Maximising your CPF: Strategies for your 20s and 30s

LP S for those of you who don't know. And if it's good idea to terminate an I LP, if it's not working for you, if that's something you've been thinking about, you want to check it out. Well, today, however, I want to talk about something that we probably don't think about often enough and that is investing your CPF money, especially when you are younger. I'll tell you how much younger. Ok. Now we all know what CPF is it a portion of your monthly salary that's set aside that

you can use for housing your medical needs. I know I've done that before. Now, whatever is left behind, accumulates interest over time and just form a tidy nest egg. Now, if you are in your twenties or thirties and that's the age group we're talking about today. Chances are you might have already tapped into your CPF to pay for your first home and then ignore what's happening in your ordinary account or your O A because you're thinking, you know what? I

have to wait till I'm 55 to cash it out. Anyway. Well, this episode might change your mind here to offer strategies for maximizing your CPF. Money. Is Lawrence Tan. It's the training and content team lead at the Institute for Financial Literacy and we welcome him to money talks. Hey, Lawrence. Hi, Andrea. Pleasure to be here. It is our pleasure to have you, Lawrence. Let's start with a personal anecdote. When did you start

investing your CPF money? Were you already investing actively elsewhere and thought, ah, it's time for me to maximize my CPF money. So, just like most people who started work and after you see some CPF balances accumulate, you sort of feel that it's something that I can see, but I cannot touch. And then of course, you have all sorts of anecdotes coming your way that this money is too far for you to use and useless. So that's why I started to invest without really having I would say on hindsight,

fully understanding the risk reward equation. So, yeah, probably around mid twenties, mid twenties. That's pretty healthy. I think I did about the same too. But it took me a how do I say this a milestone in my life to realize, hey, I can actually invest this money even though I can't touch it. So before we get into the nitty gritty, I wanted to ask you, could you explain what investing using this,

using your CPF moneys and tails versus cash? Are there specific kinds of instruments, vehicles, products that you can use versus what we normally invest in? So the CPF investment scheme or CPFIS for short is specifically tailored to give savers an opportunity to invest in a selected basket of products. So it's not open to

every product that is available out there. Generally, it's a bit more conservative from a risk perspective and that's a good reason for it because this is your hard earned money. And CPF as you mentioned in the introduction, is really for three pillars, right? One for medical needs, of course, we have your ma your ordinary account, which is for your home. Most people use it for home and also your S A for your retirement, which is a very critical component and sometimes

when you're younger, you don't think about it. So you have to make sure that you do not lose too much of your capital through improper investment. So the risk basket for products under the CPFIS scheme is calibrated. So generally, they are very conservative products having said that you have to then look at the fact that there is risk free return from your CPF. So you want to obviously invest in something that can outperform a risk free return

with a relatively logical risk reward trade off, right? Because if it's paying you 2.5% and you think you can only get about 3% question is whether it makes sense given the higher risk. So these are some of the considerations, right? And of course, recently, you can also invest your CPF into things like Singapore government bonds or Singapore savings bonds.

So there's a little bit more products available. And if you don't like 2.5% you think SSB is giving you 3% or you know, you can go for that and you have the same level of risk. So that's how you should think about investing your CPFIS, right? Ok. That's cool. Is there a minimum amount that we need to have in that O A for us to even invest in or to make it even worse? Thinking about investing? Well, actually at the end of the day, you take a look at how much you are prepared

to put your capital. The money that you don't need investing is always about, you know, the money that you can put aside for the long term. I like to use that analogy of, you know, investing, you invest your beer money, not your milk powder money that straight away drives from the point of the kind of money that you should be using, right? You immediately know what you mean, the money is fungible. But you know, if you think about it, your money is money. Yeah,

you don't have to feed somebody. So that's the kind of thinking that you sort of have in mind. But having said that again, CPF like I said, is cost savings because whatever you build up in your O A eventually when you reach obviously my age or closer to that, it all forms part of your S A for So O A plus S A becomes your retirement account. So you don't want to be too about it. That's not to say though that you talked about how some of the

pfis instruments tend to be quite conservative. It gives you quite a bit of room in terms of your risk reward capabilities, but that's not to say that you can't lose on your CPF investments, can you? Of course, I think the last time I looked at data from CPF, at least 50% of people who have invested within the CPFIS investments don't outperform the 2.5%. So in other words, you would have been better off just leaving the money there

sleeping better, right? Whatever. So the track record is not great. It's not that every seven out of 10 investors who invested in CPFIS do better than 2.5%. It's not that it's probably about 40 50% at best. So we have to remember that it's not right. It's not a given. So think carefully. There are instruments you can invest, you can put into ETF S which potentially gives you a bit more 6 7%.

