“Beating inflation should not be a reason to invest your CPF”

With elevated inflation rates grabbing the headlines in the last two years, you might be wondering, will my Central Provident Fund (CPF) savings be enough for my golden years?

If you’re under the age of 55, your CPF Ordinary Account (OA) savings earn 2.5 per cent interest per annum (p.a.), while your Special Account (SA) balances earn 4.08 per cent. Inflation, however, is projected to range from 2.5 to 3.5 per cent for 2024; last year, it hit 4 per cent, outpacing real median income growth for certain wage groups.

Even if inflation eases, with growing longevity and changes to the CPF system, it may be wise for all of us to reconsider how we are planning for retirement, and adjust our investment strategies. Under the CPF Investment Scheme (CPFIS), we can invest our OA and SA balances (savings in excess of $20,000 for OA, and savings in excess of $40,000 for SA).

But given that we already earn risk-free interest rates on our CPF savings, is investing the money worth our while?

Senior Manager (Content and Training), Institute of Financial Literacy, Lawrence Tan weighs in

What are the pros and cons of investing our CPF OA funds to “beat” inflation?

CPF OA savings are meant primarily to help members attain important financial assets, such as home ownership, basic insurance and long-term savings. Beating inflation should not be the driving reason for deploying CPF OA savings.

Even if the initial CPF OA withdrawals are deployed into such comparable risk assets, people may make subsequent investments, or roll over maturing investments into other products promoted by these platforms, eg stocks or managed funds. They may not appreciate that doing so will significantly alter their risk profile with respect to their initial CPF OA savings.

What factors should we consider before making a decision to invest our CPF OA monies, especially taking into account other uses of OA funds (housing, education, and retirement)?

Life stage will drive the time horizon (time in the market) as well as a reasonable risk posture (asset allocation) to adopt in investing.

Apart from this, one should always be clear about one’s goals for investment. For example, is it to build savings for a home purchase, for your or a child’s future education, or to complement your retirement nest egg? The nature of one’s goal determines the time horizon and the amount of equity risk suitable.

One cannot expect high returns in investing if the time horizon is relatively short. If a product offers this, it must be much riskier.

Should we view investing CPF OA as the “last resort” rather than the first option?

It is not about a first or last resort. One should aim to have a diversified or tiered structure when it comes to portfolio composition, with a certain percentage in low risk, followed by moderate and higher risk assets. CPF savings would form part of a portfolio’s low-risk component, and should be considered in overall financial planning.

If one has a relatively high proportion of overall wealth tucked in low-risk assets (ie never invested) and has a long time horizon for financial goals (15 to 30 years), then it would make sense to deploy some of this into more moderate-higher risk assets. This can help to achieve financial goals such as paying off a mortgage or building a retirement nest egg.

However, if it’s the other way around, then one should be focused on rebuilding lower risk assets, such as CPF OA savings, and avoid investing further savings in higher risk allocations.

What is CPF Life?

CPF Life is a national annuity scheme that provides you with a monthly payout for as long as you live. Most people are automatically enrolled into this scheme using savings from their CPF Retirement Account, which is created using their OA and SA savings when they turn 55.

Given the wide range of investment products that CPF funds can be used for, can you suggest a strategy for investing CPF OA in a balanced way?

Let me begin with a reminder that by paying down some types of debt, such as a housing loan, you are also making an investment [in your property].

So consider this before investing your OA, especially if it helps release cash flow, which can then be deployed (subject to current risk allocations) into higher yielding assets befitting your investment horizons and goals. If you do not have much debt that can be repaid using CPF OA, have built up OA monies, and may be overly weighted on low-risk assets, then this would be a strategy for optimising your allocations using CPF OA.

Product suitability and prioritisation must always be underpinned by one’s financial goals for investing, and one’s current and near term expected risk profile/capacity.