Thinking of investing your CPF? Here’s what you need to know | Money Talks podcast

CPF Investment: A Detailed Guide

Key Concepts: CPF (Central Provident Fund), CPFIS (CPF Investment Scheme), OA (Ordinary Account), SA (Special Account), SRS (Supplementary Retirement Scheme), Risk Premium, Volatility, Liquidity, Endowment Plans, Unit Trusts, ILPs (Investment-Linked Policies), ETFs (Exchange-Traded Funds), SDIC (Singapore Deposit Insurance Corporation), Cash Flow Management, Coverage Management, CPF Management, Full Retirement Sum.

I. Introduction to CPF Investment

• The podcast discusses the pros and cons of investing CPF monies, focusing on whether it's a wise decision for the average Singaporean.
• Christopher Tan, CEO of Providence, shares his personal experience of not investing his CPF, except for the initial Singtel shares provided by the government.
• He views his OA as a "safe bond" with a guaranteed 2.5% floor rate and his SA as an unbeatable 4-5% capital-guaranteed investment.

II. Christopher Tan's Perspective on CPFIS

• General Advice: Providence generally doesn't encourage clients to invest their CPF unless they have no other investment funds or strongly desire to do so.
• Client Proportion: Only a small portion of Providence's managed assets (approximately $30 million out of $1.4 billion) is invested through CPFIS.
• Reasoning: He believes the guaranteed interest rates in the SA are often superior to the risk-adjusted returns of other investments.
• Trend Among Younger People: While some younger individuals are interested in using CPF for investment due to job stability and lack of immediate housing needs, many are still cautious and prioritize saving for a down payment on a house.

III. Guidance for Those Insisting on CPFIS

• Minimum Requirements: Before considering CPFIS, individuals should:
  • Be at least 18 years old.
  • Not be an undischarged bankrupt.
  • Have at least $20,000 in their OA and $40,000 in their SA, as these amounts cannot be invested.
• Prioritize Other Funds: Invest cash and SRS monies before CPF, as these sources have lower interest rates.
• Avoid Investing SA: Strongly discourages investing SA due to the unbeatable 4-5% capital-guaranteed interest rate. The risk premium for seeking higher returns is not justified.
• OA Buffer: Before investing OA, ensure you have at least $20,000 remaining and enough to cover 12 months of mortgage payments in case of job loss.

IV. Age and Risk Tolerance

• Age as a Factor: Age significantly impacts risk tolerance. Younger individuals have more time to recover from investment losses and are more likely to find new employment.
• Life Milestones: Factors like having children also influence risk appetite, as financial decisions must consider family needs.

V. Determining a Reasonable Investment Amount

• No "Play Money": Emphasizes that all money is hard-earned and should be treated with respect.
• Amount Depends on Circumstances: The appropriate investment amount varies based on individual CPF balances and financial situations.
• Start Small: Recommends starting with a small amount (e.g., below $5,000) to gain experience and understand market volatility.
• Gradual Increase: Gradually increase investment amounts as comfort and knowledge grow.

VI. Enhancing the Special Account

• Top-Up with Cash: The best way to enhance the SA is to top it up with cash, taking advantage of the high, guaranteed interest rate.
• Comparison to Endowment Plans: Suggests that topping up the SA is a better alternative to buying endowment plans, as the SA offers higher guaranteed returns and is AAA-rated.
• OA Transfer: If cash is limited, consider transferring funds from the OA to the SA.
• SA Cap: The maximum amount that can be in the SA is capped at the prevailing Full Retirement Sum (currently $213,000).

VII. Supplementary Retirement Scheme (SRS)

• Tax Relief: SRS offers tax relief on contributions up to $15,300 per year for Singaporeans and PRs.
• Withdrawal Age: Funds can only be withdrawn without penalty at the statutory retirement age (62 if the account was opened before July 1, 2022; 63 if opened on or after July 1, 2022; and 64 if opened on or after July 1, 2023).
• Early Withdrawal Penalty: Early withdrawals are subject to a 5% penalty and are taxed as income.
• Investment Options: SRS offers a broad range of investment options.

VIII. Investment Instruments

• CPF Approved Instruments:
  • Low Risk: Fixed deposits, statutory bonds (LTA, HDB), Singapore Government Securities, Treasury Bills (T-bills).
  • Low to Medium Risk: Unit trusts, ILPs (with caution).
  • Medium Risk: Single premium endowments, annuities.
  • Higher Risk: ETFs (tracking S&P 500), unit trusts investing 100% in equities.
• Cash and SRS Instruments: Offer a broader range of investment options compared to CPF, including more funds and ETFs.
• CPF Restrictions: CPF-approved investments must meet specific requirements set by the CPF Board.
• Investment Management Fees: CPF Board has kept investment management fees of CPF-approved funds in check.

IX. Common Mistakes in CPFIS

• Treating CPF Differently from Cash: Not being as careful with CPF investments as with cash investments.
• Lack of Due Diligence: Not understanding the investments being made.
• Insufficient Liquidity: Not leaving enough funds in the OA for emergencies and mortgage payments.
• Lack of Knowledge and Experience: Panicking and selling investments during market downturns, leading to losses.
• Not Staying Invested: Selling investments at the wrong time due to fear.

X. Risk Protections

• No Government Guarantee: There is no government guarantee on CPF investments. If you lose money, you lose money.
• SDIC Protection: Only applies to deposits with banks (up to $100,000).

XI. The Three C's for Financial Security

• Cash Flow Management:
  • Spend below your means to create a surplus.
  • Optimize surplus by investing in higher-yielding accounts (T-bills, SSBs).
• Coverage Management:
  • Buy necessary insurance coverage.
  • Pay as little as possible for adequate coverage.
• CPF Management:
  • Take care of your CPF by buying an affordable house and not overspending.
  • A well-managed CPF will provide a steady income stream in retirement.

XII. Conclusion

• The podcast emphasizes the importance of careful consideration and financial literacy when deciding whether to invest CPF monies.
• It highlights the benefits of the SA's guaranteed interest rate and the potential risks of investing in volatile markets without sufficient knowledge.
• The "Three C's" provide a framework for building financial security through responsible cash flow, coverage, and CPF management.