Should you invest your CPF? We ask DBS’ head of financial planning

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?

DBS’ Head of Financial Planning Literacy, Lorna Tan weighs in

With inflation on the rise, we are seeing investment platforms advising people to invest their CPF OA funds to “beat” inflation. What are the pros and cons of taking this approach?

There is a growing suite of products that you can invest in with your OA, such as unit trusts, annuities, endowment policies, exchange traded funds, shares, and gold ETFs.

If you choose to do nothing, your CPF savings will compound and grow over time (when the interest earned on your savings starts to earn interest on itself). If you wish to make your CPF monies work harder via investing, do your due diligence first.

You should only invest if you are confident of earning more than the risk-free interest. For example, by investing a one-time amount of $50,000, the difference between getting a net return of 6 per cent p.a. and 2.5 per cent p.a. would be an additional $182,296 more for your retirement nest egg in 30 years. A larger nest egg offers more options for your retirement lifestyle.

Here are four disadvantages:

• Actual returns from investing CPF savings may be lower than the interest of CPF OA and SA. Some CPF members have suffered losses from investing their CPF savings

• Less CPF OA monies for housing purchases, loan repayments or children’s tertiary education

• Less monies in CPF OA as an emergency mortgage payment buffer in case you lose your income

• Less CPF monies to top up your own or loved one’s CPF SA, which may result in lower CPF Life monthly payouts

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?

You should ensure that you have sufficient CPF OA savings that you can use for upcoming housing purchases, loan repayments or your children’s tertiary education, before using the remainder for investments.

It would be prudent to keep some CPF OA funds as an emergency mortgage payment (eg six to 12 months) buffer in case you lose your income. You should also set aside CPF OA funds that you have planned to use to top up your own or loved one’s CPF SA.

After setting these funds aside, if you are willing and able to take on the risk of the equities and bonds markets, you can consider investing to potentially get higher returns than what CPF OA can provide.

If you have a long time horizon, consider prioritising your investments in diversified portfolios such as unit trusts. Unit trusts allow you to invest in a basket of stocks, which can diversify your investments. This helps to ride out market volatility, while potentially achieving higher returns than the OA base rate.

If you have a short time horizon, T-bills (treasury bills) are a safe, short-term investment option that you can use to diversify your investment portfolio. It is worth your time to understand the potential risks of investing your CPF balances in T-bills. It is not as straightforward, as you will need to work out the “break even” yields of T-bills for using CPF savings to ensure that you don’t end up in a worse off position.

It is less common to see advice to invest our SA funds. Would there be any compelling reasons to do so?

As the SA current floor interest rate is at an attractive 4 per cent p.a. that is guaranteed by the Government, do think twice before investing your SA balance, as it will be more challenging to beat this rate with most investment products.

In fact, the current interest rate for Special, Medisave and Retirement Account is 4.08 per cent p.a. from July 1, 2024 to Sept 30 2024. Reviewed quarterly, this rate is computed based on the 12-month average yield of 10-year Singapore Government Securities plus 1 per cent.

The main objective of CPF is to save up for your golden years. As the monthly lifetime payouts from the national annuity scheme CPF Life start from age 65, it means that you have a long time horizon before you draw down from your CPF.

By investing over the long term and potentially achieving a higher rate of return, you can better mitigate against longevity, inflation and healthcare risks in retirement.