In financial markets, 2022 has so far not played out the way most expected. The Ukraine-Russia war, record inflation, the Federal Reserve’s sharp interest rate hike, and the same issue that has plagued us since 2020 – COVID-19 – have made 2022 one of the most volatile years on record. the financial markets.
Apart from the crypto crash earlier in the year, the traditional financial market has also seen a significant decline. Since the start of 2022, the S&P 500 is down about 20% while the Nasdaq-100 is down about 28%.
Even bonds, traditionally viewed as a safe haven for investors, underperformed as interest rates rose. The ABF Singapore Bond Index Fund, a bond ETF that invests primarily in bonds issued by the Singapore government or Singapore government-related entities, is down around 8% over the past 12 months.
With uncertain markets, some may prefer to keep their savings in cash. Yet with inflation at an all-time high – CPI-All Items inflation is 5.6% in Singapore in May 2022 (the highest since late 2021), keeping your money in a savings account is a safe bet. losing the purchasing power of your money over time.
So if we don’t want to invest in an uncertain market for fear of losing even more money, but don’t want our savings to be eroded by inflation, what should we do?
CPF Refills – A sure way to grow our money for the future
For Singaporeans and PRs, CPF top-ups are a way to keep growing our savings for the future.
It should be noted that there are two types of CPF refills – The CPF Voluntary Contributions & the Supplementary Retirement Scheme (RSTU). When we contribute to the CPF via the Voluntary Contributions scheme, we fund the three CPF accounts (Ordinary, Special, MediSave). On the other hand, for the RSTU, the funds only go to our special account or retirement account (for people aged 55 and over). Both of these methods can be used to top up our CPF accounts.
You can read more about the main differences between CPF voluntary contributions and RSTU.
Since the base interest rates for funds in our CPF ordinary account and our special/MediSave account are 2.5% and 4.0% respectively, CPF is a good alternative to continue to grow our savings. in an otherwise volatile financial market.
In fact, that’s exactly what many Singaporeans and PRs do. According to the recently released CPF Annual Report 2021, CPF voluntary top-ups continued to reach new heights, with $4.8 billion cash top-ups and CPF transfers made to their own or loved ones special account or retirement account, representing a 60% increase from $3 billion in 2020.
Refills were made by 294,000 PCF members, about half of which are refueling for the first time. If you’re one of those first-time top-ups in 2021, thinking you’re an exception, there are also plenty of other first-time CPF members who top-up voluntarily.
For CPF skeptics who are surprised by this number, don’t be. As Dinesh wrote in an article earlier this year before the latest information was published, the CPF has evolved into a safe haven for Singaporeans and PRs given the uncertainties we are currently experiencing such as war, high inflation and COVID-19.
In total, the CPF paid a total of $18.3 billion in interest in 2021, compared to $16.8 billion in 2020. With a total of 4.1 million members, this represents an average of approximately $4,463 in interest per CPF member.
Read also : How CPF became a haven for Singaporeans
Despite the stable interest rates we can earn with CPF, it has a downside, the biggest one being that it is an illiquid asset. In the financial definition, it means that although it has value as an asset, it cannot be quickly or easily converted into cash.
Voluntary top-ups of our CPF accounts mean that the use of funds will be limited, at least until our 55s and 65s.
As the market interest rate increases, would the CPF become less attractive?
The stability of the CPF’s interest rate is generally seen as a strength, especially during periods of low interest rates when a CPF member would not be able to earn similar returns in the financial market without assuming a much higher investment risk.
However, in a high rate environment, the rates offered by CPF naturally become less attractive.
For example, from July 2022, Singapore Savings Bonds (SSB) offer an average interest rate of 3.00% per annum if you hold them for 10 years. If you hold it for 3 years, the average interest rate yield is 2.63% per annum, higher than the base interest rate that our CPFOA can give us.
Additionally, with the SSB, we maintain a high level of liquidity as we can withdraw our funds at any time, with no penalties other than a $2 redemption fee. So comparatively, that would make our voluntary CPF supplements less attractive.
However, unlike CPF where your interest returns are automatically compounded, SSB interest returns are paid out, which means investors who want to grow their savings over time must manually reinvest the payouts on their own.
Along with the SSB, our CPF refills will continue to be the safest place we can park and grow our savings for the future.
Read also : Complete Guide to Buying Singapore Savings Bonds
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