But there's always a risk. Of course, of course, with ETF S. Now how different is investing CPF versus cash apart from the types of products? What other considerations are there in terms of the differences? I think again, we come back to the core mission of what CPF is for, right? We all earn a certain level of income, we contribute significantly CPF as well as from the employer side. So the mission of CPF is really to build three key pillars that we talked about, right? Health care, retirement

and housing needs, right? Although O A along the way, because of your demand, you have allowed to invest, you know, you can even use it for education loan and some of the other stuff. But the fundamentals of CPF should be, we should remind ourselves of it, right? Cash is always the other source. The question is, of course, you know,

what are you getting from the cash? To me, the logic is obviously, if cash is lazy out there is getting only 1% I mean, these days, at least interest rate is slightly better, but you know, rewind 34 or five years back, the interest rates were bad, you are hardly getting anything. So then you have lazy cash, then of course, you want to deploy lazy cash first, right? Yeah, of course. As a 2030 year old when you start off, I think inevitably you will start carrying some debt. So

you have to ask yourself again carefully. Should I invest or should I just my debt? If your debt is costing you 4 5% you retire with lazy cash, you are actually saving 4 5%. Right straight away. You get a yield, you get a pick up 4 5%. So you can, you must think of it that way, right? If you think that you can outperform 4 5% or whatever that your debt is, then invest the cash, right, then that's the way to

think about investing, right? So use those lazy cash, but take into consideration whether how much debt you're carrying at what cost and then ask yourself, would you be better off retiring the debt or you can invest the cash with multiple returns over the course of the debt? Right. Right. So either shut that debt down and that will be an investment. Of course, it is. Yeah, exactly. Yeah, down

the road. So either that or if you don't have debt, which I don't know who would have debt in Singapore in your twenties and twenties maybe, I don't know, I think I would say, yeah, definitely, definitely have that. Ok. So either shut the debt down or think about the kinds of instruments that can give you that kind of returns that would be above and beyond it being asleep in your way of being ok. Now, I wanted to

talk about the age group here. I'm way past my twenties and thirties and I wish I had better advice when I was at that age. But you know what? Yeah, better late than never I say, but let's talk about that group of people, the twenties and thirties. Do you think that this age group and especially in today's context where you have a lot of temptation in terms of retail investing, should they have a different strategy when it comes to investing their CPF versus

those in their forties? For example, where they would have been a bit more mature in terms of where their CPF allocations and accumulations would have been? Yeah, I think this you can see as more distractions. Um the flipside is that there are more avenues, more, more opportunities, more channels. So the question is how do you navigate it,

make sense of it? But bottom line in investing, there's no shortcut, you have to do your ground work, you have to do your homework, whatever you call it, you have to be disciplined, you have to know where you're going, you have to know your objective. So these ground rules remain whether during my generation, your generation on this new, it's just that now you've got a lot more, perhaps a bit more confusing. Ask yourself whether you have the discipline to

do the homework. Some people just hate financial analysis and they just want the latest hot tip from somebody that's not investing, right? That's gambling. So you need to know the difference. If you are of the kind of mindset where you just want a quick tip to make some money in 3 to 4 weeks time, then you know,

that's not investing. So I think that's the advice for the younger age group because unfortunately, maybe because people are more impatient, things are faster and you see a lot of influences from socials and all that stuff and you want things to be quick. Hence you have this thing about people trying to get rich quick. But I wanted to ask because of their longer runway at that age, would this mean that they

can afford to be a bit more aggressive? The good news is of course they can afford to, they can afford to provide it again. We come back to the fundamentals, right? What is your objective for every pot of money that you want to invest? Right? Do you have the aptitude to do the groundwork and the homework? These are fundamentals must be there, right? If you do have all this and you are clear about your objective, you can take more risk because you are younger, you have the benefit

of two things compounding. Plus you can recover. Yes, right. You can recover. Should markets you know, go into a bit of a dive, you can recover. So you have the advantage but then again, if you don't have the aptitude, you need to outsource or you are a very risk averse person. The last thing you should be doing is to invest and then not being able to sleep at night or have quarrels with your spouse. Forget it. It's not worth it, it's

not worth it. So these are some of the things which you have is very personal and each individual has to sort of know your makeup. If you have all these things addressed and you are happy that this is beer money, right? Then do your homework and there's a world of products, there's a world of opportunities. Um and being young, like I said, you can afford to take more risk, but it's not like a must do or it something which are compulsory because you're young, right? Yeah. So

