You invest to retire.
That’s the whole goal of investing for most people. You invest now so you can draw off the capital invested or live off dividends in the future.
Therefore, many people regularly invest into the stock market with a vision of a rosy retirement in mind. It is accessible to almost everyone and easy to manage.
You could just buy the S&P 500 and forget about it.
However, something bugs me when I think of living off my stock portfolio. I don’t feel exactly safe with most of my retirement money in the market.
Incidentally, only CPF can solve this issue if we contribute more to it over stocks. It even comes with a few other bonuses as icing on top of the cake.
Let me remind you once more: most people invest to retire. You are probably doing exactly the same.
The stock market grows at an average of 10% a year. Meanwhile our CPF Special Account grows at 4% a year.
Right off the bat, it’s obvious which one you will be going for.
However, take note that I mentioned ‘average’ for the stock market’s growth. It might be 20% one year, but might be -10% the next. Nobody knows when or what is going to happen in the future.
If you are investing for retirement, you should think about what this means for you.
If most of your retirement funds are invested in stocks, you are placing them under unpredictable market forces.
You might lose more than half your retirement funds close to your retirement age if you are unlucky enough. Furthermore, your retirement will have to wait till the market recovers (which you will never know when).
Not only that, the market has remain stable in order for you to live off your investments. If the market collapses after you retire, your retirement plans will collapse equally bad.
By growing your retirement fund in CPF instead, it will grow in an environment protected by government policies. No matter what happens, your funds still grow at a steady 4% per annum.
In a way, we are paying a premium for insurance of our retirement funds. This makes putting money in CPF much safer than stocks.
We insure our lives with a life insurance policy, so it makes sense to insure our retirement as well. We can do that by voluntarily contributing more to our CPF accounts instead of stocks for retirement.
Not only that, we can get tax relief by insuring our retirement; a nice bonus to top it all off.
CPF lays a nest egg that grows even more
Many hate the CPF because it locks up their money till the age of 55, but I’m very sure the very same people should be squirming in regret after 55 for not putting more in voluntarily.
Our CPF has three accounts. They are the Ordinary Account (OA), Special Account (SA) and Medisave Account (MA).
Upon reaching 55, our OA and SA will combine to form the RA which will hold our retirement sum.
The retirement sum enables us enrollment into CPF LIFE which ensures a lifelong monthly payout past the age of 65.
So if our OA and SA initially have more than the retirement sum we wish to have in the RA, what happens to the rest of the funds?
Simple! It remains where it was. This is the reason why many financially savvy people choose to do SA shielding. This is because the SA grows at a rate of 4% per annum, while the OA grows at 2.5%.
What’s best about this is that you are free to withdraw the funds from your SA any time via PayNow.
Long story short, if you contribute more into SA early on, you can turn it into a fully liquid and overpowered bank account at the age of 55 that you can draw on going into retirement while waiting for your CPF LIFE payouts to kick in.
However, SA shielding might not last forever. The CPF Board is fully aware of this and I foresee they will remove this legal hack the CPF funds are invested in underperforms.
But for now, this is a wonderful way a nest egg is presented to us when we hit 55 and still grows at a virtually risk-free rate of 4% per annum.
The stock market can take away your nest egg at any point and will still pose a risk of destroying it even after you decided to crack it open.
Incubating it in CPF is definitely the more conservative option.
You can be disciplined enough to dollar cost average into the market, but that doesn’t mean the market can’t test your discipline.
What will you do if your holdings fall more than 50%, just like in the Great Financial Crisis of 2008? Or maybe something more relatable; will you get teased by spanking new investment opportunities like crypto investment schemes with sky-high returns?
Everything and anything can test your discipline as long as you leave your money in the market. If you want to keep your investment liquid, but at the same time keep your money invested, it’ll be a tough ride for you.
It’s actually contradictory to invest for retirement but still wanting to keep your money liquid, now that I think of it. Weird…
What CPF can do for you is to keep you disciplined and keep your money locked in till you deserve it. It is sort of an upgraded dollar cost averaging tool, that takes away liquidity but gives your retirement government-level protection in exchange.
The stock market gives people too much flexibility that will challenge discipline sometimes for the most laughable of reasons like an attractive 20% return Ponzi scheme.
What you want for your retirement funds is something stable, predictable yet with decent growth. This can only be done by keeping your money ‘invested’ with CPF where the full effect of compounding can be realised.
Furthermore, all this is done in a protected environment guarded by government policies.
Whilst our liquidity is taken away, it is a good way to enforce discipline to ensure you get the retirement your deserve.
Summing up,
We invest to retire. Therefore, we should be more concerned about the security of our retirement funds first before its growth potential.
With CPF, we can grow our retirement funds virtually risk free and at a decent rate.
Not only that, we get an overpowered savings account and tax reliefs as a bonus.
Contributing to CPF also forces us to be disciplined. This way, the market has no chance of testing our discipline to keep our monies invested to maximise the compounding effect.
