How To Make CPF Investment Schemes Work For You [TFC 105]

Most Singaporeans think that the money in your CPF “cannot touch until you retire”, but did you know you can actually use the money in your CPF accounts to invest? The discussion on CPFIS, or CPF Investment Schemes has been polarising to say the least: people either love it or hate it. How should we view CPFIS and what are some key pointers to consider when investing through your CPF? The Financial Coconut has some advice for you in TFC 105!

A recent article from Straits Times has shown that 1 in 2 people who use CPF to invest ends up worse off (https://bit.ly/3BpT2u7). Does this mean CPFIS is a no-go for us? Reggie doesn’t think so. Instead of making blanket statements like this, it might be better to ask why these people are worse off. He explains his stand on this in the episode and that will give you more clarity on CPFIS.

Before investing in CPFIS, Reggie recommends some key pointers to consider. Is there a difference if we invest the money in our OA (Ordinary Account) or SA (Special Account), and which is better? What is the minimum percentage return we should be aiming for to make our investments worthwhile? Get the answers to these questions here!

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podcast Transcript

Reggie: We are back with another CPF episode and I know a lot of people are asking about this: how to invest with CPF? For a very long time, I’m not a very big proponent of investing with CPF because I think it is a lot about risk-free returns already at 4%, and I know there’s two sides of the camp.

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One side say “don’t invest, just put 4%, put everything to SA (Special Account).” The other side say “you should invest, you should compound over the longterm” and what have you, and then some data that suggest this, suggest that… say that “people that invest CPF actually don’t perform as well” and what have you.

So I’m gonna put out my thoughts today. I think there is a more sophisticated way to discuss this thing and I’m going to share with you my thoughts on investing with CPF, aka CPFIS (Investment Scheme).

Good morning, everyone. I welcome you to another day with The Financial Coconut. In our podcast, we will be debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create the life we love while managing our finances well. 

Today, we’re going to focus on CPF Investment Scheme: how do you work out with this and my take on this subject. A bit scary…. I am very afraid to talk about this topic because it’s very contentious. Everybody has their own view, everybody has their own perspectives and I’m just going to put out mine, okay? So welcome… just listen in and see it works by you.

By now, you should recognize that CPF is quite a big mammoth, very complicated and messy depending on how you look at it. Some people is like “oh, very good. A lot of options… can do this, buy house, retirement, invest, spend on my kids” and what have you. It depends on how you look at it. Of course, some people think all the options are good, but also some people feel like “oh so many options, don’t know what to do with it. 

Investment is definitely something that a lot of people are entertaining. I think more and more young people are entertaining the idea of investing for whatever reason. It may be because people are a little bit concerned about their future. It may be because of the rising cost or it may just be because more and more people are becoming more financially aware, financially conscious, which is great.

So for whatever reason, there is a phenomenon out there where a lot of PMETs (Professionals, Managers, Executives and Technicians), young people like us, young adults or early working adults, early family are all looking at investing in CPF Investment Scheme. It’s definitely something that is within people’s perview. 

But of course this topic a bit contentious… there are some articles that came out on Straits Times to say that 1 in 2 who uses CPF to invest ends up worse off. This is historical data and it shows that for maybe the past 10, 20 years, people are not really making money from investing CPF. In other words, what the editor is trying to tell you is don’t invest in CPF, just put in SA or just put your money there, don’t touch it. Just let it do its thing, let it do its magic. Why you want to geh kiang (act smart) and do more? 

So that is one camp to look at it, but we also need to recognize that over the years, a lot of CPF products are much better compared to before. Last time the products, the premium, they charge a bit wild. I’m also saying this because… you are seeing evolution, right? You’re seeing now that robo-advisors are coming in. Of course, at this point in time, there’s only one provider, which is Endowus and this particular episode is not sponsored but I did reach out to them to sponsor other things. Because to me, it’s like “I’m going to talk about you guys mah, then you sponsor us lah.” 

Endowus is the only provider at this point in time that allows you to invest in low cost index funds through their platform for your CPFIS. I believe over time, other robo-advisors will come in but this moment in time, they are the only guys to allow you to invest your money to low-cost index funds which is amazing. Because I think something that’s out of the discussion when people use this kind of big blanket statements like 1 in 2 people who uses CPF to invest ends up worse off. They don’t really find out why are these people worse off? 

