Why the CPF is bad for you

In September last year, Deputy Prime Minister Tharman Shanmugaratnam said that "over the last 10 years, more than 80 per cent of those who invested through the scheme would have been better off leaving their money in the CPF Ordinary Account". I have written a post about it: here.

The Ordinary Account provides returns of 2.5% for amounts above $20,000. 45% of investors lost money through the CPF Investment Scheme while 80% did not made returns above 2.5%. In other words, unless you are the top 20% in Singapore, the CPF is actually good for you.

You are more likely to earn higher returns leaving your money in your CPF

Before age 55, you will earn 3.5% on your first $20,000 and 2.5% for balances above that. At age 55, your Ordinary Account becomes a Retirement Account, and you earn interest of 4% till age 65, where you can start your withdrawals under CPF Life.

piggy bank

What are your chances of earning at least 2.5% or 4% per annum? In theory, it isn't hard. If you adopt a passive investing strategy, history has shown that you would have earned 4-5% above the risk free rate which is about 2% in the past 30 years, giving a total of 6-7%.

However, because of human greed and fear, most investors simply do not earn this return. It is likely that you are better off leaving your money in your CPF. Or, you could adopt a Dollar Cost Averaging strategy, investing a fixed amount of money each month into an International ETF.

With CPF Life, the returns from your CPF become even hard to beat

Before age 55 and before age 65, you would have grown your savings in your CPF at maximum 4%. You would be astounded at how much returns the CPF Life actually gives out. For this example, I will use the Full Retirement Sum.

With the FRS, you will need to have $166,000 in your Retirement Account at age 55 and you must leave it untouched till age 65. At 4% per annum, this grows to $245,721 at age 65. Thereafter, you will receive monthly payouts of $1,280 to $1,380.

On a yearly basis, this is a yearly payout of $15,360. You can use the annuity formula to calculate the returns of your FRS.

$15,360 / $245,721 = 6.25%

In other words, having a FRS is akin to having a bond that pays out 6.25% coupon yearly, forever. Do you think it is good enough? You can do a comparison with the withdrawal rate if you were to finance your retirement yourself.

The Trinity study in 1998 found that withdrawing 4% of your investment yearly would safe enough to not deplete your investment account. I have given it a buffer and suggested 3% as the safer withdrawal rate due to more uncertainties in the future.

Edit: Since you will not receive your principal, the rate of return is closer to 0.7%. Thank you to all who pointed it out. Since the return is only 0.7%, it is much easier to adopt a passive investing strategy and adopt a 3% withdrawal rate.

I made a mistake in the title!

CPF and CPF Life is actually a good retirement hack. One, it overrides your behavioural instincts by forcing your savings. Two, the rate of return is nearly unbeatable for a risk-free rate of return. If you don't have confidence in your own investing abilities, CPF is your best bet.

In fact, that is the purpose of it, to help the average Singaporean plan for their retirement. If however, you strongly feel that you can invest better, or simply adopt the passive investing strategy, go head and you will do even better.

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Write comments
Choon Yuan
15 January 2017 at 19:48 delete


You do know that the FRS is not akin to having a bond that pays out 6.25% coupon yearly. This is because you will not recover the original sum of your money put in unlike bonds where you get the principal at end of maturity.

In this sense, the CPF payout from CPF life is only about 3-4% returns.

15 January 2017 at 20:39 delete

Hi Choon Yuan,

Thanks for dropping by. It is, in fact, unlike a bond because you do not get back the principal. In that sense, you are right.

However, the rate of return is still 6% due to the annuity formula. In the annuity formula, you expect to hold the bond till maturity, and even if you redeem it at the end, the present value of that will be negligible.

Vikas Sharma
15 January 2017 at 21:13 delete

You do not seem to understand the difference between a bond and an annuity. Your example of the 6.25% yield makes little sense

15 January 2017 at 21:14 delete

Matured bond at the end will still return you the principal amount. Hence it isa lot lower than 6%. I will be happy to even have 3% for cpf life.

Cpf life return is unfavourable to most ppl. I will not touch on the technical here.

15 January 2017 at 22:10 delete

What you both said makes sense. I realise I have made a grave error in my calculations.

Assuming an average life expectancy of 82 years old in Singapore, having a yearly payout of $15,360 for 17 years from a base of $245,721 gives a rate of return of only 0.68%.

Thank you guys for pointing this out.

15 January 2017 at 22:10 delete

Thank you for pointing it out. I have made the correction.

15 January 2017 at 22:35 delete

CPF Life is social pooling insurance cum pension scheme. Who will benefit from CPF Life? It will depend on one's life - shorter or longer. Nobody knows! No point trying to calculate CPF Life unless one is so sure how one lives.