I wanted to pick up on that. So there is obviously another camp that says, you know what, at 2.5% leaving my money in CPF. Not a big deal. Not so bad. I should just ignore it, let it roll. I'll let it sleep in my CPF account. What do you say to this? 2.5% will be short of inflation obviously, but given the fact that he's going to compound over a period of time, you know, long term is not that bad. And if you don't have the risk appetite

or the aptitude to invest, then that's the best for you. Right. You can outsource, you can put your money into a fund and have a regular way of investing. There are some tradeoffs with that because you outsource to somebody, you rely on their strategy, of course, you have to pay them. So there are some of these things that you have to be happy with. But to me that's fine. If that is your personality, your profile is fine, there's nothing

too bad about it. You won't lose out necessarily. Well, you will not have something that grows as quickly, right? With compounding, perhaps you could, you know, depends on again what the inflation outlook is in the next two or three years. But if things hopefully taper down without runaway hyper inflation, then it's OK. Right. But if inflation becomes a bit out of control, then of course, it puts a lot of pressure on, then even 2.5 can sort of fall into the camp of a bit lazy money.

But then again, overall interest rate should adjust. Like if things persist at a high level, we, we shall see. Ok. So that's the other thing that I wanted to touch on there is this longer investment horizon. We're talking about 20 to 25 years before you can even touch that money in your CPF. Right. So you would need to rid the ups and downs of the market again, depending on your risk, appetite, your aptitude to stomach all the ups and downs of volatility in the market.

So it's obviously as a younger person in your twenties and thirties, you'd feel easily disheartened. You might even panic. Um, when you see your investments in the negative, it's turning red on the piece of paper or rather it's on your digital app. Now, what advice would you have in terms of emotionally handling these episodes? So there are two parts to it. Right. I think most people would be still using the CPF

especially they heavily for their mortgage. That is an investment in itself because you are using it to pay down a loan on a property which you hope will sustain value. So it's also an investment in terms of investing in financial market products which are more volatile than your home. Then of course, it comes back to my point at the outset. Do you have the attitude to take this? Right.

It will be ups and downs. My advice is if you feel stressed, don't delete the app or whatever, don't, don't stand did every other day in your office, then perhaps you should outsource some of your investing or tear down in terms of your risk profile. So you don't have this sort of volatility, right? So move from a moderately conservative, slightly more conservative. Correct, correct. My advice is always keep an eye on the objective, right? What have you invested

in are the fundamentals of the underlying assets? Have they changed? Notwithstanding an event or a market episode, have they changed? Right. Obviously COVID has given us a very good example of

how some fundamental stocks, businesses can be impacted. So you really get a sense of, ok, are we facing the kind of Black Swan situation or is it, you know, really a sense of a situation where a short term market psychology, an industry event, which is sort of limiting, it will be limiting, although it looks very bad perhaps on the day's newspaper. Sure. But if you look over a cycle,

you will be limiting. So if your fundamentals are there, the assets, the business that you've invested in or the stock that you've invested in the fundamentals have not changed. Stay the course. Yeah, I think that's the piece of advice that we've been hearing consistently here on money talks is that you look at the market fundamentals or even the businesses fundamentals, funds fundamentals. If they have remained intact over the course of say something like COVID, then it's just best to

stay the course. Don't back out, just don't panic just because you see the first sign of bad news and that premises again, back to our basic that these monies are beer money, right? It is something which you have no sudden need or you don't say that I'm going to, I really need that cash in one month's time because of XYZ. So you got to make sure that this is not the kind of that part of your funds. Hello, everyone. My name is Christina and I'm Adrian and

we're the host of a podcast called Work It. If you never heard of it. Well, it's a good time to tap in, in the last 20 episodes. We've discussed topics like how to negotiate for a salary increase or how to get along with younger colleagues who have different values from you, which incidentally it's our top performing episode. If work consumes your life and you want some perspective on issues like management stress, even office romance, then this podcast should be on your list.

A new episode drops every Monday. Catch us on the CN A app or wherever you get your podcast. So one of the things obviously, and we've talked about this during this conversation, Lawrence is how we use CPF to pay off our housing loans for these younger people in their twenties and thirties, they would either have a BT O or a younger flat relatively or just they're just being that by virtue of the fact that they're younger, they have the option of using their CPF to pay

off their housing loan as quickly as possible. And I know people who have done this, but then they fall into the trap of weak cash flow, for example. So overall using your CPF to clear your housing loan, is this a sound strategy rather than using the money for investments, for example. So again, it boils back down to where are your lazy money for each individual, right?

If your CPF funds at 2.5% is your Laziest money because you have put your funds in things that you can yield 10 15% or whatever or be higher risk, then of course, paying down loans is always a good thing to me. Right. So if you sacrifice 2.5% but you, you are saving 5% on your housing loan, Hey, that's a good carry. So if that's your Laziest money, then of course. Right? But if you have lazy money, then don't, right.

