CPF Investment: Passive Income Guide for All

CPF Investment: Passive Income Guide for All 

CPF Investment: Passive Income Guide for All 

What is CPF Investment Scheme (CPFIS)?
It is to provide option to CPF members to invest their CPF savings in various instruments such as insurance products, unit trusts, fixed deposits, bonds and shares.

The Average CPF Interest Rate is 2.5% to 4% for Ordinary Account. Check their latest interest rate here. Below is the latest CPF rate.




Who can invest?
– 18 years old or older,
– are not an undischarged bankrupt
– have more than $20,000 in your OA; and/or
– have more than $40,000 in your SA

How much of your CPF can you invest?
– After setting aside $20,000 in Ordinary Account (OA), you can invest up to 35% in stocks and up to 10% in gold. AND/OR
– After setting aside $40,000 in Special Account (SA), you can invest up to 35% in stocks and up to 10% in gold.

What can you Invest in using Your CPF?

Here’s the link (click) to the list of investments you can invest in. We will be using ETF as our recommended investment tool. The other tools are either too risky or you have to pay high commission.

Find out your CPF Account Statement

1. Go to https://www.cpf.gov.sg/, and sign in with your Singpass ID and password.

2. Enter the 6-digit One-Time Password (OTP) sent to your mobile number that’s registered with CPF.

3. Click “My Statement”.

4. Scroll down to “Section C”. This is the part where CPF computes the latest amount you can invest using CPF Investment Scheme.

How to Start Investing Using Your CPF?

Below are the steps to go about starting your CPF investment;

First, you need to set up a CPF investment account with one of the local banks below, I listed their rates with links for your reference too;

Bank Charges For Trading of CPF Approved Stocks

DBS

$2.50 per 1,000 shares/loan stocks/units or part thereof subject to a maximum of $25 per transaction.

S$2 per counter / holding per quarter.

UOB

S$2 per 1000 shares / units or part thereof, subject to a maximum of S$20 per transaction. 

S$2 per counter / holding per quarter.

OCBC

$2.50 per 1000 shares/units or part thereof, subject to a maximum of $25.00 per transaction.

S$2 per counter / holding per quarter.

1. DBS Bank Ltd (DBS), (DBS rates) Click Here

2. Overseas-Chinese Banking Corporation Ltd (OCBC) (OCBC rates) Click Here

3. United Overseas Bank Ltd (UOB) (UOB rates) Click Here

When you invest on your own, you pay the broker their commission at much lesser range from SGD2 to SGD25 per transaction depending on the platform you are using. And there will be a quarterly bank charges of $2 per counter for holding to the stock(s)/counter(s).

If you have difficulties in setting up the CPF investment with the 3 banks, it will be best to visit their head branch. Below are their addresses;

– DBS Head Branch Address: 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Level 3, S(018982)

– OCBC Head Branch Address: Raffles City Shopping Centre , 252 North Bridge Road B1-08, S(179103)

– UOB Head Branch Address: 80 Raffles Place UOB Plaza 1, S(048624)

Things to bring along: NRIC or passport.

Reasons why you need to invest on your own in your CPF?

Since the CPF money can only be use after 55 years of age, we recommend that you grow it before you reach 55.

We also recommend NOT TO USE third party like insurance companies to invest your CPF. Even when the sales charges will decrease and eventually goes to zero in 1st October 2019. 

(News 2018 SINGAPORE: The sales charge under the Central Provident Fund Investment Scheme (CPFIS) will be removed, said Second Minister for Manpower Josephine Teo in Parliament on Monday (5 March,2018).

Speaking during the Committee of Supply debate, the 49-year-old pointed out that financial advisors are currently allowed to impose a sales charge of up to 3 per cent for Investment-Linked Insurance Policies (ILPs) and unit trusts under the CPFIS.

This sales charge is undesirable for CPF members because it incentivises financial advisors to sell products to earn more commissions. As it stands, CPFIS investors can buy unit trusts on online platforms without incurring any sales charge.

From 1 October, the sales charge cap will be reduced to 1.5 per cent. It will then be brought down to zero from 1 October 2019.

The removal of the charge will better align the investment behaviour to target investors and reduce investment cost for CPF members, said Teo.

In line with this goal, the wrap fee for investments under the CPFIS will be lowered by in two phases to 0.4 per cent of assets under management (AUM). Currently, financial advisors are allowed to charge a wrap fee of up to 1 per cent of (AUM).

The wrap fee charged is for the creation and maintenance of investment portfolios by financial advisors for their clients.

To help CPF members know more about using their savings for investments, the CPF Board will also introduce a self-awareness questionnaire (SAQ).

