Whenever I bring up the topic of investing the money in my CPF Ordinary Account (OA), my dad will always remind me that the primary purpose of our CPF is to support our retirement purposes; and I should consider very carefully if I decide to use them to invest in stocks/bonds/gold. Well, he is not wrong and there is little reason to disagree with him. The present CPF OA’s 2.5% interest rate is actually not too bad and most importantly, it is risk-free. So why should we ever use our CPF OA for investment?
Our triggering point came last year when it dawned on my wife and I that all of our CPF OA will soon be wiped out by HDB. We started to ask ourselves whether this move will fit well into our investment strategy. A few questions sprung to our mind:
· What is the purpose of the money in our CPF OA? I think this is the most fundamental question that we should ask ourselves. If we are not convinced, we would just let HDB flush away our CPF OA as clearing our loans should be the safest bet, right? Well, our consideration is that we are looking to buy a 2nd property in the near term. So the money in CPF OA would be useful in providing extra firepower to our “cash-on-hand” to fund the purchase.
· What are my options to prevent our CPF OA from being flushed out? Based on my research, they include: (Option 1) Transferring the money from CPF OA to CPF Special Account (SA). (Option 2) Use the CPF OA money to invest in stocks, bonds, gold and/or etfs.
· What are the pros/cons of Option 1? The SA account yields a higher, risk-free 4% interest rate return. This interest rate is much higher than the 2.6% HDB loan rate which means that I could earn an additional “1.4%” and more each year. However, in the near term, I might have to use some “cash-on-hand” each month to cover the loan if my monthly OA contribution is unable to. Another consideration is that this money could only be withdrawn around 20 years later.
· What are the pros/cons of Option 2? This option will allow us to hold our money in CPF OA so that when the opportunity arises, we can use it for our future purposes. The downside is that there is a potential likelihood for the OA money to get stuck in a paper-loss situation. We will also have to take on the investment risk fully by ourselves instead.
So what is our final decision after all these brainstorming?
We decided to adopt a hybrid approach using Option 1 and 2. The current interest rate for HDB Loan is 2.5% and I believe that it is not too difficult to achieve an investment return that is higher than that. My aim is to at least achieve a minimum of 3% returns per year in order to be higher than the 2.6% loan rate after deducting all transaction cost. I focused our portfolio on 2 strong companies - Singtel and OCBC so that even if we get ourselves into a paper-loss situation, their annual dividends should still be stable enough to maintain throughout.
Over the past weeks ago, my wife and I have purchased and are adding more Singtel, OCBC; and also STI ETF shares into our CPF portfolio. Once we have used up our CPF OA until its remaining S$20K, we are likely to transfer a portion of the S$20K into SA; after taking into consideration all other payments such as the remaining 5% downpayment (staggered downpayment scheme).
Moving forward, we are keeping a close watch on the HDB loan rates. This is important as any drastic increase could potentially change our approach, though we believe that the chances of this happening should be relatively low. Still, no one can ever predict the future and we should just get ourselves prepared.
Hope you enjoyed this sharing and so, What will your approach be if you are in a similar situation ?
Together, let us all Go & Huat ah!