Imagine this, Bank A offers 0.25% interest. Assuming that your monthly income is S$3,000 and you’re able to save 20%, you’ll be saving S$600 every month—or S$7,200 a year. In 20 years, you’ll save S$144,000, and with compounding effect on interest, the actual amount you save will be S$147,840.53.
Now, assume that Bank B offers 2.5% interest. Based on the same assumptions, you’ll have S$188,519.57 in 20 years’ time.
So, which bank makes better sense for you? The choice is obvious.
The only catch is that for Bank B, you can only use the money in two ways:
Purchase a house
Pay for medical bills
In addition, you can only withdraw a partial amount at the age of 55 years—and the remaining amount can be withdrawn monthly starting from the age of 65 years.
In reality, ‘Bank B’ describes your CPF account. And 2.5% interest is only an example; the interest you can receive on your CPF savings ranges from 2.5% to as much as 6% per annum, depending on your current age and the amount you have in your account.
With such attractive interest rates, why should you invest your CPF monies?
By investing the CPF monies, you’re giving up on the guaranteed interest rates. However, for this decision to make sense, the investments you choose must be able to outperform these guaranteed interest rates—and be able to tide through market volatility.
In fact, studies have shown that over 80% of Singaporeans who chose to invest their CPF monies would have been better off sticking to the guaranteed interest rates offered by the CPF Board. It was found that more than 80% of people who invested their CPF monies would have been better off leaving their money in the CPF Ordinary Account. This means that only 1 in 5 people managed to achieve more than 2.5% rate of return. Transactional fees and investment costs of CPF Investment Schemes (CPFIS) also eat into returns, and investors who seek to make a quick buck often end up on the losing end.
The good news is, on 5 March 2018, the CPF Board announced that there will be lower costs when investing under the CPFIS. Sales charge will be reduced to 1.5 per cent from 1 October 2018, and removed entirely from 1 October 2019. Wrap fees will also be lowered to 0.4 per cent on 1 October 2019.
If you’re an investor who is more open to risk, these reduced costs could make it worthwhile for you to invest your CPF monies for the opportunity to generate higher returns. And if you who would rather keep to the security of guaranteed returns, the high interest rates make your CPF account is a great place for your money.
At the end of the day, it’s all down to your risk profile and the time horizon you have when it comes to investing and diversifying your portfolio. It’s never too early or late to start thinking of ways to make your money work harder for you—beyond just saving traditionally at the bank or in your CPF account.
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