Wondering if you should invest your CPF OA? Read on to find out what are some need-to-know facts before you commit to investments.
If you are a Singaporean or Singapore PR working in Singapore, you and your employer would be required to contribute up to 37% of your salary every month to your CPF accounts. These contributions are then allocated into three different accounts, namely Ordinary, Special and MediSave. These CPF accounts serve different purpose and earn risk-free interest between 2.5% and 4% p.a. as depicted in the diagram below.
In addition to using your CPF OA monies for to pay the down payment or monthly loan instalment of your home, you can also invest your CPF OA monies in a myriad of instruments under the CPF Investment Scheme. These instruments range from shares, gold, property funds, Singapore government and corporate bonds, approved insurance products, Exchange Traded Fund (ETF) and unit trusts, each subject to its own limits.
Depending on your current circumstances, you might find that there could be some benefit to investing your CPF OA monies even though it is already earning the risk-free rate of 2.5% p.a. In this article, we will cover three ways you may benefit from investing your OA.
1. Grow your funds for your retirement or other long-term goals
For those of you in your 40s or 50s, the time when you can finally touch the money in your CPF draws closer. When you turn 55 (assuming there’s no change in CPF policies), you would be able to withdraw any balances in your CPF OA and SA after setting aside the applicable retirement sum. The monies withdrawn can be used to fund an early retirement, kept in the CPF accounts as an emergency fund or used to finance your children’s education, wedding or first home purchase. Whatever the use may be, it remains that if you can grow your OA monies faster, you would be able to enjoy greater liquidity with your CPF monies.
For example, $100,000 earning 2.5% p.a. over the next 20 years will grow to about $165,000. If you have already settled your housing needs and do not have use for your excess OA savings, you could invest these monies to earn potentially higher returns of 5% p.a. This will grow your OA monies to $265,000 over the same period. You can use this additional $100,000 to top up your Retirement Account to get a higher payout from CPF LIFE from the age of 65. You can also withdraw this money after setting aside the applicable retirement sums to fund your children’s university education or even stream it out as additional monthly income as you start to take a backseat from work.
2. Shield your CPF monies
While this may not be as popular today, investing your OA monies can also function as a means to shield your OA funds from being fully withdrawn when you apply to buy a HDB flat. If you are taking up a HDB loan to finance your housing purchase, one of the pre-requisites is that you would need to use up all your CPF OA balances, save for the first $20,000 in your OA, to pay down the house so that you do not need to take up such a big HDB loan. The $20,000 left in your OA serves as a buffer to pay your housing loan instalments should you decide to stop working for a year or two. Some people could prefer to leave a larger buffer in their OA to provide them with greater peace of mind.
To accomplish this, you will need to invest the additional amount you want to keep in your OA before you complete your home purchase. These funds will sit outside of the CPF system temporarily while you complete the purchase transaction. Thereafter, HDB will empty your CPF OA balances, save for the first $20,000 if you instruct them to. Once everything is completed, you can then liquidate your investments and these funds will flow back into your CPF OA. Since this is meant for a short-term purpose, the investment you pick should ideally be a very low risk instrument. Do also be mindful that the larger the loan you take, the higher the monthly instalment will be, as well as the total interest in the long run too.
For those approaching 55 years old, you may also want to consider shielding your CPF OA monies in the same way to prevent CPF Board from transferring your OA monies to your Retirement Account to make the retirement sum. The reason for this is not so much as to bypass the CPF regulations, but rather to enable you to use your cash savings to top up your Retirement Account instead. By doing so, you get to earn higher interest on your cash, and maintain liquidity on your OA savings. For more information on SA shielding, read this article.
3. Kickstart your investment journey
The third benefit is that investing your CPF monies often poses less of a psychological hurdle for those new to investing compared to investing your cash. This is because while CPF is your money, we have been conditioned to accept that the money in your CPF is not very liquid and you won’t be able to touch it until you’re at least in your 50s. Given this situation, some younger people find that it would be more worthwhile to use their CPF monies as a source of funds to help them venture into the world of investing, experience some hard knocks, and become wiser and more confident to invest in the future.
The reality is that with inflation creeping up on us, we and our children will need to learn how to make our money grow for us rather than keeping it in the bank or under our pillows. This is the only way we can stretch our savings to enable us to live purposefully every day, while having enough for set aside for our future goals. The good thing with investing your CPF is that you cannot withdraw your profits so there should be less motivation to liquidate your investment prematurely. You also do not need to make good your investment losses, so you won’t need to panic sell during times of market volatility. Investing your CPF could well be the best way for you to learn to stay invested through the short-term noises and learn that when you trust the market, the market will help you multiply your savings in the long term, when you finally need it.
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