One of the bigger problems is they invest in ILPs (Investment-linked Plans), they invest in unit trusts, they invest in all these kinds of managed investment products that have very big wrappers, very expensive. A lot of these companies, they charge 1, 2, 3% per annum and what have you, so very expensive. Essentially, when your management company is charging you this kind of rates, it’s very hard for your portfolio to perform above 2.5% or even above the 4% from your SA. 

But of course Endowus is coming in to change the game and they are charging you 0.5% on management fees and I believe with more and more people coming in, all these management fees will come down and I believe there’ll be new people coming in. They cannot be the only guys. As of now, they’re the only ones to use CPF to do your low-cost index funds, so definitely check them out. I think… pretty good, what they are doing. Also, check out the episode that we are doing with them about why you should invest your CPF and listen to what they have to say. Don’t just listen to me. Today’s episode is put together by my thoughts and talking to all these different people and what have you. 

So broadly speaking, the CPF Investment Scheme is after you have $20 000 in your OA (Ordinary Account) and $40 000 in your SA, all the excess cash you can actually put through this CPF Investment Scheme. Of course, there’s some caveats. You can only put 10% in gold, 35% in single stock, corporate bonds, property REITs (Real Estate Investment Trusts), what have you. It makes it a bit complicated for a lot of people. In that sense, a lot of these providers will come in to try to capitalize on this complexity and say “oh, we are going to provide you a service.” But they do charge a lot and my view is you want to go for low cost. I think at this point in time, we all have really come to be perfumed in this environment of low cost funds and low cost service providers. So yeah, robo-advisory is a fair play. 

Today, I’m sharing you some core tenets to have when you’re thinking about CPF Investment Scheme. It’s not just using one robo-advisor and what have you, but really understand this idea and based on this big mammoth, I’m going to share with you some of my pointers. Number one is when looking at investing through CPFIS, your risk-free return is probably closer to 4% because your SA already gives you 4% and the investment horizon is so long, so liquidity as a factor is a little bit off the way. 

Of course, I know some people say “oh, but you can invest your OA also.” That means you don’t put the money in SA. You just invest directly to OA. Fair, because at some point your SA gets maxed out. You cannot top up anymore and what have you. So I totally get that. But in that sense, you probably shouldn’t invest your SA, your Special Account, which is giving you 4% risk-free. 

This is my view… once again, not a recommendation. It’s really for education and my perspective because it’s very hard for investments to perform at risk-free level beyond 4%. You probably have to take up a lot more risk and in that sense, I feel like yeah, maybe you shouldn’t invest your SA money. Based on last week’s episode, I talked about topping up your OA into your SA and only keeping sufficient OA for your BTO (Build-To-Order flat) down payment. To me, that is a process of optimizing your CPF structure to get the most out of your SA account because there is an entitlement to all Singaporeans. You got this 4% risk free account that’s sitting down there, you put your money in, 30 years later when you retire, you can get it back out and I’ve already debunked the idea of “oh what if the government run away” and all that shit. So just listen to last week’s episode.

Assuming no weird shit happens in the governance, assuming even if the current government step down and hand over to another government and what have you, CPF stays intact. You get your 4% risk-free. 30 years later, you can do all sorts of things with it because the money can come out and what have you. I think that is a fair thing that more people should capitalize on whether or not you have a full-time job. Really, check out this idea of topping up your Special Account. 

But with that in mind, 4% is your risk-free so when you plan your OA investments… so I’m saying don’t really invest your SA, just put it in a risk-free… which is in the SA itself. All the excess that you have in your OA, you can invest because 2.5% is not that difficult to beat, but invest with the mind of the SA being the risk-free return already. There are a lot of investment strategy out there that people are talking about how to build a portfolio, 80-20, 80% stock, 20% bonds, 60-40 or what have you out there, which is pretty crazy. It’s a jungle, there are a lot of different ways to invest. 

When I look at building a CPF portfolio, I really need to consider this idea that I don’t really need bonds because I really have that 4% risk-free in my SA account, or at least today in fixed income, it’s quite hard to get 4% or beyond 4%. So I would think that you need to be cognizant about this SA component when you’re investing your OA. Don’t try to be too safe with it anymore. Consider investments that can beat 4% per year per annum consistently for 30 years with this in mind. Probably, there’s only equity. Equity is really the discussion and we’ll talk about this slightly later, but why is this important? 

