Friday, February 16, 2024

CPF investing is "dangerous"

[ Kyith of Investments Moats has pointed out an interesting point I was unaware of. While I know that RSTU up to FRS into CPF-SA exists, I was unaware that after age 55, you can RSTU up to ERS!

He also sought clarification on what I mean by the uncertainty of annuity payouts at age 65 when annuities are designed to provide fixed lifetime payouts. What I meant was that the uncertainty comes from not being able to predict annuity pricing before payouts begin. The CPF Life estimator is just a rough guide.]

What a historic day! What a landmark Budget!

I'm focusing on one significant CPF policy change: to make everybody's CPF Special Account disappear after age 55. The first effect is that CPF Shielding will no longer work, so folks trying to juice an extra 1.5% from retirement savings can no longer get assistance from a financial advisor. The second effect is that the compounding effect of 4% in the CPF-SA will render some of the 1M65 strategy useless.

You can refer to some of my previous posts and judge whether my articles are prescient on such matters.
A more detailed treatment of the available financial mitigations for someone over 55 years old will be posted on the Dr Wealth blog later, I just want to share some random thoughts on these changes.

a) What is the political cost of making CPF-SA vanish at age 55

The first thought I have in mind is the political cost of this move. I think the CPFB really wanted to replace the 4% with a variable rate tied to the 10-year bond many years ago but probably refused to make this move because they were concerned about angry voters. 

I think this policy is much milder because it largely impacts richer folks who have over $426,000 in the CPF system who are milking the 4% risk free. If the CPFB no longer owes 4% to many millionaires, they might be able to enact more generous policies for lower-income voters. 

b) CPF-Life is now a cognitive strain on financial decision-making

CPF Life is now very central to retirement planning.

As the 4% is now gone, folks have to decide whether to commit funds into the OA account that gives a measly 2.5% or park monies in the RA which converts to an annuity. I suspect this will engender a lot of anger in the future because CPF-Life payouts can change over time depending on when you use the Life estimator or reach age 65, and folks don't really know when they will die. I think this cognitive burden levied on the populace, while good intentioned, will cause a lot of unhappiness in the future. 

In a future Dr Wealth article, I will provide a framework about how much to put into the CPF-RA after age 55. I will also talk about investing to minimise the market risk whilst retaining at least a 4% dividend yield for a locally focused portfolio. The days of getting 4% risk-free are over.   

c) If you raise ERS to four times BRS, maybe you add a few new policies to make it easier to reach it.

The raising of ERS to 4x BRS is what baffles me. Many features that can speed up the accumulation of retirement funds switch off after you hit FRS. These features include the OA->SA transfer, and the Retirement Sum Top-Up scheme ceases to function once you hit FRS. The central problem of conventional retirement is that if I accumulated just the FRS, CPF-Life payouts would not be able to match the $1,421 in 2021 dollars required for a 65-year-old to live a dignified existence. There will be a $400 shortfall.

Extending the OA->SA transfer and RSTU to 3x BRS would help greatly for folks who want to attain retirement adequacy earlier in life, given that CPF is no longer burdened by the millionaire's CPF-SA accounts. 

The collective effect of this seismic change in CPF policy is that CPF investing is now highly "dangerous". You no longer have a risk-free 4% CPF-SA account after age 55. 

  • You still have a risk-free 2.5% account in the form of CPF-OA.
  • You can move the funds into CPF-RA but you take on the risk of uncertainty of CPF-Life payouts at age 65 which can be based on annuity pricing. You also don't know when you will die so you struggle with deciding which plan to choose. 
  • Finally you can invest in the equity markets and take on some market risk.

I'm actually pleased with these policy changes because it is going to be much harder to ignore our local stock markets if you want a source of returns denominated in SGD. This may actually provide a longer boost to SGX equity markets.


  1. Thank you for your analysis.

    You are pleased because this change could possibly boost the local equity market. But, those who like keeping the 4% in SA are probably not good equity investors. Furthermore, most people lose money in the equity market. Could this policy really be good for cpf holders?

    1. I don't think it is good for CPF HODLers at all, but a 4% fund that benefits primarily the wealthy in Singapore no longer makes sense after the Forward Singapore conversation. I expect that the benefit of that 1.5% to be redistributed across all CPF members in future years. So we need to have the right perspective on the CPF-SA disappearance after 55 - it gives CPFB more fiscal space to benefit ordinary citizens.

  2. Actually, even with the 4%pa interest rate that CPF SA is giving currently, I have been investing them into balanced funds. I think one have to take some risk in order to get more return. Best is to put it in practice for your CPF SA funds even before you reach age 55.

    It doesn't make sense paying members 4%pa rate for liquidity as one can withdraw money from CPF SA after 55 if they set aside FRS or BRS with property in Retirement Account (RA). Which means, if CPF SA is locked in for long term, actually paying 4%pa to them risk free is ok. But with the situation that I have described, it becomes paying a higher interest rate for risk free liquidity than CPF OA, which doesn't tally.

    1. A balanced fund cannot be compared to SA because the 4% for SA is riskless. Folks will miss that. But I agree that this loophole still needs to be plugged as it gives too much advantage to others.

  3. LOL the first thing that came to my mind when hearing LW's speech was that FAs & RMs will be salivating over targeting the >55yo with endowments & ILPs 🤣

    "Better than CPF" will be their new slogan lol ..... I can still remember the days of "better than the bank".

    1. Attempts to provide some kind of 4% with some hidden credit or liquidity risk will aise to replace the revenues lost to Shelding nerf. This blog is ready to combat that.