Should You Max Out Your CPF Voluntary Contributions Every Year?

More People Are Choosing To Put Their Money In CPF

With greater financial literacy, many Singaporeans have started to recognise the country’s Central Provident Fund (CPF) system as a great tool to accumulate wealth. Interestingly, in the 2017 Melbourne Mercer Global Pension Index, Singapore ranked well inside the top 10 countries with the best pension system, of which CPF is a big component.

The CPF is becoming an increasingly popular choice for many Singaporeans primarily because we are able to earn a good return, of up to 4% on our Special Account (SA) and up to 5% on our Retirement Account (RA), on our investments.

Best of all, we can do this without much financial knowledge or taking on almost any investment risk.

In addition, the money we put into our CPF can also be used to offset taxes or place you in a lower tax bracket, up to $7,000 each year, and also build towards your retirement sum.

This behaviour not confined to only the younger generation, many older Singaporeans, who have tended to view the CPF system negatively, have changed their minds (or least those that we’ve been interacting with).

To give this some context of just how popular the CPF has become, in its latest annual report for 2016, CPF highlighted that there was a total of 146,340 cash and CPF top-ups amounting to $1.8 billion to CPF members’ Retirement Account and Special Account in 2016. This was a 30% increase in terms of number of top-ups and a whopping 96% increase in terms of total amount compared to 2015.

But, should you always maximise your top-ups, of up to $7,000, each year just because it’s such a great deal?

4 Reasons You May Not Want To Maximise Your CPF Top-Ups

We didn’t ask a trick question above. We’re just trying to explain that there are always further considerations we need to think about no matter what the investment product – even a great one like the CPF. Here are four things you need to think about before maxing out your CPF top-ups each year.

#1 There Are Other Investment Opportunities Out There

Other than your CPF, there are many investment tools available to you.

You should consider diversifying into them to potentially earn better returns or just to keep liquid investments.

Given its volatility, stocks offer you the potential to earn better returns over the long-term. You can also take greater risks, and earn even better returns, in the stock market if you’ve already got your bases covered in your CPF. Stocks also tend to be more liquid, especially when compared to your CPF.

You can also invest into bonds, which are less volatile but offer greater liquidity than your CPF, as well as properties, where you can utilise low cost leverage to buy an expensive asset. There are many other asset classes you can consider too – this includes the latest trending investments such as bitcoins or Ethereum, to investment-linked products sold by banks. Of course, all these asset classes come with higher risks, and you should carefully research your options.

Maxing out your contributions to your CPF accounts may leave you short on funds to explore these other types of investment opportunities.

#2 You May Have Other Priorities In Life

Another reason you may not want to squirrel away too much of your cash into your CPF is that the process is irreversible – and you cannot take out what you’ve put in.

This is important if you have other priorities in life such as contributing to your parents’ or grandparents’ monthly expenses, experiencing the world or even wanting to further your education after a few years.

You need savings to be able to afford some of these responsibilities or indulge some of these life goals.

By maxing out the amount you can top-up into your CPF accounts, you may not have enough for fulfil these responsibilities and/or life goals.

#3 Saving Too Much Today May Lead To Liquidity Problems Tomorrow

If you’re stretching yourself to put in the maximum amount each year, you may find yourself in need of cash if an unfortunate situation arises.

As mentioned, you don’t have the flexibility to take out what you’ve put into your CPF.

If you’re stretching yourself to put in the maximum amount each year, you may find yourself in need of cash if an unfortunate situation arises.

In instances where you lose your job, a family member falls ill or even if one of you or your spouse wants to quit work to take care of your child, you may find yourself in need of cash to do so. Even if you want to take a calculated risk starting a business, you may not be able to do so if you don’t have enough start-up capital or money to tide while building your business.

#4 You May Be Giving Up Early Retirement

Your CPF monies are tied up until you’re at least 55 years-old, and even then, you will only get to withdraw balances above your retirement sum. This means you may not be able to head for an early retirement as both returns and balances remain locked until you turn 55.

In effect, you’ll likely not be able to retire early embarking on an investment plan unless you’re really successful in your business or career.

And as mentioned, tying your money up from a young age may also limits your ability to start a business in the first place.

Anything thing you need to consider is a change in policy to delay withdrawals. Already, there’s a re-employment age up to 67 years-old. Further, the current scheme encourages people to delay disbursement until they are 70. With life expectancy set to rise as we age, policies of when we can take our money out might change.

These are important considerations you need to think about before maxing out your contributions to your CPF accounts each year.

This article is republished with permission from Dollars and Sense.