Because you need to recognize that the portfolio that you’re building, it’s not only your investment account, not your CPFIS only but that’s the extra percentage that is risk-free, 4% in your SA, so you don’t need to over balance that portfolio already with more bonds or what have you, compared to if you were to build a portfolio out of the CPFIS with your own money then, okay, a lot of the balancing, 80-20, 60-40 kind of things start to make more sense. 

When you look at the whole portfolio as its one entity then yeah, if you see CPF investment structure as a one entity of your whole CPF system, then maybe you really want to look at equities a lot more than bonds and what have you when investing in CPFIS. 

Which brings me to a point number two, and that is after fees, actually to beat the 4% SA, you need to consistently be somewhere around 5.5% and 4% per annum to beat the OA account… somewhere around that ballpark. It’s actually not that simple, but we’ll come back to discuss this after a word from our sponsors.

Okay, so let’s take down the SA first. 4% risk-free returns from… in your SA account, if you want to beat it through investment, you’ve got to pay some investment fees, management fees and what have you. You add another 1%, 1.5% on top of it, you gotta beat 5.5% in essence, because that’s a year on year kind of thing. Of course, the cat’s out of the bag. Endowus is charging even lower, so they are changing the game. But if you’re not using Endowus, you’re using other providers, then on average, you have to add another 1.5% fees per year on the total asset. 

In that sense, it’s quite hard to beat 5.5%, because 4% risk free, and then add 1.5% cost… so to invest your SA money, you have to make more than 5.5% per year through investments to make it valuable to invest your SA money to begin with. If you look at CPF data, it’s not performing very well because 58% of people don’t perform what have you.

But if you want to look at the market performance, 20 year chart of the MSCI World Index which is the broad index of the global asset structure, everything add together, weighted accordingly MSCI World over the 20 years performed about 6.1% per annum and MSCI Singapore Index performed about 4.5%… barely meet 5.5% returns that you need to make sense to invest your CPF, your SA account. 

In other words, I would think from an educated perspective, I will not want to invest my SA account. I’m happy to keep it at 4% risk free but I can consider investing my OA account because after fees, if I can make about 5%, 6%, then okay. I think it’s worth it to invest my OA and knowing that SA has a limit, I can only max out my SA at a certain minimum sum then yeah, all the extra I can invest my OA. 

So in other words, I will prioritize maximizing my SA for the first 4% risk-free return and then I’ll entertain investing my OA account with the CPFIS structure. I hope that is clear for all of you. I know a lot of things coming around: OA, SA, IS and what have you. Singapore got too many acronyms… but the idea is your CPF SA account is already paying you 4% and you want to beat 5.5% or about 5% after fees is going to be quite hard. So why not just leave it there and consider investing through the OA? I think that is a little bit better. 

Which brings me to point number three, and that is I want to be very aggressive with my excess OA money. what do I mean by excess? It means I have sufficient for my 5% HDB down payment plus 3 years of mortgage payment, then I’m good to invest the rest in an extremely aggressive fashion, which means all equity to beat the CPF risk-free return. 

So why three years mortgage payment, you may ask? We have already talked about the 5% down payment in the last episode, so you totally get that already. Why 3 years mortgage payment? That is because the longest economic downturn so far is 3 years essentially. So which means worst to worst 3 years, you have sufficient to cover your house. Nothing is really going to affect you. You can draw down to your CPF OA if you need to pay the mortgage. To me, that’s a… you’ll be very, very, very safe already. 

Estimated $450 000 home loan… I’m assuming a $500 000 BTO. I think Bidadari… maybe a bit hard to get, but assuming $500 000 BTO, you get $450 000 home loan. 90% of property value, 2.6% interest rate, $1.8K a month times 36 months, that is $114 000 needed in your mortgage payment. 

In other words, to be super duper, super safe, I got my CPF down payment already, I got my 3 year mortgage payment already, the rest, I put in my SA to optimize then yeah, everything else I can invest in CPFIS through the OA structure and I can just do a full stock portfolio massively, very aggressive in the US and what have you.

