CPF Special Account

For the longest time, there were several investment bloggers who had been talking up the merits of topping up CPF Special Account (CPF-SA) with cash or CPF Ordinary Account (CPF-OA). They gushed and purred about how parking those extra $7000 into CPF-SA can earn risk-free 4-6% of return. Apparently, many readers were so impressed that they were pretty sure that these two fellows had uncovered the sure-win secret formula to wealth building. One of the readers almost kissed the foot of one of the bloggers.

Finally, today SG Wealth Builder came across one fellow blogger who had the guts to stick out his neck and pointed out 6 Reasons not to Voluntary Top Up your CPF Special Account with cash or CPF Ordinary Account.

If you have not read the article, I would urge you to read it (at least once) because it is one of the most well-balanced investment article I have come across with regard to CPF matters. The author described the approach of topping up your CPF-SA as “dangerous” and cautioned Singaporeans to consider carefully before doing it. As a wealth builder, I fully agreed it!

I shall not list down all the 6 reasons written by the blogger but fundamentally, his points on cash-flow and business opportunity costs were exactly what I had in mind whenever I came across bloggers espousing the merits of voluntary topping up CPF-SA.

Look, in life, there are always trade-offs. You don’t expect free lunch and if things are too good, they probably are! Whilst I don’t deny the fact that CPF-SA interest rate is indeed hard to beat and can be considered risk-free, investors must realize that such an approach is a one way ticket. This mean you cannot take out the money as and when if you need it for emergency cases.

Sure, if you consistently pumped $7000 every year into your CPF-SA for the next 10 years, you would have an extra $100,000 (more or less), including the interests. But imagine you are retrenched from your job. Imagine you have mortgage, car, insurance policies, children’ school fees and living expenses to worry about. Imagine calamity struck and your loved ones need money to battle long-term critical illnesses. You are just one disaster away from financial ruin. Would that $70000 come in hand?

Life is unpredictable and sometimes can be very fragile. It is foolish to expect that for the next 20 years, you would be in the pink of your health. Even if you try your best to keep fit, there might be unforeseen circumstances that are beyond your control. For example, what if your loved ones had an accident and need your urgent financial help? Can you bring yourself to reject their plea for help? Henceforth, it is important to have cash-flow in your portfolio. There is no point in being asset rich, such as having a lot of cash in the CPF-SA because there is zero liquidity. You simply don’t have the flexibility to use the money to address urgent needs because CPF-OA and CPF-SA are meant for retirement needs. Your money, once transferred into CPF, would be locked in until you reach 55.

The golden rule in personal finance is always to achieve a healthy cash-flow. In times of crisis, cash is king. Indeed, there are a lot of carrots being dangled around in exchange for your money. Be prudent and ask yourself if it is worth to lock up your money for decades? Don’t be seduced by the idea of magic of compounding. It might sound sexy but in my view, not worth it!

Another important point that needs to be highlighted is business opportunity costs. Sometimes, you might come across a brilliant business opportunity. Never say never. Just imagine the amount of money that you had transferred into your CPF-SA could have been used for the business. You would have the chance to grow your pot of gold into a much bigger pot of gold. But alas, you have to give it a miss because you are short of money!

In summary, my principle for financial freedom is never ever to depend on CPF-OA and CPF-SA for retirement needs. The government has designed the CPF system to cater for Singaporean’s retirement needs but in my opinion, the CPF savings are not sufficient to meet our needs. Singaporeans must start to invest as early as possible and develop sources of passive incomes to build their wealth. You can never attain financial freedom if you have only your CPF savings to rely on when you are old and unemployed.

So start to wake up your money!

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Magically yours,

SG Wealth Builder