Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Thursday, 11 February 2016

6 Points your CPF is like your Bond Portfolio

While most people considers CPF money not as theirs and ignores it as part of their retirement planning or investment portfolio, we tend to think that CPF compliments those 2 things!
We think that money in CPF is like money in invested in Bonds (Terms & Conditions applied).

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A standard retirement portfolio consist of bonds, stocks (equities) and cash.
In most cases, the goal is to try put as much money as possible inside your portfolio and withdraw as little as possible, allowing your money to grow over time to finance your retirement in the future.

We recommend Indexing for equities, read more about equities-indexing HERE

CPF fits into this criteria nicely - money only in, rarely out!
You can look at your Special Account like it is part of your Bond Portfolio!

1) Pays you Interests
Think of your Special Account as a bond you bought that pays you interest annually.
Even better, think of it as a long-term bond! - one that starts when you start working, and ends when you reach your retirement age (kind of like a 40-year bond).

2) Pays you a Higher Interest
Bonds today pays little/low interest! - you are lucky if you found one paying you 3%!
Fortunately, CPF SA pays a minimum of 4%!
It comes with a bonus +2% interest too (terms & conditions applied).

3) High Credit Rating
The money inside is "backed" by the Singapore government!
That is essentially risk-free!
It is hard to find high interest paying risk-free rate of returns these days!

4) Fits your Retirement Goal
To reach your retirement nest egg, not only is the returns you get important, but also the discipline to keep the money inside your nest!
It is preferable to have more money going in and less money going out of your retirement portfolio.
CPF is able to do just that - it is almost literally a one-way traffic!

5) Disadvantage of this "Bond"
You cannot withdraw money out from your CPF - unlike a normal bond where you can sell it for cash.
That is the drawback of getting a higher interest from a "bond".
But, since it is for your retirement goal, you really shouldn't mind the problem of not being able to withdraw it out.

6) Allows more Money in Equities
Because the money in your CPF forms part of your bond portfolio, you can allocate less of your money into bonds and more into equities, which allows you to earn a better rate of return.


Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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6 comments:

  1. Cpf is a special bond that can be encashed only when specific conditions are met

    ReplyDelete
    Replies
    1. Hi Starlight,

      Yes I agree with you that the CPF is a special bond that can be encashed when specific conditions are met - particularly Ordinary Account & Medisave Account.
      But I think we should consider Special Account as the bond portfolio instead of the other 2. Because the SA is created specifically for retirement, thus its fits the bill better

      Thank you

      Delete
  2. My 2 cents , most people cannot handle money .

    Good that government forces all of us to save money . End of the day , they are paid their own money when they retire , hence the taxpayer will not need to pay for thier retirement because they fail to save for themselves .

    but i think the government could give a higher return during good times where temasek/GIC earns a higher return .

    ReplyDelete
    Replies
    1. During bad times, are we able to swallow lower than current returns?

      Delete
    2. Hi Starlight,

      Whatever you said is true as CPF serves as a safety net for individuals to prepare their own retirements without causing a significant strain on the government. However, possibly due to the higher living standards and expectations, it can be seen that the government is doing more to help people cope more seamlessly into retirement.

      As for the second point, I wish to offer another perception whereby the risk and instability of the returns are removed from the participants but transferred to the government. This can give more stability and predictability of these returns, making it easier to forecast. Though the disadvantage is that, during good years, you may not be remunerated enough.

      Just my 2 cents though.

      Delete
    3. Hi Starlight,

      Whatever you said is true as CPF serves as a safety net for individuals to prepare their own retirements without causing a significant strain on the government. However, possibly due to the higher living standards and expectations, it can be seen that the government is doing more to help people cope more seamlessly into retirement.

      As for the second point, I wish to offer another perception whereby the risk and instability of the returns are removed from the participants but transferred to the government. This can give more stability and predictability of these returns, making it easier to forecast. Though the disadvantage is that, during good years, you may not be remunerated enough.

      Just my 2 cents though.

      Delete