The SAQ will give feedback to CPF members on their level of basic financial knowledge and reminders on other options to grow their CPF savings. It will be part of the process of opening a CPFIS account from 1 October 2018. Existing CPFIS account holders are strongly encouraged to take the SAQ.)

Because the percentage of commission pay to these companies and agents can go from 10% to 50% in the first year. So in theory, you are only using 50% to 90% of your intended investment! Making it an instant loss when you purchase them. That is why they always say you need a certain number of years to see that the policy is breakeven.

Straits Times shared that 40% of those who used CPFIS made losses, only 15% made profits larger than 2.5%. Read more here. 

The 3 main reasons for the low ROI is due to;

1. High Fees in Financial Products (One of the main culprits, which I shared above.)

2. Switching Financial Portfolio Too Often.

3. Not Being Updated or Lack of Concerns on their CPF Investments.

Read more on “Don’t buy Endowment Policy

Today, I like to share with you the disadvantages of buying endowment policy plan from insurance companies and cheaper & better alternative of protecting you fully, yet have the control of investing your money passively to it’s full potential.

I will take this chance to introduce a concept called “Buy Term Invest the Difference”.

This is not widely known or used because it is not profitable for insurance companies. The commission is not attractive enough for the agent as well as the insurance company. This explains why it is not aggressively promoted by most insurance companies.

Main Reason: Commission is not attractive for your insurance agent for term insurance (Because it’s cheap). See their commission chart table below.

Agency Schedule of Commissions

Source from onemilliondiary.blogspot.sg

Buying a Term Policy costs you less compared to paying for an Endowment Plan with similar coverage. With the balance of money saved, you can invest it in the stock market yourself. A Term Policy is not only cheaper compared to other insurance plans; it is also more liquid, which means you can sell it anytime you want, instead of waiting for maturity.

For example, you pay $1,000 a month to an insurance company for an Endowment Policy. Part of the money you pay is to insure yourself; the bigger portion is to be invested under the insurance company’s account. As mentioned earlier, winnings from the investment are tough for you to track.

Rest assured that most of the winnings go back to the insurance company. Buying a Term Policy costs you much less, say $100.

This is because it purely insures you and does not have an investment component that Endowment Policies do. You can then invest the balance of $900 directly into the stock market yourself. Therefore, instead of paying $1,000 for an Endowment Policy, you can get a Term Policy (offering similar coverage) for $100 and invest the balance $900 into stock market, offering much more visibility to you.

The problem is most do not know how and where to invest this money.

Fun Fact: Aviva SAF Term Insurance has the lowest monthly premium yet the highest coverage in Singapore. It ranges from SGD$4.10 to SGD$41 monthly.

You need to be a SAF in-service or NS men, to purchase the term insurance. AND you can buy it for your spouse and children, equal or lower than your premium. This will protect you up to 65 years of age.

If you like to find out more, do click here.

Let’s get back to business…

Endowment Plan Policy Alternative

Quite a handful want to invest the money in the stock market, but they do not know when to enter the market. One option you can consider is the Share Builder Plan (SBP). SBP is an investment cum savings plan offered by Phillip Securities. It is a plan that allows you to buy stocks at a regular basis by using a technique known as “Dollar Cost Average”.

With this technique, using the same amount of money, more shares are purchased when the prices of shares are low and fewer shares are purchased when the prices are high.

By investing a fixed amount of funds consistently every month over a period of time, your average cost of shares purchased will be lower, thus reducing the risk of investing a large amount in a single investment at the wrong time. This technique is good for investors who are not good at timing the market.

Example of Dollar Cost AveragingDollar Cost Averaging Example

For example:

Month 1 – Price is high and you buy fewer shares.

Month 2 – Price drops and you are able to buy more shares with the same amount of money invested.

Month 3 – Price drops further ad you are able to buy even more shares with the same amount of money invested.

This goes on. Look at the Net Gain/Loss at the end of the year in table above.

SBP is most suitable for:

1) Fresh graduates who have just joined the workforce.

2) Those without significant capital or savings.

3) Investors who are interested in long-term investment.

Through “Buy Term Invest the Difference”, with the same amount of money spent (compared to buying an Endowment Policy), you get insured (with similar coverage as a typical Endowment Policy) and at the same time get more returns from investments through SBP in the long run. One more advantage of SBP is that only handling fees are incurred and this is a considerably small sum. There is no brokerage or front-end load when you purchase shares through SBP.

Example of “Buy Term Invest the Difference”

Let me give you a live example so that it is easier for you to understand, relate, and realise the power of this strategy.

This is extracted from an insurance company and let us call it insurance company P.

P company endowment policy

P company endowment policy

The table shows an Endowment Insurance Plan from P. The insured is assumed to be 30 years of age (male/non-smoker). The insurance policy term is 30 years with a yearly premium of $3,617.

