CPF- Yay or Nay?

This would be the first of many CPF-related posts, simply because i think CPF is an important and prominent part of a Singaporean working adult life (whether we like it a not). At the ripe old age of 32, I have only recently started to realise that CPF is not such a bad deal for Singaporeans after all. The following is my personal opinion. I am happy to hear alternative views as well. 😀 

As a young adult, many of the things we learn about, we learnt though social media. And social media thrives on controversies. Controversies are called controversies for a reason, because they stir up emotions and bring out strong opinions. Many times, the loudest (not necessarily the correct- correct in my opinion at least) get heard and people can get convinced or confused accordingly.

In June 2014, it was reported about 2,000 people gathered at Hong Lim Park to hear speakers talk about CPF and demanded the government return CPF monies to citizens. That event certainly generated a lot of publicity / spotlight on CPF and talks if it was being misused. I personally gave it some thought but finally personally decided that my CPF funds are in good hands. Or rather put it in another way, would you know if there are better hands out there whom we should hand our CPF monies to? 

Four years ago, I was even more ignorant about CPF than I am today, but thankfully, I have learnt a bit more about our CPF systems along the way and have also grown to trust it more.  

It is sometimes thought that many people (especially our parents' generation) did not have the luxury of being financial trained and are hence not financial-savvy, given a huge amount of money at 55 years old, would they know how to deal with it? For those who are more risk adverse may choose to put the funds into banks saving accounts which pays out peanuts compared to CPF interest rates which could be =>6% for those older than 55, which bank would be able to pay such high interest rates? 

People say that "Its their money, let them deal with it themselves." which is fine in itself, but if after their money runs out, who would these people turn to? I am not saying they would definitely turn to the government but there is a high chance they would look to the government for handouts. If their children do not support them as well, then who would these people turn to? Though it seems like a rather pessimistic point of view to take, I would rather be pessimistic and be proven wrong then optimistic and proven wrong, cos then, there would be a much higher price to pay for both government and citizens. 

Singapore is not quite a welfare state as compared to the Scandinavian countries (which comes with high tax rates correspondingly). I am not saying which is the better systems but they are fundamentally different systems which different governments have adopted.

My views on CPF:

• Yes, 20% of our monthly wages is not a small sum, but your employer also needs to contribute another 17% to your CPF as well. So it is like bonus of 17% each month. So effectively, if your salary is X (for cases where X=<$6,000), you are effectively getting 1.17X monthly, just that you do not get them all in cash in hand. Putting in 20% for an extra 17%, I think it is still alright for me personally. I feel I should be able to survive on 80% of my salary, basing on a fresh graduate (normal local uni degree) starting salary.
• The returns on our CPF monies is (nearly) risk-free with government's backing. Should something major detrimental happen to Singapore government / economy, I personally think there will be bigger issues for us to worry about than our CPF returns. Granted, CPF is still very important to all of us and in no way I hope to see anything unfortunate happen to it. 
• Interest rates are quite decent ranging from 2.5% to 5% (<55 yrs old) and 6% (>55 yrs old). No banks / insurance company out there can provide this guaranteed risk free high interest rate.
• The minimum interest rate of 2.5% for OA and has been there since the beginning of CPF, I am pretty assured it should continue for the foreseeable future.
• Assuming one starts to work at about 23 (for females) or 25 (for males), one is able to make use of CPF's favorable interest rates (compounded) to their advantage for a good 30 plus years. Assuming you contribute just $500 to your SA which pays you 4% interest, at the end of 30 years, you would have almost $350,000. From your investment of $500*12 months*30 years= 180,000, you would have almost doubled your money. [This is a conservative estimate since you would earn an additional 1% on your first 40,000 of your SA funds.]

• If you are able to double the contribution to $1000/ month, you would end up with $700,000! That is more than half a million!  Granted this is provided you do not use your CPF to buy your house, which many of us in Singapore do, me included. Regardless, these figures made me pause and forced me to re-assess my then decision to pay for my home using CPF back then, though that is another post for another time.

Therefore, at the age of 32, with a tinge of regret, I did not realise the eighth wonder of the world earlier (in my 20s). I am now trying to make it work for me to the best of my abilities by transferring my OA to SA and am also considering if i should make Early repayment of my HDB loan to inject some spare cash on hand into my SA. Some might say it is a drastic move, but missing out on the 4% interest compounded over many many years is also pretty drastic as well.

A neat tip for those who have just started working. If you do not have need to use your CPF for housing, you could starve your OA, and stuff your SA for additional interest. 

E.g if you had 20k in OA (earning 3.5%) and 40k in your SA (earning 5%). But if you starve your OA by transferring your 20k in OA to SA (20+40K=60k) you will have 60k in your SA earning you 5% instead of part 3.5% and part 5%. Do bear in mind that by doing so, you "lose" the usage of the 20k for your housing and can possibly only touch it at 55.

I will touch on CPF for housing in my next post. Do stay tuned. 

Frugal Singa