How CPF can be a great addition to your investment profile

As youngsters, we seldom think about old age. Our minds are too occupied to worry about our expenses at the age of 66, when we have retired from work. And are likely to require periodic medical attention. But if you are wise enough, you would know the importance of planning for your post retirement expenses early on. The earlier you start saving, the lesser will your monthly savings target be for your retirement.

But how many of us really include retirement planning in your financial goals? Most of us don’t think of retirement until we are 35 years old or above. And then, e is left with relatively lesser time to save for our retirement. According to a report published in Channel News Asia, 1 in 3 Singaporean working adults is NOT planning for retirement. Majority of the people end up focusing on their immediate expenses. Such as buying a home, car, paying off educational loans, etc.

Post retirement

Most people can estimate the total amount they will need to survive post retirement. There are many online calculators that can help you arrive at this number. This figure is based on your lifestyle expenses, medical expenses, and the estimated inflation rate in the future. Let’s say the total estimate you arrive at is SG $310,000. You would have to start saving SG $100 from the age of 25 for the next 40 years to arrive at that number (considering there will be adding compound interest)

This just goes to show that it is important to start retirement planning early on and what could be better than investing in the Central Provident Fund (CPF)? It is not only a good start towards retirement planning but also a great addition to your investment profile. Read on to find out more about the CPF investment scheme in Singapore.

What is the CPF?

The CPF is a government-run scheme design to help residents to prepare for their retirement years. As part of the program, it is mandatory for all Singaporeans in employment to contribute 20% of their monthly pay. While their employers contribute 16% on top (the percentage employers are required to pay is regularly tweak by the government as a reaction to the economic situation. When the economy is fully recovered, it is hoped that it will return to a level equal to the contribution made by the individual).

The scheme is made up of three separate accounts all with their own discrete functions:

  • Ordinary Account (OA) – used predominantly to fund housing
  • Special Account (SA) – for retirement, and retirement-related financial services
  • Medisave Account (MA) – for healthcare

The interest rate for the OA is 2.5% and 4% for both the SA and MA. Once you have a combined total of $60,000, these rates increase to 3.5% (up to first $20,000 from OA) and 5% respectively. The other main difference between the OA and SA is that you can dip into the OA, whereas once it is in the SA, it is locked away – in the government’s reserves no less – until you are 55. So, what are the arguments for transferring your money into the higher paying SA, and why are so many people reticent to do so?

How can the CPF benefit you?

There are many investment options available, but the benefit of the CPF’s SA is that it guarantees you not only a return but a specified return. This means there is no confusion, no gambling on your future. The interest rate is (currently) at 5% (for those that meet the minimum criteria), and that is the return you will receive on your investment. Everything is guaranteed by no less than the Singapore government so as long as they are still around, your money is safe, and is growing. There are higher rates of return to have in different forms of investment and trading. But their returns are far from guaranteed, and can and will fluctuate year on year.

Investing in the SA requires no skill, time or knowledge of the financial markets, or other investment channels. It is an easy option, and the rates of return are still higher than you will be offering by similarly safe options such as high street banks, insurance companies and the Singapore Savings Bonds. It is also higher than inflation (normally kept at around 3% in Singapore) which is another crucial requirement when planning a retirement fund.

Finally, if things were to take a turn for the worse in your personal financial situation, creditors cannot get hold of your money if it is locked up in the CPF. This is something that should be a consideration for small business owners, or anyone potentially threatened with bankruptcy.


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