking on more risk for potentially higher returns, consider stocks or unit trusts.

Diversification is also crucial—don’t put all your eggs in one basket. Spread your investments across different assets to balance potential gains and losses.

Watch out for fees, as they can eat into your returns. Lower-cost options like ETFs might be a good choice.

Finally, keep an eye on your investments. Regularly review and rebalance your portfolio to stay on track with your goals. And if you’re ever in doubt, don’t hesitate to seek advice from a financial advisor.

By taking these steps, you can make your CPF savings work harder for you, helping you build a more secure and comfortable retirement.

Cheers,

Zechariah See

#retirementplanning #CPFinvestments #maximisegrowthpotential

Important: The content in my posts/sharing is for informational purposes and personal views only, and should not be depended upon as professional financial advice yet. Readers should seek independent financial advice that is tailored to their individual financial objectives, circumstances, and needs. Content is not reviewed by the Monetary Authority of Singapore.