When I was younger, I used to be annoyed at CPF. And why wouldn’t I? 20% of $2,700 was a lot of money. Still is.

Today, I have come to accept it, and come to understand why it exists.



K, many people don’t understand how CPF works, so let’s start with that.

Click this if you don't understand how CPF works. If you do, move on. Every employee age 55 and below is required to save 20% of your sa ​ lary. Your employer will be required to contribute another 17%. You can check out the contribution and allocation rates here .

All this money goes into three accounts (Ordinary Account (OA), Special Account (SA) and MediSave Account (MA)).

Money in OA is for housing, insurance, investment and education. Money in SA is for your retirement. They yield up to 3.5% and 5% returns respectively.

At 55, a Retirement Account (RA) will be created for you, and your savings from the OA and SA will be transferred to your RA, up to the Full Retirement Sum (FRS). The FRS for a member turning 55 in 2019 is $176,000.

When you reach age 55, you can withdraw your CPF savings above your FRS or BRS with property. If you have not set aside that, you can still withdraw up to $5,000.

Look at the picture below to see more uses for each account Your CPF savings in the Ordinary Account earn interest rates of 2.5% per year, while savings in the Special Account and MediSave Account earn interest rates of 4% per year. The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account, earn an additional 1% interest per year.

But before we continue, let’s acknowledge CPF isn’t a perfect or ‘magic’ system.

CPF is first and foremost, a retirement fund.

It was designed with the majority of Singaporeans in mind. These are people who intend to work till their 60s and then retire in Singapore.

Like any system that caters to the majority, CPF will not be ideal for some people. I was (and am) actually one of them. Why?

Let me explain.

I used to feel like I could get better returns on my money if I could invest it myself.

At up to 3.5% and 5% per annum for the Ordinary and Special Account respectively, the interest rates from CPF didn’t seem sexy enough to me.

Yeah, I get that it’s risk-free, and it’s an impressive number for a ‘risk-free’ investment. But few experienced investors would ever boast they invested $10,000 and made $500 profit in a year.

And yes, CPF also introduced CPFIS to help people invest in a limited range of products. But these offerings are low to mid risk. Which means you’ll never ever be able to invest super aggressively with CPFIS.

Long story short, you’ll never become very rich in a short period of time with CPF or CPFIS as it’s designed to be slow and steady, not fast and furious. To someone who intends to retire at 40, that’s not exactly good news.





I can’t use CPF money for… my immediate wants

As highlighted earlier, CPF is mainly for your housing, healthcare and retirement needs.

If I wanted to use CPF money to set up a business or travel the world before I hit age 55, for example, I’d be out of luck. Same with loaning my friend some money to get him out of debt.

No, no, no and no. This simply isn’t what CPF is designed for.

So why did I come to accept CPF?

I’ve learnt to work around CPF for my investing needs

After making silly mistakes on the stock market at 25, I’ve become a believer in the three-fund portfolio – click here to read more about it. This strategy advocates having money in both foreign and local index funds (mid-low risk) plus investment-grade bonds (very low risk).

I treat my money in CPF as the bond portion of my portfolio, and invest the rest of my money in the stock market. Of course, this means taking on significant risk for the promise of higher returns and it’s definitely not for everyone.

If I wanted as little risk as possible, I’d allocate more money in my CPF Special Account to get up to 5% interest or buy more Singapore Savings Bonds.

(This is how I manage my portfolio, and it is not endorsed by CPF.)

I’ve come to realise that most people don’t know how to manage their money

We don’t want to sugarcoat the facts. So here’s what you need to hear. Not what you want to.

According to this survey, 33% of Singaporeans don’t even invest. That means they can’t even beat inflation – which is currently 1.4%. According to MAS, only 60% of working adults are preparing for retirement.

This isn’t a problem now, when they still have jobs. But everyone has to stop working at some point due to age or just obsolescence – who’s going to pay for their retirement then?

That’s right. The taxpayers. Are you prepared to pay higher taxes?

…this brings me to the third point.

I view CPF as an alternative to taxes I would have paid if I was a salaryman in another country

[Edit: A previous version of this article used marginal tax rates to calculate tax paid. We have done manual calculations for each country for a more accurate representation.]

I read an article on Seedly recently, where they calculated how much taxes one would pay if they earned approximately S$100,000 per year. They concluded Singapore had the lowest tax rates.

We did our own calculations, assuming if someone earned $100,000 in their own currency, and we’ve arrived at similar conclusions.

In Singapore, you pay 5.65%. In the US? Around 25.6%. In Australia and the UK that we love so much, it’s about 24.5% and 28.7% respectively.

The difference between CPF and taxes? You can still use CPF to pay for housing, retirement, and healthcare.

Taxes? You’ll never see them again The government will use it to improve the standard of living for its citizens, so you’ll be indirectly impacted. But you’ll have no direct control over how your tax money is spent.

Now, we are not saying one system is better than the other.

Both have their pros and cons. In one system, you have more freedom in how you spend your money, but you are taxed higher. In the other, you have less freedom to spend your money, but you are taxed lower.

Hey, nothing is perfect.

(Note for Singapore, it’s not exactly (20% CPF + 5.6% = 25.6%), as the 20% CPF contribution is only applicable on the first $6,000 of your salary. So if you earn $8333 a month – $1,200 goes to CPF, so that’s just 14.4% of your income. )

If you can’t trust CPF when it comes to money, you might as well not trust anything else.

When you put your money in CPF, you essentially invest in the Singapore Government.

The Singapore Government is rated AAA by Moodys, S&P etc – the highest rating possible.

I put most of my savings into investments in the stock market that are far riskier. If I can’t trust a AAA rating, then why bother investing at all?

Contributing to CPF is an acceptable compromise for Singapore’s standard of living

My opinion is this: Singapore definitely has its issues and isn’t for everyone, but in this part of the world (Southeast Asia), it’s one of the best places to live and work in. Zero doubts about that.

If having to live here means having to save 20% of my income (and receive an extra 17% from my employer), so be it.

Two final points if you’ve read till the end:

CPF has, and will always be evolving:

If you’re in your 20s reading this, we’d expect CPF rules in 2049 to be different from CPF rules in 2019. That’s because the system has to evolve to stay relevant to Singaporeans.

For instance, in 2009, the Full Retirement Sum is $117,000 while in 2020, the Full Retirement Sum will be $181,000. That’s because of inflation and people living longer. If humans do continue living for super long in the future, expect this to be higher.

CPF alone may not be enough

Finally, we’d like to add that CPF should not be used as the ONLY thing funding your retirement, especially if you’d like to extend your current lifestyle into your golden years.

For someone who turns 55 in 2019 and has the FRS of $176,000 in his RA, he will get about $1,450 monthly under the CPF LIFE Standard Plan from age 65, all the way until he dies. (For a lady, it’ll be about $1,350 as you are expected to live longer than men.)

If you want higher payouts, you can set aside the Enhanced Retirement Sum (ERS), which is $264,000 in 2019, and that will give you around $1,960 to $2,110 from age 65.

Using that as a guide, we think it’s best to look for additional sources of income during retirement if you intend on living large.

Stay woke, salaryman.

Read more about CPF, and take this quiz to find out if you are making the most of your CPF savings.

You can also check out these tools to estimate how much you need to set aside for your desired monthly payouts, and how to grow your CPF savings faster.

*All stats in the article are valid as of 20 Sept 2019.