Sunday, September 27, 2015

Manage your CPF well but please do not rely on it !

I'm very busy this week as I have my mid-terms and a presentation to make next week in school.

Nevertheless I want to elaborate on this point I made in my radio interview which Driz'zt of Investment Moats has kindly referred some traffic to me is his very well-thought article on CPF.

We Singaporeans are a lucky lot because a large part of what our government do actually works. The same cannot be said if you happen to live in our neighbouring countries.

The mindset of not relying on CPF is not a judgment on our government's capabilities. I am a lot more positive than Driz'zt and Roy Ngerng and believe that a comfortable lump sum awaits me at age 55. I expect to get a nice lower 6-digit sum at 55, which translates to about $1,000 a month additional passive income after that. It's not enough to live on if I have yet to clear my mortgage loan, but it's a nice welcome addition to what I already have. So the primary effect of relying on ourselves allows us to achieve a more comfortable retirement when the CPF board suddenly decides to reward us when we reach 55 years old.

That being said here are some minor points to push the debate further.

a) I am a strong proponent of the CPF-SA transfer.

I see real estate being stagnant for the next decade with interest rates rising, so the option of using the CPF-SA to get a bigger home may not be such a good idea. I prefer small homes with a larger investment portfolio and performing the transfer earlier in your 20s will see more interest being credited over your lives. More interest from CPF-SA makes it earlier to cross the minimum sum hurdle so you get all of it back after you hit 55.

Sometimes not having options when it comes to money is not such a bad thing. I might be considered foolish or insane when I maxed out my CPF-SA in my twenties because I did not know who my wife will be in those days. I thought Gen-X Singapore women would want bigger houses and would deplete my CPF resources so I decided to keep it out of reach from my future wife before I even met her. I still managed to get my EC in the end and the government credits over $6k to my CPF-SA every year as a result of that action.

( I reserve the right to change my mind if the Government raises the amount we can invest in our CPF-SA. Ideally, I would like to invest 100% of my CPF-OA but not everyone would well if this opportunity arises. )

b) CPF Life is better than the alternatives from buying it from commissioned agents. 

A retiree's passive income is best supplemented by an annuity. The problem is that annuities are expensive and affect the rights of your remainder men.  CPF Life solves the problem for us because we can just rely on it to fend off mortality risk. From the point of view of a million dollar portfolio, the government is not retaining much of your assets and another guaranteed $1500 passive income from age 65 is not a bad idea.

The broad idea is to have a portfolio of securities to provide capital gains and dividends supplemented by a fixed annuity payment. You eat your annuity payments first and farm remaining dividends back to your portfolio to keep the engine moving. If my portfolio remains large relative to the sum retained by CPF, I can opt for bigger monthly payments with less money returned to my family when I die.

c) Max out your CPF-IS with high-yielding blue chip stocks.

Finally, if possible max out the CPF-IS scheme and do it before you buy your first property because the government will not force you to sell your holdings if it exceeds 35% of your CPF-OA.

I also manage my CPF-IS differently from the rest of my portfolio.

As I can't extract dividends from this portfolio, I choose big bluechip companies that I can afford to hold for a long time horizon which yields higher than the CPF-SA rate. This guarantees that for some market risk, I get to have bigger returns than the default 2.5% that the CPF Board gives me.

In conclusion, while we should not rely on the CPF for our retirement, managing the CPF well can give you a $1,000-$2,000 boost to your monthly passive income after age 65. While the CPF-SA is not as flexible as the CPF-OA, it comes with a gigantic boost in guaranteed returns so transferring the OA to SA in your mid-twenties is not a trivial strategy.


  1. hey chris,

    you have used CPF well as a wealth protection tool.

    i think this point is very underappreciated for financial planning purposes. the interest rate is not bad as well.

  2. 4% is a steal by modern standards.

    Now it would be extended all the way through 2016. That is a lot of money for the conscientious employee.

  3. what is the maximum CPF Special Balance? Up to Minimum sum (currently at S$161k?)