If you have lazier money somewhere, then don't. So at the end of the day, you have to look at where your funds are. So that's the way to sort of make that decision for most younger people with mortgage. My advice is don't forget that your mortgage, you're paying 4 5%. That's a drag on your investment, your overall wealth, right? So you can pay off do so. Ok. Ok. That's good advice. Have you had any stories where

uh CPF investments have gone awry? Any pitfalls that you've heard of that we need to be aware of because I've heard of some myself, but I wanted to hear from you what you've heard on your side. I think the CPF IFI S scheme is relatively ring fenced. Hence, there's always a logic why you can only invest in certain type of products. So where people have lost money it is more because of market risk, right? And they needed the funds immediately and, and it was not

a good time. Hence the milk powder money versus beer money thing. So they were not clear how long term could they deploy the funds. Right. And, and of course, we always always have a camp of people who panic and they decide to withdraw and then they basically crystallize the loss. So the horror stories have been well relatively mild because it's not because of scams or some regulated scheme that has misled. So CPFIS is kind of contained.

So I've not heard of any scam related or people who have invested in, in stuff which have turned negative because they were poorly regulated. Right? Yeah. So CPF SI S is really contained. Ok. That's good. That's reassuring. Ok, so wanted to get your thoughts on the best hacks for growing CPF money within a 20 to 25 year horizon. Ok. Let's hear it. So a couple of things,

I'm going to start with a big picture. Of course, I have to champion money since and if so best hack is invest in yourself, come to our platform ifl we conduct courses for free, including some of these investment topics and a lot more. Secondly, with your twenties and thirties, I would imagine you want to also save on tax and CPF is a good way, we all get tax relief. But if you are starting out and you are not at AC PF wage cap, which is 6000, it's going to

be 6003 in September this year, by the way. So your wage is not there, right? And you have an additional wages that your employer pays you. Maybe for specific duties, not additional duties. You may get some commissions from sales or you may get some employers pay you for your handphone. So some of these go and check out whether some of them qualify as wages, if you can contribute additional wages to your CPF, of course,

that's better and you get additional relief. So those help you on the tax side, right? Um If you're self-employed, many 2030 years could be self-employed. Don't forget to contribute, right? I heard of instances where you don't contribute because you, you think that you, you maybe you are so busy or you don't have the sense that this is the important part because if your salary staff is automated, right? But self-employed, you have to

do it. So contribute regularly as if you are an employee and an employer, both sides top up or a medisave account and these are all tax benefits. So to me, those are the very clear hacks that you should take advantage of. Those are really great hacks. Laurence, I have to say very, very good ones and final advice for young people thinking of dipping their toes into CPF investing, maybe top three pieces of advice. Well, I

like to use the ABC S, right? OK. So first thing investing to avoid investments, which doesn't fit your risk profile if you are going to be panicking and worried all the time to avoid. That second thing is be careful. I call it maybe the formal mentality. Yes. OK. Yes, I think you do that. So you hear somebody says, oh, this is the best game in town and this person says that he made so much money from it. Formal builds up, right? Be very careful to sort of put

that at bay and do your own research. Like go back to the fundamentals, do your own research. Do you have the aptitude and the risk appetite? Is this beer money or milk powder money? Some of these things, right? What is the objective of your investment? And of course, c is always be careful about your CPF two CS, but always be careful with your CPF

because I've lived through the twenties and thirties. I think when I was at the age, I also felt that CPF is something like somehow it takes away my cash flow. I I wish I had the cash flow because I needed for housing. You sort of either belittle it, ignore it or be agitated with it, right? And plus you have a lot of people who may spew wise cracks about the fact that the government is taking your money and stuff.

So you have all these hotspots. But again, I think that the most important thing is don't underestimate the power of CPF, I think for Singaporeans, it is one of the most important financial asset. If you manage it well from young in your twenties and thirties, you will be well placed in your forties and fifties. When you see the benefit of CPF coming back, it's that nest egg that we always thought for sure. So investing your CPF money can be a great way to grow that retirement nest egg.

As long as you keep your eye on the prize like Lauren says, and remember it's a long game that you're playing when it comes to CPFIS. As with all investments, of course, do your homework. Keep on top of developments. Don't get into trends and products you don't understand. Don't give in to that formal thanks, Lawrence for the great advice and for being here today. Oh, you're welcome. It's a pleasure.

And thank you to you, our listener. If you've enjoyed this episode of Money Talks, there's always more content for you to enjoy. Simply follow us on Apple podcasts or Spotify. Give us five stars or leave a review while you're there. The team behind Money Talks is Jacqueline Chan, Joanne Chan, Tiffany, Ang Christina Robert and I'm Andrea. He