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13 Steps To Financial Freedom Step 6: Don’t Forget Your CPF

When we are discussing a job offer, many of us are offered a monthly figure that does not include the employer’s CPF contribution.  In other words, we earn more money that the amount of money that gets credited into our bank accounts every month (of course, the money that goes into the bank is also less our compulsory employee’s contribution).  Other than saving that money to pay for a roof over our heads, many of us don’t really make use of that money.  This amount can be substantial, ranging from 11.5% to 36% of our total income (capped at $5,000 income), depending on our age.

You may wonder what the big fuss is when you use your CPF money solely for paying off your mortgage.  After all, a HDB flat in a prime location can cost you almost a million dollars (yes, it’s a little difficult to explain to a foreigner why a public flat will cost so much money, but that’s beside the point).  Moreover, CPF is paying 2.5% interest on an ordinary account, which is, *gasp* 250 times more than the 0.1% you get on your POSBank savings account.  While that might sound like a lot, it really isn’t when you compare it to the long-term returns from the stock market.  Remember the miracle of compounded returns?  A $1,200 investment could turn into $3,222 in 40 years when you leave it in the CPF. But it could turn into $37,691 when you invest the same $1,200 in the stock market.  Now that is truly gasp-worthy.

Many people in Singapore think they can rely solely on their CPF for their retirement needs.  While the Singapore Government has raised the CPF minimum sum to $139,000 by 2013, many Singaporeans do not have enough in their CPF, and have to pledge their properties.  Let’s assume you have the minimum sum at age 55, and continue to earn the CPF minimum interest until the age of 82.  You will only be able to draw out $650 a month.  This amount becomes even less if you think you will live beyond the average life expectancy or if you have less than the CPF minimum sum.

Here is our community service announcement of the day: you can invest your CPF money in shares using the CPF Investment Scheme.  You might ask, what is the CPF Investment Scheme?  We could take up the next 2 pages explaining in excruciating detail what it is, but we decided to save you (and ourselves) the pain.  Also, you can visit CPF’s website if you feel like you have a couple of hours to burn.

In short, the CPF Investment Scheme allows the CPF holder to invest some of their CPF money in shares, bonds, unit trusts, and a variety of other investment vehicles.  In other words, it gives you the option of earning a higher rate of return than 2.5%.

Before you proceed to withdraw any available dollar from the CPF and invest in the stock market, we should also point out the CPF’s warning, which states “No one can guarantee that investments under the CPF Investment Scheme will always be profitable. CPF members have to decide for themselves how to invest their savings, and what risks to accept, and exercise prudence and care in investing their CPF savings to ensure their financial well-being after retirement. If they are not confident of investing on their own, they should leave their money in their CPF account which earns interest and is risk-free.”

This is where we should probably insert a marketing message from us to tell you how the Motley Fool’s aim is to help you earn consistent profits with a high level of accuracy over the long-term, by focusing on the greatest Singaporean and international investment opportunities.  But we won’t.  Instead, we would like to go on and discuss just how much of your money you should be investing, and how much you should be saving.  If you want to know more about investing your CPF money, visit our guide “Making the Most of Your CPF”.