You can’t touch your CPF money, so might as well try to invest it, right? Wrong. Here are three consequences to losing money in your CPF.
During the last financial year, just 15% of people who invested their CPF monies were able to beat the standard interest rate. 40% of them lost money by investing it, and the others performed the same as people who left their CPF untouched.
Here’s an opportunity for a lesson to learn, and consequences you want to avoid happening to you.
Wait, What are CPF Investments?
If you are at least 18 years old, and have at least S$20,000 in your CPF Ordinary Account (OA) and S$40,000 in your Special Account (SA), you can invest your CPF money.
In all, you can invest up to 35% of your OA in a list of approved products. This is referred to as the CPF Investment Scheme (CPFIS), and is meant to give Singaporean more control over how their CPF money is used.
Most Singaporeans use the CPFIS for two reasons: to try and generate returns higher than the usual CPF interest rate (2.5% last financial year, but currently revised to 3.5%), or to put money into their investment linked insurance policies through the CPF (this money is usually untouchable).
Unfortunately, most CPF investors would have made more money just leaving their CPF alone. In from 1993 to 2004, only 25% of CPF investors beat the interest rate. From 2004 to 2013, only 18% managed to beat the rate. And finally, last year, the number dwindled even further to 15%.
It’s clearly a minority who benefit from trying to control their own CPF money, and that ought to be a lesson to DIY investors. Bear in mind the consequences of losing cash on the CPFIS:
1. Losses are Not Replaced by the Government
If you lose your invested CPF money, you are not required to top it up. This is one of the main reasons that investors get reckless – they don’t feel the immediate loss of the money, as it seems like they never had it in the first place.
However, any money lost from the CPFIS will not be replaced for you. What you lose is gone for good, and this can affect your immediate bank account. When you need to make a S$20,000 downpayment on your flat for example, the sum that could pay for it may have been thrown away on a poorly chosen mutual fund – and then you’ll be reaching into your pockets or taking a loan.
2. The CPF is Critical to Owning a Home
Most people think of home ownership as the main purpose of the CPF. This isn’t actually CPF’s only purpose, but they are quite close.
When taking out a HDB loan, 10% of your flat’s value – the minimum down payment – can be drawn from your CPF. If you don’t have the CPF funds for it, you’ll be paying in cash. Think long and hard about that, before deciding to treat your CPF monies like a casino pass.
The CPF is also used to make regular home loan repayments (again, you’ll be paying this in cash if you don’t have the funds), and to pay for the legal paperwork when buying a house or refinancing (this can cost around S$1,500 to S$2,000).
Unless you’re happy to bear these costs out of pocket, don’t mess with your CPF money.
3. The CPF is Your Most Guaranteed Source of Retirement Funds
You may not agree that the CPF alone is sufficient for retirement. You could be right, as there are financial advisers and other experts who feel the same way. But that being said, the CPF is still a crucial aspect of retirement planning.
The CPF is the only source of funds you have that are guaranteed. Short of the entire government of Singapore collapsing, you can always count on it being there. Treasure it and guard it – when everything else fails it will be all you have.
So, When Should You Invest Your CPF Money?
If you are acting under the advice of a qualified wealth manager (e.g. an independent financial adviser who is overseeing your entire portfolio), then you should consider taking their advice and doing so.
Otherwise, it is best not to attempt to invest the money yourself. While most of the approved investment products have been screened to remove any toxic options, they all still carry a degree of risk.
When would you consider investing your CPF money, if ever? Let us know on Facebook!
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.
Photo Credit: Robert Lowe