For example, if the insured passes away at the age of 40, the premium paid thus far is $36,170. Upon death, the insured is guaranteed $100,000 with a non-guaranteed investment return of $10,684. As such, the total return would be $110,684.

If the insured passes away at the age of 60 or upon maturity of policy, he/she will get back $156,354 in total, after paying a total premium of $108,510. The insured ROI (return on investment) is about 44%.

The table below indicates what the insured will get if he/she chooses to give up the policy. For example, if the insured wishes to give up the policy at the age of 50, he/she will have paid a total premium of $72,340. The insured’s guaranteed and non-guaranteed returns will be $53,957 and $10,092 respectively (assuming 3.25% investment return per year). His/ her total returns will be only $64,049, running a loss!

Surrender Value of P company policy

Surrender Value of P company policy

Now, let’s assume that the insured adopts a “Buy Term Invest the Difference” approach. From the same company P, the sum assured is still $100,000 upon death, with a yearly premium of only $266.

Buying Term Insurance Chart

Buying Term Insurance Chart

Instead of paying $3,617 yearly to company P for an Endowment Policy, you pay only $266 per year for a Term Policy. You can invest the balance of $3,351 in the stock market. From many open literature, the average annual returns (inclusive of dividends) for Straits Times Index (STI) in general is about 9.5%.

If you invest $3,351 yearly in the STI, you could potentially gain $506,004 (round numbers) in returns after 30 years (not forgetting the power of compound interest)

Buy Term and Investing the Difference. Using Compound Interest Effect.

Buy Term and Investing the Difference. Using Compound Interest Effect.

At the end of 30 years, your Term Policy would be rendered useless and you would have lost $7,980 in total. Despite losing $7,980, with your gain of $506,004 from the stock market your ROI after 30 years would be 336%!

Buying endowment vs BTID

Buying Endowment vs BTID

Read more about this in my new book, The Systematic Trader . You can buy it now by clicking here >> The Systematic Trader Book.

Conclusion

It is good to have insurance protecting you, which acts as a safety net for you and your family. Be a responsible person to yourself and your loved ones, buying at least a term insurance.

As for investing the rest of your money, I would recommend that you invest into SBP if you are new to investing your money.

Here goes the reasons…

Reason #1: Using your CPF Money to Buy Home.

Most Singaporeans will use their CPF money to purchase new home. So it makes sense, once you have more than $20,000 in your normal CPF account, you should start investing early so you can put a comfortable downpayment for your new home.

Fact: You will need to return the CPF amount you used to purchase the home when you sell it, plus the interest! CPF Monies UsedSource from HDB.gov.sg

Reason #2: Use CPF for retirement in the future.

I know this is a lousy idea, but there’s not much one can do until you are 55 years of age. So might as well grow as much as possible and as early as possible. So that once you reach 55, you will have a monthly comfortable amount to draw out.

How to grow your CPF Account?

Instead of gaining the yearly CPF interest of 3.5% to 5%, why not use it to invest in assets that have higher percentage of CPF investment returns that’s better than what the CPF interest is offering?

Here’s how….

We have found out that the past 30 years our STI index are in a general uptrend since 1987, and has a consistent yearly growth with dividend payout of about 9.5%.

I would recommend using ETF (Exchange Traded Fund) to invest into STI index. You can do it monthly or yearly. This is a dollar cost averaging strategy, and it requires to be long term. That means 10 years or more to see the compounding effect.

What is Dollar-Cost Averaging (DCA)?

It is an investment strategy that buys a certain investment in a regular schedule (weekly, monthly or yearly) and fix amount of money, regardless of the price of the investment. DCA is usually used in stocks investing. The investor will buy more stock when stock price is low, and buy less stock when the price is high. 

Since most would want to focus on their job or business, this is a great passive way to grow your CPF money. Below are the list of companies in the STI Index as of 17th July 2019, taken from sginvestors.io.

So in theory, if you were to use $5,000 from your CPF every year to invest in STI index (at 9.5%) using ETF for 30 years, you would end up with $825,539 at the end of 30 years. See below.

You can see that the total deposit that you would have invested is $150,000, yet your total interest earned is $669,539.

Compound interest is the most powerful force in the universe. -A.E.

Compound interest is the greatest mathematical discovery of all time. - A.E.

Can I use CPF Investment to trade?

Yes, you could!

There’s 418 CPF approved stocks to trade on. Here’s the list of CPF approved shares, and from the list you can use it to trade using our Systematic Trader system. Click here for this list of stocks.

Conclusion

So here you go, the “CPF Investment: Passive Income Guide for All ”.

This strategy requires consistency in investing and time (10 year or more) to see results. It works great for retirement plan, for child’s future education. For those who just want to set it and focus on their business/work.