Why I Love the CPF System But I Am Not Doing Voluntary Cash Top Ups

This post is written based on personal opinion and circumstances, and it is definitely not applicable nor suitable for everyone.  It is just to record my personal thoughts and actions moving forward, and it is definitely not any form of financial advise.

The Central Provident Fund (CPF) is Singapore’s most well-structured social security system.  Besides providing Singaporeans and Permanent Residents (PR) a reliable way to save for retirement, CPF also offers attractive benefits like guaranteed returns of between 2.5% to as high as 6% (depending on the account and age band of individual) and tax relief.  Personally, I love how the CPF system works, but being a self-employed person since 2015, I did not benefit from employer's contribution of 17% to my CPF account in the past 9 years.  However, as I believe the CPF system is a reliable and a technically risk-free system that works like a guaranteed-bond, I religiously contribute 37% of my annual net trade income to all my 3 CPF accounts, even though being a self-employed person, by law, I am only required to contribute a mandatory 9% (age dependent) of my annual net trade income to my CPF Medisave Account (MA).  Despite my deep appreciation for what the CPF system offers, I did not do further cash top ups to the annual limit of SGD 37,740.00.  Why am I not doing that to grow my retirement funds?

Before I delve into that, I would first like to be a 'patriot' and share why I love the CPF system:

1)     Guaranteed and Competitive Interest Rates

CPF accounts provide some of the highest risk-free returns available:

a)     Ordinary Account (OA): 2.5% per annum.

b)     Special Account (SA) and Retirement Account (RA): 4% per annum, with an extra 1% on the first SGD 60,000.00 of combined balances.

These rates are difficult to beat without taking on significant investment risks, making CPF an excellent foundation for retirement savings, and this allows my CPF to act as a bond component in my portfolio allocation, so I can take more risk on my cash component and invest them in equities.

2)     Tax Relief with Voluntary Top-Ups

When you top up your SA or RA, you enjoy tax relief of up to SGD 8,000.00 annually.  This can significantly lower your taxable income while growing your retirement savings.  This is the main reason why I contribute 37% of my net trade income annually to my CPF accounts instead of just the mandatory 9%.  Every bit of savings from taxes count!

3)     Peace of Mind with CPF Life

CPF Life ensures that I will never outlive my savings.  The lifelong monthly payouts provide financial stability in my golden years, no matter how long I live.  The only main concern I have is, I do not live long enough to see myself getting the monthly payouts due to conditions beyond my control.  I may sound like a pessimist, but this is a legitimate concern that I have.

4)     Flexibility in Usage

CPF isn’t just for retirement.  It covers housing, healthcare, and even education too:

a)     Housing: Use OA savings for property purchases.

b)     Healthcare: MA helps pay for hospital bills and outpatient treatments.

c)     Education: CPF funds can be used for children’s tertiary education (not applicable for me, but I am a beneficiary of this as my dad uses his CPF monies to support my tertiary education in NUS for 4 long years).

This multi-purpose functionality makes CPF indispensable in various stages of life.

5)     Nomination Ensures Funds Are Not Lost

One common concern is that CPF funds might be “lost” if I pass away early.  Thankfully, CPF allows nominations, ensuring that the remaining balance is passed on to my beneficiaries, including accrued interest that is earned before RA is created.  Technically, even if nominations are not made, the funds will also not be lost, but will be paid to Public Trustee Office for distribution in cash to your family member(s) based on intestacy laws.  However, do note that without nominations, the timeline for such distributions and payment will be much longer, and an administration fee will be charged by the Public Trustee Office.

6)     Inflation Protection

While CPF rates are not directly tied to inflation, they usually outpace it.  Additionally, the Escalating Plan under CPF Life increases payouts by 2% annually, helping to cope with rising costs of living.  However based on numerous sharing by individuals and experts of the CPF system, if one already has personal investments or other annuities to draw down to combat inflation, the better Plan to chose will be the Standard Plan under CPF Life.  

