In my last post, I shared that I never top up my CPF due to the reasons stated in the above image. I also mentioned in the same post that I do like our CPF system.
If you have read the classic personal finance book The Richest Man in Babylon by George S. Clason, then the forced savings to CPF is basically the first rule of money – “Start thy purse to fattening: save money”.
What makes CPF even more compelling is it makes us save a whooping 37% of our income. Not only that, it pays up to 5% interest on our savings if we are below 55 years old.
However, many people, including myself, use quite an amount of our OA for housing; and MA is meant for medical insurance and expenses. So SA which makes up about 6% – 7% of our gross income will do the main lifting in building our retirement sum.
It is no wonder then that many follow the Mr Loo’s advice to top up SA and MA at a young age and let it compound over a long period of time, so that a couple can achieve 1M65. It is a sound advice and I might have adopted it if I had heard of the plan when I started to work in my 20s.
With little commitment and being an investment goondu then, earning a 4% guaranteed return and letting it compound for 30 years is definitely an attractive proposition. The presumption though is Singapore continues to do well for the next 30 years and there will be no change to the retirement scheme system!
Started Investing OA in my 30s
With a lot more commitment in my 30s, I prioritised living in the present than saving up for the future. So topping up CPF was a no go for me, but that did not mean doing nothing to grow my CPF.
Increase active income
The direct way to get more CPF is to have a higher active income. It’s not just work and no play but it’s definitely more work and less play. I was fortunate that I enjoyed my job and did not mind putting in the extra effort and time in it then. That led to promotion which boosted both take home pay and CPF.
Get a flat in non-mature estate
The second way is not to over commit your finance to housing. My spouse and I decided to go for BTO in a non-mature estate as that would be easier on our wallet. Yes, the location was ulu and had little amenities, but I guess being young, we did not really mind that.
We are still staying at the same place! Glad to say that due to the growing population of the estate over the years, the town has became more vibrant and has a lot more amenities now!
With less CPF tied to housing, it simply meant that I had the opportunity to invest the remaining sum to build up our retirement nest eggs.
The final way follows the third and fourth rule from the fable – “Make thy gold multiply.” and Guard thy treasures from loss.”
To get a higher return than 2.5% is something really quite simple. The easiest method is to transfer it to SA and get the 4% return. However, the maximum one can transfer is the current full retirement sum (FRS). More inhibiting for me is that the transfer cannot be reversed! So I was unwilling to do it and chose the alternative way, which is to invest my CPF-OA.
If one can save $5k a year in OA for 20 years, the $100k capital will grow by 31% to $131k. Transferring to SA will grow it by 53% to $153k. However if one can get a 8% return, then it will become $236k! That’s another full retirement sum!
Is it possible to get such return? Too good to be true?
8% return is possible but not easy. 6% return though is quite do-able if one consider both dividend and capital return. The key is one needs to learn about investing, have a plan, stay discipline and be patient. Nowadays, it is also a lot easier and one can even invest in S&P ETF and World ETF via Endowus!
My record and what did I invest in?
I was fortunate to get an annualised return of about 12% from 2004 to 2019. 15 years is a long time and I cannot even remember some of the counters that I owned before. If my memory doesn’t fail me, most of the above counters were bought and sold in the earlier years. For a decade after GFC, I only had First Reit, Metro and STI ETF in my CPF portfolio. They were divested in 2018 and 2019, and was replaced by Micro-mechanics, OCBC and Vicom.
Now that I think about it, there are two psychological advantages from investing with CPF that led to the good performance. I was more patient with my investment and more nonchalant about its volatility.
Given that I was already earning 2.5% from CPF-OA, I wasn’t in a rush to invest it. That probably led to a better entry price for my investment. Also, since I could not withdraw the money, I felt less fearful when the value of my investment plunged and could take advantage of crisis to add on to my investment.
Record on the spreadsheet shows that my CPF portfolio was down by 48% in 2008 during GFC, wiping out 4 years of gain! However, not only did I not sell my holdings, I added more to it, and portfolio managed to recover all the loss in the following year by registering a 97% gain!
On the other hand, I realised some of the losses in my cash portfolio, and eventually it dropped by 39% in 2008. Fear probably stopped me from adding more, and so the portfolio did not benefit as much in the subsequent year’s rebound, with only a 31% gain.
I am not advocating blindly buy and hold. Due diligence still must be put in and one needs to monitor the performance of the underlying businesses, to make the decision to buy, hold or sell every year.
What am I vested in now?
Last year, I decided to divest all my unit trusts, which I made a net loss after having them for about 4 years. It seems like I am better (or luckier) with investing in individual stocks. With the clean up and some adjustment, I am now holding the following counters with my CPF.
I no longer track the return of CPF portfolio separately after I rebooted my portfolio in 2020. A simple computation shows that the average return (including dividend) of the 5 counters above is 22% with Micro-Mechanics and OCBC providing bulk of the return. Not fantastic but definitely better than 2.5%.
I remain positive that they can sustain their dividends for the next few years. Based on cost price, on average I am getting a 6% yield. I am also hopeful of their long term prospect, and so if I am correct, then there will be some capital gain too.
Top up? Transfer? T-bill? Equities?
It all boils down to personal preference, risk appetite and skill set. Not forgetting we don’t have to choose one option over another, we could always do a mixture of strategies.
All the best to you in growing your CPF.
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