CPF Investment Decisions

Since the start of the year, I have been doing a lot of reading on the CPF system and many opinions on it. While I am still unconvinced about voluntarily contributing to CPF, I have been deliberating on what to do with the monies in CPF-OA.

Personally, I view the CPF as the "last line of defense" in our financial wealth. Hence, we should definitely spend some time to learn about it and manage it.

I have read extensively on 2 mainstream arguments, and their opposing stance can be best-represented by 2 bloggers. I will just summarize their points below:

AK and his CPF-SA
AK advocates transferring monies from OA to SA account while you are young to allow compounding to work its magic. Guess what, he receives more than $8000 a year from SA interest alone!!!

With the kind of interest he's getting, it is more than enough to cover all future minimum sum increases. Basically, his stance is to 'make full use of the government' to help you save for your retirement.

Some research: If say I transfer $20K from OA to SA (an additional 1.5 - 2.5% interest), I will receive an additional $600+ every year. That will result in an additional $20K in about 20 years time, and will definitely go a long way in meeting the minimum sum!

The appealing part of this is while we are young, our contribution percentage to SA is very low.  However, SA pays the highest interest (5% on the first $40,000). If you are willing to give up the flexibility of OA, that extra 2.5% will grow your money much faster. Once it reaches a substantial amount, you no longer need to worry about future minimum sum increases.

Note: A possible "good problem" is that if your SA reaches the minimum sum, you can no longer do voluntarily contribution to reduce tax.

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Keith from Investment Moats
On the other side, Keith highlighted the dangerous of doing such transfers.

Flexibility and Safety - Even though I have no intentions of wiping out my OA for housing, it's still a safety net. What if you lose your job and is unable to service your mortgage? OA gives you that last line of safety.

Political risks - It's 25 years to withdrawal and who knows how the rules may have changed by then. However unlikely, they may increase withdrawal age, reduce SA interest, etc... It's a risk of the unknown that we have to keep in mind.

Opportunity Costs - I am in a huge dilemma because of this. Doing the transfers "locks in" your monies until 55, at a fixed interest of 2.5%. There is the potential cost of delayed financial independence.

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It's a choice between safety and opportunity.

In the end, the deal-breaker for me came down to this: Can I beat the 2.5% "risk free" rate in OA account?

According to the media, over 80% failed to do so. I find that quite unbelievable because the STI provides an average returns of 6% (as of now) over the long term. There's a few possibilities:
- Selective reporting in bear markets.
- Same reason why 90% of traders/hedge funds fail to beat the market, but 2.5% is really not high in my opinion.

All I need to do is to buy the STI, keep calm and collect dividends. This is especially so given the recent 25% correction (dropping from 3500 to 2600) - the yield alone (as of now) is already 3.6%, even if we were to exclude capital appreciation altogether). With that, I should hopefully beat the OA and possibly SA returns.

Even though I've never been through the GFC, I know I am not the kind of person that would panic-sell. I know I am a long-term investor, and I believe in the future of Singapore.

And so, I abandoned my initial plan of doing an OA to SA transfer, and opened an CPFIS account. I think I would re-look into doing a SA transfer in the near future if the market recovers and the investment pays off.

In conclusion, I still look at CPF-SA as a final safety net that I would likely never touch, unless some black swan event happens where STI crashes below 1500. 5% risk free interest rate is very very good good. On the other hand, I also want to adopt AK strategy, give myself a peace of mind and build up this safety net while I am young.