Why not investing your CPF savings could be a greater risk

[SINGAPORE] For generations of Singaporeans, the Central Provident Fund (CPF) has been the bedrock of financial security.

Its tiered interest rates – 2.5 per cent for the Ordinary Account (OA) and 4 per cent for the Special Account (SA) – are often regarded as the ultimate “risk-free” benchmark. In a volatile world, the psychological comfort of a government-guaranteed return is hard to overstate.

However, as the financial landscape evolves, a “risk-free” return can ironically become a risk in itself – the risk of falling behind. In the recent past, we have gone through a period of high inflation, and the real value of OA balances has struggled to keep pace with the rising cost of living.

When the “science of wealth” is applied to retirement planning, it becomes clear that for many Singaporeans, the greatest threat to their golden years is not market volatility, but the erosion of purchasing power.

The changing CPF investing landscape

Recent shifts in the CPF landscape have brought these considerations to the forefront.

The closure of the Special Account for members aged 55 and above, starting in 2025, has forced many “young seniors” to rethink their strategies. While Retirement Account (RA) savings earn a healthy 4 per cent or higher, any excess from the shuttered SA is now funnelled back into the OA at 2.5 per cent.

This “right-siting” of funds has coincided with a recent discussion in Parliament on the Lifetime Retirement Investment Scheme (LRIS).

In a recent parliamentary session, Minister for Manpower Tan See Leng said that the government is in the final stages of studying the LRIS to provide members with more streamlined, low-cost investment options that strike a better balance between risk and return.

Since the first digital adviser for CPF Investment Scheme (CPFIS) was included in 2019, many changes have been made to lay the groundwork to help CPF members navigate the complicated investment landscape with more clarity and transparency.

The message is clear: The status quo is being challenged. Many segments of the market, including the government and market players, all seem to recognise that for CPF to remain “fit for purpose”, members need better ways to grow their nest eggs beyond the default rates.

Complacency trap: why investing is mandatory, not optional

We are now entering a period where the rising income of Singaporeans means that CPF contributions, coupled with interest payments and top-ups, will increase the total pool of money in CPF accounts.

The maths on the OA returns is simple but sobering. From 1961 to 2024, Singapore’s average inflation was about 2.6 per cent. In the past few years, we have seen spikes as high as 3.9 per cent. If the cost of a bowl of noodles or a doctor’s visit is rising at more than 2.5 per cent, your wealth is effectively shrinking.

To make more use of the CPF balance and reach retirement safety, one must look towards the CPFIS. Historically, many were cautioned against investing, based on data that showed that a majority of investors failed to beat the base rate hurdle. However, this narrative and, more importantly, the data is changing.

Data from the past few years reveals a significant shift. The vast majority of CPF members who invested in unit trusts have actually done remarkably well. This is partly due to a more robust global market and a shift towards more sophisticated, low-cost investment vehicles and digital platforms.

The reality of higher returns

Since 2019, lower-cost and broadly diversified options have become available for CPF members. Investing in a diversified global equity portfolio through such a platform has generated an actual annual average return of 11.2 per cent over the past five years.

Compare S$100,000 left in the OA at 2.5 per cent versus the same amount invested at 11.2 per cent. Over five years, the OA balance would grow to roughly S$113,141. In the investment portfolio, that same S$100,000 would have grown to more than S$170,000.

That is a difference of about S$57,000 – money that could mean the difference between a basic retirement and a comfortable one.

Of course, investing involves risk. Markets can and do go down. But the “science” part of wealth management teaches us that risk is not a binary on/off switch; it is a dial that can be managed through time and diversification.

Furthermore, the longer you invest, the risk of losing money decreases significantly. In fact, over a 10-year horizon, the probability of a globally diversified equity portfolio underperforming a cash rate is statistically extremely low.

Performance gap: unit trusts vs ILPs

Recent CPFIS data shows a stark performance gap between product types.

For years, many Singaporeans were sold investment-linked insurance products (ILPs) for their CPF savings. While these products offer a veneer of “protection” alongside investment, the data suggests they have been a significant drag on wealth.

ILPs have typically underperformed unit trusts by an average of 1 to 1.5 percentage points per annum. This “ILP tax” is often the result of high embedded commissions, distribution costs and complex fee structures that eat into the compounding effect.

In the world of finance, a 1.5 per cent annual drag over 30 years can result in a final nest egg that is 35 per cent smaller.

This is why the role of the adviser has become so critical. In the past, advice was often synonymous with sales. Today, the modern adviser’s role is to provide guidance that is evidence-based and conflict-free.

Adviser’s role in the CPF journey

The reason people struggle to beat the 2.5 per cent OA rate is typically due to human emotions and high costs. Investors often buy when markets are at an all-time high and panic-sell during a dip. They also underestimate the impact of recurring fees that drag on returns.

This is where guidance and support become the critical factors for success over the long term.

Dr Tan’s discussion of the LRIS underscores a national recognition that guidance is a public good. While the LRIS may provide a simplified pathway, proactive investors can already take control of their journey by seeking out platforms that prioritise transparency and long-term success.

Path to CPF millionaire

To become a CPF millionaire, time and discipline are your greatest allies. The journey starts with a simple shift in mindset: viewing your CPF OA not as a savings account, but as a retirement investment account.

Consider the power of compounding. A 30-year-old who invests S$50,000 and contributes an additional S$500 monthly at a 2.5 per cent return would have roughly S$400,000 by age 65.

Assuming a 7 per cent return through a diversified portfolio, that sum balloons to more than S$1.1 million.

The difference isn’t just a number; it’s also life options. It is the ability to choose when to retire, how to care for one’s health, and how to support the next generation.

We have always advocated for rational, data-driven decision-making. Today, the data is telling us that the perceived “safest” choice – doing nothing with your CPF – might actually be the riskiest long-term strategy for your retirement.

With the upcoming refinements to the CPF scheme and the potential implementation of the LRIS, Singapore is entering a new era where options to reach retirement adequacy will increase and the probability of a better outcome can be enhanced.

But you don’t have to wait for policy changes to take the lead. By moving away from high-cost ILPs, embracing low-cost unit trusts, and leveraging professional guidance to navigate market cycles, every Singaporean has the chance to turn their CPF into a powerful engine for wealth creation.

The guaranteed rate is a floor, not a ceiling. It’s time we started looking up.

Samuel Rhee is group chief investment officer, and Hugh Chung is chief investment officer at Endowus, a digital wealth platform with S$15 billion in regional client assets across public, private markets and pension (CPF and SRS)