I think we’ve already talked about it again and again in other podcasts about being aggressive as a investment, what is your stock portfolio looking like and what have you. The only guys in town at this point in time providing a full stock, aggressive portfolio for CPFIS is Endowus. Not sponsored… this one not sponsored. They sponsor other things. But it is what it is. For now, they’re the only provider and they will fundamentally change the game. To me, that is how I look at it. 

Of course, you may say “hey bro, a bit wild lah. If you think about it, you have hundred over thousand in your OA account and then you put the rest in your SA. You think you have so much money by that time you want to buy house and everything?” But honestly, these days, for a lot of the gig workers, for a lot of entrepreneurs like myself, we may not have so much money sitting around in the OA or in the CPF in itself. 

But for a lot of other people that are working $5000 a month kind of job, which I believe is quite a lot of you guys, $4,000, $5000 a month… because the median wage is about $4.4k at this point in time. After a few years, you have about $4.something, $5000 and if you are pretty lean, you optimize your expenses, you top up your SA, you top up your OA or you top up your MA, what have you, it’s not that difficult to have this kind of numbers. So I don’t think it’s far fetched in that sense. 

But yes, this is my take on the CPFIS. I think a lot of the articles out there have not factored in why people are not making the higher returns through the CPFIS. A lot of them are really spending too much money on fees and speculative investments and what have you. So if you think about it, if you can optimize your CPF already and you have all this extra money sitting around, then hey, why not invest your CPF money? I think over time, the stock market has proven to be a pretty reliable return, but you may not be very wealthy from it, but you can do this. 

I am going to sum up the three pointers when investing your CPFIS. Okay, this is my view. Like I said, there is no best way to do things. It’s just… this is my view after studying this thing and yeah, I hope you learnt something.

Point number one is when looking at CPFIS, your risk free return… you need to know it’s 4%. Your SA already gives you 4% and the investment horizon is very, very long, when you invest in CPF. You cannot take the money out, so liquidity shouldn’t be a factor. I know there are some ads going around tell you the liquidity blah blah blah… whatever rubbish they are talking about. CPF Investment Scheme, your risk free return is 4%, which also means that you don’t need to overly optimize to balance with bonds and equity and what have you, because if you want to build a whole portfolio, you already need to factor in this 4% which also means I don’t want to invest my SA. 

Which brings me to point number two: after fees, it’s almost impossible to beat your SA or you will beat it by very little, so why bother? After fees, broad market performs about 6% per year MSCI Singapore performs about 4.8%. Very hard to beat SA, so just put money in SA but you can consider investing your OA because I think it’s not that difficult to beat the OA’s 2.5% returns after fees. 

Number three is personally, if I were to invest, if I have so much money in my CPF, I would want to be a little bit more aggressive with my CPF investment with the OA money after I have 5% of my HDB down payment and 3% of mortgage payments, I think I’m very good to go, to be very aggressive with my CPF for a full stock equity portfolio. Currently, provider is only Endowus, so yes, I hope you learn something. 

Of course, there’s a lot more nuance and details that can come along with investing and what have you, but those, we already covered in other episodes. Specifically for this CPF, I think these are a few factors that you need to be aware of when exploring CPF investments. So with that, I hope you learnt something useful today. See ya!

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Okay, so investment is a very 见仁见智 (different people have different opinions). It depends on who you are, depends on your perspectives and depends on your palate and what have you. So I would say look for a professional, talk to them and in this case, look for whichever advisor that you want to look for to have a more holistic discussion about investments. I do think a lot of people out there, they understand CPF maybe even better than I do and they have been facilitating a lot of CPF investments. 

But yeah, be very conscious about low costs and about risk-free returns. I think these two are the main ideas when investing your CPF. Low cost investments is important and also risk-free because you don’t get 4% out there risk free. For something that is extremely long horizon in terms of investment then yeah, 4% not too bad. So that’s for you. 

I hope you learnt something useful. Next week, I still don’t really know what to talk about but when I figure out, I will let you guys know. I think there’s endless things to talk about happening in the market recently but I hope… this is the end of August and I hope you are healthy, doing well and we’re going to open up our country very soon also, I hope. So yeah, hang on there guys. We are getting past this whole Covid situation and like it or not, you’re not alone. We are here for you together. Anything… we should hang out, after the border, after this whole thing opens, we should organize a TFC gathering. Any questions, come to our Telegram group. I can expound in more detail specific to your situation. Meanwhile, take care.

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