Despite all these benefits, I deliberately made the choice of not topping up my CPF accounts with cash beyond the 37% contribution I currently make (which is much lower than the annual SGD 37,740.00 limit), which can definitely expedite the process of accumulation towards the Full Retirement Sum (FRS).  Below are some of my concerns that made me contribute less than the limit:

1)     The Possibility of a Short Lifespan

Life is unpredictable, and while I hope to live a long and healthy life, there is always a chance that I might not live long enough to enjoy the full benefits of my CPF savings.  This is especially the case when personally I am not in the best of health (although I am trying my best to maintain and keep my health in check) with years of chronic conditions.  The CPF system locks up funds until age 55 (for withdrawals) or 65 (for monthly payouts), and that is a long wait from my goal of FIRE by 45, and touchwood, anything unexpected may happen.  If my life expectancy is below 65, I will not get to enjoy the fruits of my labour if the majority of my assets remain locked up in CPF (and I do not have any descendants who can benefit from my possible bequest). 

Therefore, even though CPF is great, I would love to have it as a buffer and a backup plan, while I consistently invest my monies on riskier equities, with the desirable liquidity.  Regardless of the volatility in the markets and dividends I receive, I know that at the basic level, I still have the CPF account to depend on if anything happens, and thus the FRS is the amount I hope to reach, but probably nothing more than that, at least for now.

2)     Balancing Liquidity with Security

CPF is fantastic for long-term savings, but the locked-in nature of the funds makes them inaccessible for short- or mid-term goals.  To be realistic, I am not earning a high income (despite being self- employed), so I do not really have lots of spare cash for expenses.  If I do cash top-ups further to the annual limit, my monthly cashflow would be very tight and that may negatively impact my monthly livelihood.  By avoiding over-topping my CPF, I ensure that I have sufficient liquidity to over unforeseen expenses, reasonably enjoy life while I am still active and reasonably healthy, or even pursue opportunities like travel with mum, hobbies, or personal development.

3)     Diversifying My Investments

I prefer to diversify my retirement savings.  As the age-old saying goes, "never put all your eggs in one basket".  For the CPF, probably it becomes "Never lock up all your eggs in one vault".  CPF definitely forms the stable, risk-free part of my portfolio, but I also invest in stocks, ETFs and REITs for higher potential returns and recurring dividends, albeit with risk.  Diversification ensures that I am not overly reliant on CPF for my financial future, which although risk-free in terms of returns, is still susceptible to unforeseeable policy risk.

4)     Maximizing Enjoyment in My Active Years

With the personal experience of first-hand witnessing what happened to my dad, I value the freedom to use my money while I am still young(er) and active more than ever.  By accumulating CPF savings gradually instead of pumping all my liquid cash into CPF, I maintain control over part of my cash flow and ensure that I can fund experiences and goals before the CPF withdrawal age.

5)     Avoiding Policy Risk

The biggest news that will happen next year is the removal of the CPF SA for Singaporeans and Permanent Residents reaching 55 years old and above.  The monies will be moved to RA and/or OA, depending on the monies available.  This eliminates the option of the financially-savvy to use SA as a high interest savings account (via SA shielding) to keep large stash of cash that turns liquid within the account, earning "almost risk-free" 4% interest.  

From now till the day I can access my CPF monies, there is at least 15 more years to go, and anything can happen during this period, especially policy risk, which will be beyond my control.  Therefore, I believe it will be good if I just grow the 'uncontrollable' amount in my CPF to the FRS amount, while any excess liquidity I own remains within my control outside of CPF.

Personally, I am comfortable with my pace of work, investment and contribution towards CPF.  I think I am striking a rather good balance with whatever resources I have currently.  I think my approach towards CPF reflects a balance between leveraging its advantages and addressing its limitations, where I:

a)     Accumulate slowly but steadily up to the FRS (hopefully) to secure a solid retirement foundation.

b)     Keep sufficient liquid funds accessible for flexibility and peace of mind.

c)     Diversify into other investments for higher returns and earlier accessibility.

By doing this, I believe I can get the best of both worlds: the security of CPF and the freedom to live life as fully as I can while I am still able to enjoy it.

Nonetheless, the CPF system is one of the best tools for retirement planning in Singapore, and I genuinely love its structure, security, and benefits.  However, financial planning is personal, and my cautious approach reflects my current priorities, which is to prepare for a comfortable retirement while ensuring I have the flexibility to enjoy life now.  Barista FIRE, here I come...!