Should you invest your CPF? A financial trainer weighs in

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?

The Savvy Investor: May Ng, 60

After 25 years in the banking industry followed by several years in the preschool education sector, May became interested in financial planning. She is currently a master trainer at the Institute for Financial Literacy.

Have you invested using your CPF OA before? If so, what did you invest in, and how did it perform?

Yes. Many years ago, I had a classmate who was working at a bank doing investment sales. They were launching a new product, and that’s how I got started. It was a unit trust – I think I invested around $2,000. I didn’t do much research then.

After that, I bought a single premium insurance plan that would give me a yearly payout after a certain number of years. I can’t remember the amount, but it was definitely slightly better than the CPF OA interest rate. I also bought some blue chip stocks, which I have since sold.

Now, my current strategy is moving towards T-bills and lower risk products. With T-bills, it’s quite clear what you will get upfront, so there is transparency.

Before I learnt about financial planning, I did not monitor my investments closely, so the outcome wasn’t good for some funds. One unit trust I bought was commodities related, and the prices started dropping after I bought in. But there were other funds I bought in that did well, gaining about 30 per cent after I started.

What are the pros and cons of investing one’s OA in riskier products?

The pros are that you could potentially do better than the CPF OA 2.5 per cent interest rate. For example, the single-premium insurance plan I bought had quite good returns. But it is important to know what you are investing into, because the main con is that you are essentially exchanging no risk for risk. Investments are never guaranteed, but your CPF savings and interest is guaranteed by the Government. Your investment could do very well for the first few years, and then start dipping after.

It is also important to pay attention to compound interest. For example, I bought a unit trust, and because I am a long-term investor, I held it for a good 30 years. I got a 30 per cent gain, which I am happy with, but if I had left the money in my CPF, it could have doubled (because of compounding interest). So you need to understand how CPF interest works, and be aware that there is an opportunity cost in taking out your CPF monies to invest in something else.

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?

Before you invest and start taking risks, make sure you have set aside your emergency funds. Think about your protection needs, such as life and health insurance for yourself or your family, and ensure that you have adequate cover and sufficient funds to pay the premiums. After that, if you don’t have important needs or goals to cater for, then you have your pot of funds to start investing with.

Personally, I do see using CPF OA to invest as a “last resort” in the sense that it is my “safe bucket”. When you invest, you want to diversify and manage your risk, so you can see CPF as one instrument – it can be your low-risk pot, while you can use other funds for investments that are higher risk.

Remember that CPF is for your key needs, like housing and retirement. I am careful about investing with CPF because ultimately it pays a good, risk-free interest rate, and the funds grow [exponentially] as you contribute, because there is compounding interest.