I haven’t been doing a blog entry about the CPF system for some time and thought that it would be a good time to add one now. I have received a comment previously from a reader who invoked an inspiration for this blog entry (thanks Wabi, whoever you are!). He has asked a question on whether the interest rates for the individual accounts for OA, MA and SA would be sustainable.
Hmm, sustainable… Maybe the first question we can ask ourselves would be how sustainability can be defined for the CPF system. For the sake of this article, I assume that the CPF system would be considered sustainable if we can obtain full financial reliance on it while serving its purpose, e.g. at retirement.
Let’s go back to the purpose of CPF according to the CPF website:
- Retirement savings to meet your basic living expenses in old age
- A property that is fully paid-up when you retire
- Sufficient savings for future medical expenses as you grow older
I’m going to place the focus on Point 1. If the CPF’s real purpose is indeed to build up our retirement savings, then the real enemy that lies here is inflation. By now, you should have already known that the interest rates for OA, MA and SA are 2.5%, 4% and 4% respectively (excluding additional 1% interest rates).
Let’s study the history of inflation rates of Singapore for the last 10 years.
According to the graph, you can see that in 2016, Singapore was faced with deflation as the chart crosses to the negative side. This means that if you withdrew all your cash and put in into a biscuit tin, you would still have beat the market of Singapore! Not saying that would have been the best decision, of course.
The more important question here to ask would be if this trend would continue, and to be honest, I don’t know the answer to that. What I do know are that the interest rates of the OA, SA and MA have not changed since October 2001. The additional 1% of interest that you can earn also adds on to your returns.
Comparing it to the above chart, there are quite a couple of years that the 4% interest rate would not be sufficient to beat inflation, let alone the 2.5% interest rate of the OA. Therefore the simple answer to whether the interest rates are sustainable is a sad and plain “no“, as you have very limited control over your CPF money during the times when inflation is higher. In such situations, it would be wise then to use the money that you have outside of CPF to recover from this loss. It is also critical to note that any excess monies from the OA should almost always be used to generate a return that is higher than 2.5%. Some options would be to move the money from OA to SA or make use of the CPFIS for investing purposes.
The key take away is this – if the inflation rate is more than 2.5% (where by default, majority of your funds are in the OA), you are “losing money” in the CPF. Inversely, if inflation rates are lower than 2.5% (looking at things more pessimistically), your CPF money is growing by itself.
Now, going back to points 2 and 3.
Point 2 reinforces the leverage of using your OA to pay for your property. If you purchase a HDB with your spouse around the age of 30, taking a housing loan of 25 years would mean that your HDB would be fully paid up by the time you are 55. If you do not have the intention of moving or selling your flat, then the 2nd purpose of the CPF would seem to have fulfilled its purpose. However, it may no longer achieve the purpose of retirement (Point 1) because your CPF would have much lesser funds.
In this case, there would be even more reason to use the money that you have outside of CPF to gain better returns, so as to additionally prepare for retirement. You should not take for granted the extra liquidity that you have gained (from the downpayment or monthly installments of your housing loan) for you have exchanged your retirement funds in the CPF for it.
Point 3 is pretty straight forward, where it directly points to the funds that you have in your MA. Sadly to say, just relying on the MA itself isn’t going to help you much with rising healthcare costs. So, the answer for the interest rates in MA being sustainable is a sure but disappointing “no“. The good news is that there are already existing solutions for this. With a good H&S plan for protection in place and adopting the approach of Buy Term Invest the Rest, you can easily set aside another set of funds for this purpose.
This article did invoke certain thoughts within me and now, I realize that there is even more reason to take charge of my finances. Since the CPF system is going to stay, and I am not intending to leave, the best that I can do is to understand it and try to maximize my returns. I hope that this article has also helped you in understanding the CPF better.
What about you? Do you think that the CPF system is sustainable? Please leave a comment below. I would love to hear your thoughts.
Thanks for reading!
Miss Niao xoxo