The Underrated Investment

All working Singaporeans should know that our CPF account is split into "ordinary" and "special". The ordinary accounts (OA) pays 2.5% interest p.a., while the special account (SA) pays 4%. For both accounts, you can only start drawing down on them when you hit 55 years old.

Why does the SA pay you 4%? Because the government is trying to encourage long term savings. While the savings in the OA can be used to buy a home, pay for CPF insurance or for investment and education, the savings in the SA are for old age, contingency purposes and investment in retirement-related financial products. In other words, once you put money in the SA, it's pretty much stuck there till you're 55 (Note that the transfer from OA to SA is irreversible).

Many people view this as a bad thing, especially since many of us use CPF money to purchase property. However, let us consider the following:

1. It is probably not prudent to liquidate all your worldly possessions to pay for a house, hence it is likely that you're gonna have some savings left over even after purchasing a property
   
2. It is a good idea to start saving for retirement as early as possible so that you can experience the power of compound interest
3. Your bank account gives you a pretty crap interest on your savings
4. Stocks will give you 7-8% pa in the long run, but they are not without risks
5. The current yield on Singapore Government Bonds is around 3+% on the top end, but carries significantly lower risk compared to stocks.
   
6. A sensible asset allocation for your investment portfolio would have to involve some diversification across different asset classes, be they equities, bonds, commodities, etc.

So if we think of the CPF SA as a long term government bond with a practically risk-free 4% yield, that sounds like a pretty sweet deal to me. So instead of buying bonds, transfer more funds into your SA! A strong case can be made for starting these transfers early when one looks at the power of compounding in action.