The CPF board invited some financial bloggers to have a session and I was able to gate-crash the event because a few "more prominent" bloggers were not able to show up for the event. As it turns out, the event was informative and it was a great learning experience for all of us. I felt that the CPF folks very very candid and gave us a realistic picture on how the program is viewed by the general public.
In this article, I would like to put my own spin into the CPF and show that there is definitely room for more improvement.
Firstly, people need to understand that the CPF program would always attract more negativity than positivity. Any program which forces a citizen to set aside money for retirement and housing is not going to be welcome by the people who think that they have the right to spend their own hard-earned money.
Secondly, the CPF program does not really know what is it's true mission should be. On one hand, it is supposed to be retirement fund. On the other hand, it is also money set aside for housing and medical expenses. These two objectives are often at cross-purposes with each other. For example, A HDB loan mandates that the borrower exhaust his entire OA account so as to minimize its size.
I don't believe that the CPF is created for retirement planning or home ownership.
To me, the CPF program is a program to hold every citizen's money on ransom such that when they screw up their own lives, they have to dig into their own financial resources to pay for medical and home ownership expenses rather than dig into the money the government needs to run its daily businesses and maintain our infrastructure. CPF is, thus, protection money.
Protection money meant to protect the more responsible citizens from the less responsible ones.
A lack of clarity as to the CPF's role prevents financial bloggers from being able to agree with each on how to manage CPF funds and to what extent should it be employed for buying housing.
So instead of prescribing what is the right way to manage your CPF, I will share a philosophy which in my opinion, would be a better guiding principle on retirement planning.
I call this the "Eat the Government" philosophy. ( Jiak Cheng Hu in Hokkien )
When you decide to "Eat the Government", your objective is not to maximise your utility when it comes to social security but to extract the largest amount of funds from the Government without regard for your personal consequences.
This means three things :
(a) Extracting the largest returns from the government as much as possible before reaching 55.
(b) Trying to get the most money out of the CPF when you reach 55 years of age.
(c) Maximising the amount your children will get from the CPF Board after you die.
Applying this philosophy will result in three moves :
a) Transfer as much of your OA to your SA as possible.
Getting 4% risk-free is quite amazing. Personally, I think it's better than getting 8% from equity if your horizon is longer than 20 years.
The government pays 2.5% for the CPF-OA risk-free. Transferring the funds to CPF-SA gives you 4% but limits your flexibility as funds can no longer be used for housing. If you "Eat the Government", then you should maximise your transfer to SA so as to extract 4% from the government as much as possible.
I was able to max out my CPF-SA before I hit 32 years of age. This exacts a heavy toll on the CPF board who has to pay me $4,000 - $8,000 into my SA every year since my early thirties.
b) Invest your full 35% of CPF-OA
This is less intuitive.
When you invest 35% your CPF-OA, the government is not giving you interest on that money you pump into the stock-markets so, on first inspection, it goes against the idea of "Eat the Government". But investing your money into REITs and high yielding counters can yield over 6% which then flows back into the OA account allowing it to grow at a faster clip. In my case, I have already maxed out my CPF-SA, so I put in the remaining 35% of the CPF-OA into a portfolio which returns about 5-6% dividends. It allows me to grow the CPF faster and "Eat the government" by moving those funds out of reach of their investment managers and directly into investments of my choice.
[ One alternative school of thought is to keep the funds in OA and invest 35% of it into the markets rather than move it to SA. But I am biased towards SA as it is a guaranteed 4%. ]
c) Choose the Basic Plan instead of the Standard Plan for CPF Life.
If you know that you will die early, always opt for the Basic plan. If you will live to ripe old age of 120, then the Standard plan would be more worthwhile. But, unfortunately, we do not have an idea how long we will live.
If you are single and have no kids, the Standard Plan works because you will have no need for your money after you die. However, if you have kids and do not absolutely hate them, the Basic plan provides a smaller pay-out but leaves behind a larger residue after you pass on leaving more money for your children. So while you do not get to Eat the Government, you children would.
[ Note : I expect the actuaries who designed CPF Life would reduce the longevity risk transferred per unit price of the annuity to earn CPF Board reasonable profits, so you should always be mathematically well-off when you reduce your exposure to these annuities instruments.
Put another way, if you adopt the Standard plan, you may need to live significantly beyond the average life expectancy to break even against the Basic Plan.
Do note that this is my own speculation and I welcome officials to disprove my hypothesis. ]
In summary, in spite of its schizophrenic nature, the CPF programme is still fundamentally a good thing because it prevents Singaporeans from hurting ourselves. However, as it stands, simple questions like whether CPF should be used for housing will not achieve any consensus even amongst financial experts who may be evenly divided as to whether the CPF is meant for retirement or housing.
Perhaps a better approach is to design a series of moves as part of deeper personal philosophy, acknowledge your personal biases, and then stick to the plan as part of your lifestyle design.