Read this before you top up your CPF

This post is sponsored by CPF. All views expressed are the independent opinion of The Woke Salaryman. If you’re not familiar with CPF, you can check out what we think about CPF in our previous post here.

‘Topping up of CPF’ is widely advocated for retirement planning. It is commonly mentioned by personal finance communities in Singapore, and literally preached as a way to reach a dream figure for retirement under the 1M65/4M65 movement.

Don’t get us wrong: its popularity is one that is well-earned.

By topping up your CPF, you can:

Last year, over 198,000 CPF top-ups and transfer of CPF savings were made by Singaporeans, many of them below 35.

That said, we believe that CPF top-ups are better suited for some groups.

There are many resources out there (here and here) on why you should top up your CPF.

But in true Woke Salaryman fashion, we think it’s also important to understand the factors to consider when you top up your CPF.

You can’t touch that money till you’re 55.

The best return of ‘safe’ investments such as endowments or bonds today are somewhere around the 2-3% p.a.

In comparison, CPF SA provides up to 5% returns* – a rate that’s high considering there’s little to no risk involved.

However, you won’t be able to withdraw any money from your CPF SA until you’re 55.

That means if you need your money for stuff such as your wedding, renovations, further studies overseas or big-ticket holidays, you might wanna think twice before you do so.

Opportunity cost of other financial tools

Your CPF SA is arguably one of the best wealth preservation tools available to Singaporeans. It’s safe, and its interest rate is stellar for its risk level.

That said, it is still a wealth preservation tool – and your money will not grow as quickly as riskier wealth accumulation tools.

That means if you play it too safe and put all your money into your CPF SA, you will be missing out on a lot of opportunity cost.

Here’s an example:

Growth $100,000 invested over 30 years
CPF SA Up to 5% p.a* $357,990
Historic S&P 500 (30 years) 10.7% p.a $2,110,710

*Total figure based on 5% p.a. returns on your first $60,000, and 4% p.a. returns on any SA balances above that. Also assumes no initial OA and SA balances

Of course, all this assumes that you’d buy and hold your investments, not panic sell them when the market falls (which they most certainly will).

If you’re the sort who’d panic sell their stocks in times of crisis, you might want to consider more allocation to CPF SA – rain or shine, it keeps chugging along at up to 5% p.a*.

The younger you are, the more you should think carefully about that CPF top-up

Combining the above two factors means that while CPF could be part of your investment portfolio, most millennials and Gen Z should not put all their money in their CPF SA.

Reason 1: They have the investment horizon necessary to take on higher risks.

Reason 2: Given how far they are from retirement, there’s plenty of sudden expenses to surprise them along the way. They need to manage their cash flow for flexibility.

Keep in mind, we’re not saying you should not top up your CPF at all.

What we’re saying is that you should top up an appropriate amount, based on your investment horizon and risk appetite.

How much to top up, then?

CAVEAT: This section is an independent assessment by The Woke Salaryman.

There are many ways to skin the cat here. But here are three ideas for you.

‘Your age’ play:  The traditional ‘balanced portfolio’ play. If you are 30, you can have 30% of your net worth in CPF. 40, 40%. 60, 60%. You get the idea. You can put the rest in higher risk investments such as Robos and Index Funds.

(Warning: Might be slightly outdated as people are living longer, most people have modified it to be riskier. One popular modification is ‘Your age – 10’)

The ‘Safety Net’ play: The 1M65 movement is based around this. First, you focus on securing your future retirement needs with CPF SA. After you’ve done so, you are free to take on higher risks in other investments – whether it’s business, trading, crypto, etc etc.

As part of Barbell strategy:  Put the majority of your net worth in safer investments such as CPF and bonds, then use the remaining to make risky plays into high growth, or speculative assets.

Of course, all these are only starting points for your portfolio allocation. You’ll need to figure out what works for you.

No investment is perfect

By now you should understand that there is no perfect investment, they all have their strengths and weaknesses.

But just like how you won’t jump off a building blindly, you should not leap headfirst into any investment just because the returns seem great. This applies to all investments – stocks, bonds, crypto or even CPF.

Ultimately, you owe it to yourself to make informed decisions.

Stay woke, salaryman.

**Includes extra interest. Members who are below 55 years old are paid an extra interest of 1% per annum on the first $60,000 of their combined balances. Members who are 55 years old and above are paid an extra interest of 2% per annum on the first $30,000 and 1% per annum on the next $30,000 of their combined balances. Terms and conditions apply.

A message from our sponsor, CPF

No matter what your views towards the CPF scheme are, we cannot ignore the fact that CPF is a huge part of every Singaporean’s life and personal finances.

And while CPF has its pros and cons, what we can do is to make the most out of what CPF has to offer, such as up to 5% risk-free returns on our Special Account balance.

That’s why in 2020, there were over 198,000 top-ups made under the Retirement Sum Topping-Up Scheme.

To find out more about topping up your CPF and the benefits of doing so, click here.

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