Tuesday, July 05, 2016

Jiak Cheng Hu - Manage your CPF by "Eating the Government"

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.


  1. My way to "eat the government" is to accumulate a huge SA account right up to 55 so that the remainder in SA will still be significant after setting aside the FRS in RA. After that, drawdown from SA at a rate of 4% p.a and we have effectively created an annuity plan out of CPFSA which starts paying out from 55.

    1. +1 this comment coz i'm doing this too (however, pls be aware of policy risk; i.e. Govt may change the rules of 55 withdrawal. Unlikely due to political implications among the "wiser" cohort but still present nonetheless)
      +1 this post coz I'll reach FRS by 32 and do the same for my OA :)
      +infinity this blog coz it's awesome :)

  2. Thanks for sharing.

    So your approach is to keep FRS in SA and then draw 4% every year until you reach 68. That's a pretty good idea.

    Do you have a view on the Enhanced Retirement Sum ?


  3. Point (c) is useful. I shall be taking the Standard Plan.
    The main gripe I have about CPF is the frequent 'shifting of goalpost' aka policy changes. We can try to think of ways to 'eat the government', but soon they will think of measures to counter our methods.

  4. Dividend Knight,

    You are absolutely right. The government will counter our measures to eat them, but thanks to the Internet we now have an active personal finance blogosphere.

    I don't expect all of us to agree on how to manage our CPF, but if someone reads all our articles, this person would be better informed as to what to do next.


  5. Hi Chris,

    2 more ways.

    Climb the Coporate ladder so that u hit the max 6 k ceiling that pay CPF.

    Top up your family CPF, especially your parents', u get tax rebate, they "eat government"

  6. Hi Christopher,

    when we reach 55, the FRS will be transferred to the RA from SA followed by OA. Hence, my approach is not to "keep FRS in SA and then draw 4% every year until you reach 68". Let me illustrate my approach with an example.

    At 55, say I have 300K in SA. After setting aside the FRS of 161K in the RA, I have 139K in the SA. The annual interest I earn with the monies left in SA would be roughly $5,560 (4% of 139K). That translate to $463.30 per month for life. Not a lot of money but it serves as an "annuity plan".

    Personally, I would not use the leftover monies in SA to top up to the ERS. I would prefer to have flexibility with my SA monies.

  7. Thank you for sharing your approach. It is quite formidable as 4% guaranteed yields will supplement income yields from your cash portfolio quite well.

  8. I have also transferred as much from my ordinary account to special account.

  9. Hi Chris,

    Personally, as an investor, I will not take the CPF SA interest rate even at 4%pa as my monies will be locked in for very long term. Therefore, I will seek to invest for excess returns. If you asked any decent investor, he will be disappointed with 4%pa long term return even if it is risk-free. There is a need to take some risk because you are investing for very long term.

    For example, just buy blue chip counters like SingTel, Keppel Corp, CapitaMall Trust, A-REIT etc more than 10 years ago and you will be better off than 4%pa now. I speak from experience as I have invested in these counters using my CPF-OA funds. Just buy and hold, collect dividends every year. Plus, add some small caps on top of these blue chips and you can achieve at least 8%pa return for long term.

    Even investing in STI ETF, Schroder S'pore Trust etc will yield more than 4%pa if you invest them for long term. These products are outside the 35% CPF stock investment limit and they can be invested using 100% of your CPF OA funds, after setting aside the initial $20k.

    All in, I find that CPF account holders are in the two extremes. Either they are too defensive or too aggressive. We should seek the middle path and try to make our funds work harder without taking significant risk. And with time, it is the best friend for a investor to learn from his mistakes and make better investment decisions.

  10. ghchua,

    Can I confirm that you can buy the STI ETF with more than 35% of CPF-OA ?

    You raised a very interesting conundrum which I think is heart of disagreement amongst even the experts. I think that the trick is that only 35% of OA money can be invested in CPF-IS.

    So I propose solving the following equation.

    x*35% + 2.5% x 65% = 4%

    x = 6.79%

    If you are confident that you can earn at least 6.79% in the markets, then keep the money in the OA account and invest the rest. Perhaps the folks who support the transfer are not confident of that 6.79% break-even point.

    But I certainly have to agree that if a person is confident of a Singapore unit trust which exceeds 4%, it might actually be a better idea than a CPF-SA transfer since you can pump 100% into this unit trust.

    This is yet another tragedy of the CPF program. We can put in 100% into a unit trusts which bleeds us from management expenses but we cannot invest 100% with less friction.


  11. "I was able to max out my CPF-SA before I hit 32 years of age"

    i didnt know you can max out SA? is there actually a limit for SA?
    if so, what is that?

  12. Once you hit your minimum sum, the CPF will not allow you to transfer anymore funds into CPF-SA. It is currently $161k.

  13. Hi Chris,

    Yes. I can confirm that one can use 100% of his available balance in CPF-OA to buy STI ETF, after setting aside the initial $20k. ETFs do not have high expense ratio. For example, SPDR STF ETF only have an expense ratio of 0.3%.

    There are some unit trusts which also incur low expense ratio of around 1%. Still ok and not too high. Therefore, I still would not recommend not investing the remaining 65% of your funds in CPF-OA, after setting aside 35% to invest in stocks.

  14. Hi Chris,

    Personal suggestion is to leave at least 12 months of amount in OA of u r servicing a home loan using OA. In case, u go out of job, then at least the excess in OA can still be used.

    If u max out and go without a job for a long time for some reason, then u have to eat into ur disposable income which for many Singaporeans can be painful bcos their disposable income had all along been use to sustain their pretty high standard of lifestyle!