The past couple of days have been the equivalent of a 7pm Channel 8 boxing drama for personal finance geeks like me. In the Red corner we have Roy “Colourful Charts” Ngerng (how do you pronounce that name?) crying foul at how our CPF funds are being used by the “gahmen”. In the Blue corner we have PM Lee “You just got Davinder-ed” Hsien Loong who just wants to come up with a retirement plan for all Singaporeans without being harassed by those ungrateful bloggers out there.
And in the audience we have the hoards of armchair activists citing conspiracy theories, economic studies, and most commonly, whining about how unscrupulous the government is, how the rich are screwing the poor, and wah, why is it so hot in Singapore nowadays ah?
Who’s right and who’s wrong? Was it right for Roy to selectively publish data that would support his controversial case? Is it unreasonable for the Prime Minister’s lawyers to threaten to sue him?
My answer: Who cares? 
This debate will be going on for a long, long, time. The funny thing is, a lot of it is actually really old news. For example, this ever-increasing Minimum Sum thing? It was decided wayyyy back in 2003, yo. And published on the CPF website for all to see for years. (But of course, no one reads that shizz because reading the CPF website is like reading a calculus textbook. In Arabic.) This article from Dollars and Sense explains it really well though.
I don’t like debating over the morality of stuff that isn’t going to change. (Trust me, the CPF policy isn’t going to change no matter how many people turn up at Hong Lim Park on 8 June). Instead, I’d like to focus on what we can actually DO about this CPF thing. I totally get the fact that many people are confused by it, and that misinformation is the primary source of all the angry comments out there.
But posting a pissed off “Stop stealing my money!” Facebook status isn’t going to help anyone. Instead, here’s what I believe you can do to make the most out of a policy that’s been in place for over a decade:
1. Understand the Facts
Okay, let’s stop whining or hypothesising about conspiracy theories and look at the issue objectively. As my favourite personal finance blog MoneySmart puts it: “CPF is a system that, like it or not, is there to help you with the three biggest financial situations you’ll ever face – healthcare, retirement, and property.”
Let’s talk about the primary purpose of CPF: your retirement. I know it’s hard to believe, but you can totally use your CPF to help you out here. Think of your CPF as your own personal pension fund. And like any pension fund, the more you put into it now, the more you’ll have when you retire. I know right, this is like, crazy news.
Yes, I know that “retirement” sounds like it’s a billion years away, but here’s what most people don’t realise: When you turn 62, you’ll have to live for another twenty years on your savings. And you’ll have to deal with all the things that old people care about like hearing aids and walking sticks and playing Bingo on Star Cruise. Where do you think all that money’s going to come from?
That’s right – your pension fund, aka your CPF account. Now, a lot of things can be said about how it’s managed, the returns we’re getting, blah blah blah. But the reality is that it gives us a way better interest rate than any savings account that we’d ever be able to get on our own. I mean, try finding a bank that will consistently pay you 2.5% or 4% on any balance you have. Not to mention the 16% of FREE MONEY that our employers deposit into it every month! (Dear Employer, if you’re reading this, thank you!)
2. Minimise Borrowing From Your “Pension Fund”
Shhh, don’t tell future Lionel that I’m “borrowing” 50 bucks
Let’s face it – many of us are gonna use at least a part of our CPF funds to fund our houses. That’s totally cool. After all, CPF is here to help us with our housing needs.
But here’s where I think most people are completely misguided: They’ll say things like, “Aiyah, CPF cannot use for anything else one lah, just use as much as you can for house lor!”
WRONG. Remember what we said earlier: The primary purpose of your CPF is for your retirement, jackass!
When you take a loan to buy a house, how you choose to repay that loan is a personal choice. In Singapore, you have two options:
- Option 1: Use cash from the salary you earn, which is what the rest of the world does
- Option 2: Use your CPF, so you have more cash leftover to buy overpriced cars, Prada bags, or selfie sticks
Unfortunately, many Singaporeans use more of Option 2 instead of Option 1. But by doing that, they’re getting hit by a double whammy:
- They forego the 2.5% interest that they could have received on the CPF funds they used
- When they sell their house, they’ll have to pay back the amount they “borrowed”, plus the accrued interest that they should have earned!
Added together, that’s at least 5% in “lost” returns they could have gotten from their CPF funds! We can debate about whether this is fair or not, but that’s just the way it is, folks.
Instead, be prudent. In my opinion, everyone should try to use as much cash as possible to service their housing loans. Some of you might say, “But I can’t afford the mortgage payments if I don’t use CPF!” Uhm, then maybe you should stop buying houses that you can’t afford? I mean, do you REALLY need to live in a condo with a built-in waterfall in the swimming pool that you only use once a year?
It’s totally cool if you wanna use a part of your CPF for your house, but do it knowing that you’re actually borrowing from your “pension fund” – leaving you with less for your retirement.
(I totally recommend reading this other article from Dollars and Sense, which explains the borrowing thing way better than I do :))
3. Increase Your Return On It
A 2.5% return is better than most savings accounts out there, but there are other things you can do to get an even better return than that.
A better return = more money in your pension fund = easier to meet the Minimum Sum when you’re 55 = more money at retirement. Life win! (literally)
How can you get a better return? Well, how about investing your CPF funds? Sure, you can’t withdraw the profits you make from your investments, but I’ve been hammering home the point that you’re supposed to be investing for the long-term anyway.
Pick a portfolio of sensible investments (like an index-tracking ETF – my book Automatic Investing talks more about this), invest in it using your CPF, and hold on to it for the long-term. Bam! You just kicked ass over the vast majority of clueless CPF members out there.
Bottom Line
Some of you might not agree with certain aspects on how I view CPF, but let’s not get caught up in the details here. Here’s the bottom line: CPF can actually be used to help us (I know it’s hard to believe, but it’s true). Instead of spending our time bitching and whining about a scheme that was decided on more than a decade ago, we can take some steps to make the best of it.
Now, I’d love to hear from you. How do you think you can make the best of this CPF scheme? I’m looking for actionable insights here, not political arguments. Let me know in the comments below – I read every one.
Image: scottwillis, yellowbook, Neal Edgeworth Photography, jpctalbot