CPF SA/RA, A Bond Investment Product for the Middle Class

As a Singaporean/PR, we should know that the CPF SA/RA is a compulsory savings and retirement scheme administered by the Singaporean government. It's also seen as a safe and reliable investment instrument because it's backed by the government.

With a minimum return of 4.0% p.a. (4.08% p.a. as of 1st January to 31st March), the CPF SA/RA provides a bond like rate of return in the medium to long term, this is also why if an individual is looking to invest into bonds for their retirement, Singaporean and PR alike should look no further than to top up their CPF SA or RA to meet the minimum sum for their retirement needs if liquidity is not a concern.

CPF Conservative Investment Approach

CPF Funds are invested into Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government. The government takes the investment risk in managing the SSGS proceeds and ensure the CPF board will be able to pay its members all their committed interest when its due.

Bond Like Returns is Stable, Should i dump all my monies into CPF?

Firstly, there is a limit to how much you can contribute to your CPF account. While you can voluntarily top up your SA to the minimum sum for that year, you may lose out on tax savings capability in future if you were to simply max out your SA, this will prevent you from enjoying tax relief top up (currently at $8000 each year) in future.

As a financial advisor, I will advise against putting all eggs into one basket. The CPF is a government scheme and we as citizens/residents have little to no control over it. While policy changes to the CPF if made favorable can benefit us, policy changes to tighten withdrawal due to higher number of retirees could backfire if we were to solely rely on CPF Life for our retirement.

60/40 Rule for Investment

For decades, a significant number of financial planners and stockbrokers constructed portfolios for their clients with a composition of 60% equities and 40% bonds or other fixed-income products. These balanced portfolios proved successful during the 1980s and 1990s period with mixed outcomes in the 2000s. Of course a decade or two seems to short to be planning for retirement if you're only in your 20s and 30s.

Simply put, if you're interested in a 60/40 investment strategy for your retirement, you can consider treating your fund in the SA as the 40% bonds component. Any additional funds can then be allocated to equities. However, it's crucial to note that there are different risk classifications for equity investments. Investing in individual stocks or shares or into a single sector (e.g. technology) or country carries significant risks, as companies may face financial challenges leading to potential loss of investment capital. Therefore, a well diversified global approach is the best way to go about for this.

e.g. the MSCI All Country World Index has delivered more than 8% p.a. returns over 40 years (factsheet)

What Should I Do if I am 55 and I already meet the Minimum Sum for Retirement?

In the 2024 budget, the government has announced a mandate to increase the enhanced retirement sum from 2025 onwards to four times the Basic Retirement Sum (or twice the Full Retirement Sum), replacing the current rate of three times the Basic Retirement Sum.

As a result of this change, the SA account will be terminated once a CPF member turns 55 year old with the proceeds (capped to the Minimum Sum in that year) to be automatically transferred into the CPF Retirement Account with excess going to the CPF OA.

Members will have 3 options thereafter:

• Withdraw excess Monies from CPF OA as cash to spend or invest.

• Transfer more monies from CPF OA to CPF RA to enhance their CPF LIFE payout (Capped @ 2x Minimum Sum for that year.

• Leave the monies in CPF OA to earn interest

It may be a good idea to Maximise ERS if you have a million dollar to set aside for retirement at 55 and the ERS for that year is less than 500,000. This also ensure you still have more than 50% of your retirement asset within your control to invest into more flexible products such as Endowments, Funds, Equities and Commercial Bonds.

If you have already met your minimum sum at or above 55 and only have the other remaining 50% of your assets investible for your retirement, then it is risky to put all eggs into CPF just to enhance your Retirement payout for CPF Life. Here are some considerations

Low Risk, Equity is Not For Me

If you lean heavily towards a risk averse profile, allocating your funds into equity-like asset classes may not be suitable. In such cases, an alternative could be investing in Retirement plans offered by insurance companies. These plans offer potential returns comparable to CPF, with the added benefit of allowing you to decide when and for how long you wish to receive payouts. This flexibility offers more certainty, albeit with potential returns lower or higher than CPF Life, depending on the insurer's investment performance. Additionally, certain insurers provide disability or critical illness protection during both the payout and accumulation periods, offering further security to policyholders.

Otherwise, short term fixed deposits/endowment offered by banks can be a potential option if you wish to short term to medium term liquidity as you may be able to find good yields from these products now and then.

Can Take Risk, What are The Chances Of My Monies Doing Well vs Putting it into my RA for CPF Life?

High returns, but also higher risks. Unlike CPF Life, stability isn't guaranteed for equities investments. Your monies are not backed by the Singapore Government. It can be a 'go big or go home' scenario, where one might invest heavily in a few technology stocks in hopes of significant gains. Alternatively, diversifying funds across a range of companies globally and across different sectors can provide more stability over time. (factsheet) 

Here is how investing globally across sectors can fare for you over the short to long term base on past records. Past performance do not guaranteed future returns this is not an investment recommendation

The MSCI world tracks large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,479 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

It's a no brainer investment that can be low cost or can done yourself or through advisors like us.