As an investment blog, I seldom talk about the dimension of personal finance, but after hearing from the Budget 2024 about the changes to the CPF Special Account (SA) and seeing the vast number of reactions to it, I decided to pen this post on the issue. The reasons being first, it somehow affected our step-down plan; second, it touches on the topics of portfolio drawdown and the portfolio multiverse, which are chapters in my eBook; and third, a lesson on risks and diversification.
To summarize in a one-liner: from 2025 the SA would be closed for all who are 55 years and above of age, and any balance from the SA would move to the Ordinary Account (OA) after setting aside the selected retirement sum into the Retirement Account (RA), if applicable. This meant that SA “shielding” (investing the SA funds to “shield” it from being swept into RA) and the subsequent treatment of SA as a high-yielding interest account would be rendered useless.
Our Step-Down Plan
With the announcement on Friday, many people online and my friends and acquaintances were busily recalculating the retirement models on their spreadsheets, and we did the same, too. Our moment of step-down was after the age of 55, and we used the assumption of no SA shielding to keep things projectable and simple. With the new ruling, however, two parts of our model were affected: the loss of an additional 1.5% thereabouts compounded from the supposed balance in SA, and the calculation of yield/withdrawal rate of our step-down income from CPF. For the former point, after reworking the numbers, the loss from a lesser compounding effect is not that much as our runway between 55 and the step-down age is relatively short.
For the latter point, instead of using a generic 4% yield/withdrawal rate across our portfolios (which was based on the SA’s 4%), we would have to use two sets of withdrawal rates: 2.5% for the OA portion and 4% for the rest of the portfolios. With the new numbers, our projected annual income is down by around 9.5%, and to us we are still comfortable with the new amounts.
As mentioned in this post on our step-down, a good financial plan takes a lifetime, and this SA closure thing is an example of the kind of scenarios where you need to relook at your models and figures, and adjust accordingly to fit into the changing situations.
The Importance Of Diversification
Personally, I dislike the word “riskless” and yes, risks are everywhere. The only thing that differentiates between the risks is the probability of them happening. The false security comes when one who did not experience a risk happening would assume that the item/event would never occur, and thus label it as riskless.
Why I brought in the topic of risks is the general assumption by some on CPF keeping the things they are in years to come. While it is known that the risk of CPF not paying interest is close to zero, there is another that few did not realise is policy/regulatory risk, which is the possibility of change of rules and regulations pertaining to a policy. If one remembered decades ago (for younger ones you can approach your family elders to verify), one’s CPF funds could be fully withdrawn at age 55, and OA rates were once 6.5%.
The main countermeasure to reduce (not eliminate) risks is my oft-preached act of diversification, not just on asset classes but also portfolios, hence our portfolio multiverse concept. Whilst the CPF itself is reliable in fulfilling financial obligations of safekeeping of funds and interest payments, it is good to have at least another investment portfolio funded with cash to augment the former, just in case there are further policy changes. Overall, it is not recommended to base an investment and income strategy solely on one portfolio or even asset class.
The Search For Alternatives
The caveat that I want to put here is, besides RA, there is no known financial instrument (at least to me) that offers the near-consistency and simultaneous low risk level and high yielding characteristics of SA. So, if one plans to have a higher CPF Life payout from age 65 onwards, topping up RA to the prevailing Enhanced Retirement Sum would be a prudent idea.
For those who are not eligible for CPF Life yet and/or wanted to have a higher-than 2.5% yielding cash flow, some risk would have to be taken in the form of investing in equities for growth and/or dividends, and it would be better if the investment time horizon is long. There are bonds, too, and they are currently favoured with the prevailing high interest rates, like fixed deposits. Still, everyday is not a Sunday for equities, bonds, or even real estate investment trusts (REITs) and commodities due to the phenomenon of market cycles.
Like it or not, we would need to take it upon ourselves to learn and look for other alternatives if one door is closed. If the world of investment is too daunting, then approach it passively and periodically (e.g., dollar cost averaging into index exchange traded funds). The final word here is there is no excuse for not learning, for it is one’s own financial future that he/she is responsible for.
Reference
https://www.cpf.gov.sg/member/infohub/news/cpf-related-announcements/budget-highlights-2024?cid=cpfprel:bn:bau:alsgm:cpfoverview:cpf101:announcements
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