I don’t really think that topping up your own CPF with cash at a young age is a good thing. Doing so is like running a marathon after shooting your own foot. It hobbles your journey for financial independence. There are many better ways to invest your money than locking it away and only getting the key back when you hit the magic age of 65.

This is not a slam piece against CPF and those who top up. Many do so for good reasons, especially those who top up for their parents. That has tax advantages on top of the parental allowance, which I think is a good idea. Besides, CPF could very well do better than my investments, and they have during this recent tech market sell-off. The future is hard to predict. Towards the end, I also talk about why CPF is a necessity for most Singaporeans.

But all the pieces in Singapore slant a certain way, and there are often government marketing dollars behind it. I would want to add a bit more debate to the matter. And in my humble view it doesn’t make sense for any person with decent self-control to top up their own CPF.

The Government will help you top up

There is actually a bit of incentive to keep your CPF balances as low as possible. For one, there is the Matched Retirement Savings Scheme (MRSS). If you have below the BRS in your CPF, the government will give up to $3,000 if you top up. This is free money. There are some strings attached, like being of a certain income and being 55-70 years old, but if you are eligible, it is pure free money.

In addition, you get higher interest the lower your CPF accounts have. The extra interest is only valid for the first $60,000. That’s easily achieved within the first five years of working. Topping up further doesn’t net you any additional interest.

I wouldn’t be surprised if there are more schemes in the future to help the disadvantaged top-up. Not saying that’s a bad thing, but there is a moral hazard argument. Why top up my own CPF account when I can wait and let the government help me to do it?

From a financial perspective, it doesn’t make sense to look rich to the government. By appearing poor on CPF, you become eligible for much more free money. CPF is one of the few ways that the government can guess your net-worth, besides your residence.

Much better returns in the market

Singaporeans have been conditioned to think that 4% is a good return. With the STI returning essentially 0% for decades and fixed deposits doing the same, 4% does sounds pretty decent.

Make no mistake, 4% is excellent for a zero risk investment. There isn’t anything else equivalent. Currently the risk-free rate is about 1%.

The fallacy is that we should not be relying on zero risk investments. When we are young, we can take on higher risk. Invest in the Teslas and Palantirs. We can wait out the volatility since time is on our side. And young means about 40s, or even 50s. This gives 10 and 20 years for investments to compound and smoothen out.

Hence, most young people should be putting their spare cash into growth stocks or a diversified ETF such as the S&P 500. That should grow by at least 8% a year. And not into CPF which gives 4% a year.

It is an extremely big difference to be compounding at 8% vs 4%. $1,000 per month in CPF will eventually return $673,000 after 30 years. That’s not too shabby. But the same amount in a S&P 500 ETF should turn into $1,360,000. That’s over twice the amount.

The main reason why the stock market can do this is because it’s uncertain. We don’t know where it will be tomorrow or next week. Worse, it appears irrational, going up in bad times and down in good times.

In contrast, we know precisely what our CPF returns will be. Interest is paid at a certain rate, and it’s deposited at the same time every year. We can be sure that our CPF will go up, regardless of market conditions.

But certainty in returns is very expensive. You pay for that safety net. Without those, returns well above 4% are very possible and in fact easy to do. As long as you can accept your portfolio’s returns will go down or turn negative once in a while.

Giving up all liquidity

I don’t get why people want to wait till they are 55 or 65 to enjoy the fruits of their labours. There is no need to scrimp and save until that age. Many people won’t even make it till than.

There is strong demand for liquidity in our 40s and 50s. Ageing parents need help with medical bills and care, children need money for university, etc. Many people will need to access their money for family or unforeseen needs.

You can’t help any of them if your savings are locked up in CPF. Who the hell cares if you are a CPF millionaire if you can’t draw out a single dollar for your family?

Giving up the ability to withdraw money is a risk. The terms of withdrawal and interest rates can change at anytime. In addition, you cannot change your mind about your CPF top ups, even if your life circumstances change.

CPF returns are not guaranteed. Every year, the government decides the rate of interest. It is entirely up to their discretion. There will be a backlash if they reduce interest rates in any way, but they have told Singaporeans bad news before (e.g. HDB value will go to zero). If low interest rates endure, it is not unthinkable for CPF to eventually lower their rates. That is a very low possibility though.

There are better alternatives than CPF LIFE

While CPF LIFE isn’t a bad product, there are better retirement plans if you plan ahead. As I pointed out earlier, CPF LIFE takes 15 years to break even when you consider the drain on the bequest. You and your family have to reach the age of about 80 to get back your principal. A savvy investor would have established a guaranteed income stream much earlier than at 65, one that would have broken even in 5-10 years, doesn’t decline in value, and can be liquidated.

Instead of being a cheap lender to the government, why not be the one who is borrowing cheaply? Interest rates are so low now that it is silly not to take advantage of it.

Conclusion

I do think that there is a place for CPF, and that is to act as a safety net for most Singaporeans.

Firstly, most people are awful at the stock market. They would rush in during booms and flee during the busts, precisely the wrong way to play it. Buy high and sell low. I don’t think they can be trained to do otherwise because its simple human nature.

Secondly, most people won’t be able to control their spending. Any profits or extra income they make would go into buying a better lifestyle. They won’t save or invest it. Hence, most people would have nothing left for retirement if they were not forced. CPF is good for such people because it takes the money completely out of their hands and it always grows. Not uncommon to hear of retirees who get their CPF money at 55, blow it all in scams and bad investments, and go running back to beg their family or the government for help.

I do believe that CPF is necessary for those reasons. It’s a scheme to ensure that seniors can retire with a minimal amount to live with dignity, and does so by forcing savings and trickling it back.

But if you’re reading this, there is a good chance that you are more sophisticated and wish to retire better than average. Topping up your CPF account isn’t likely to do that.

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