You will calculate the hurdle rate for your CPF and decide whether investing it makes sense for you.
Kelvin had a hurdle rate from lesson 4.2 and a cost list from lesson 4.3. What he didn't have was a picture of what the decision meant in dollars, over the years he would actually hold the money. This exercise builds that picture in a spreadsheet and ends with a written decision. It takes about twenty-five minutes.
You need the current OA and SA interest rates from cpf.gov.sg, the yearly cost figure you worked out in lesson 4.3, and an amount you are considering investing. The rates in the worked example are made up.
Make labelled input cells for the amount, the account it would come from (OA or SA), that account's CPF interest rate, the total yearly cost of the investment, the number of years, and three gross return levels: low, middle and high. Gross means before costs.
Pick return levels you can defend, not ones that flatter the idea. A sensible set is one at or a little below the CPF rate, one in the middle, and one that would be a good result for the kind of product you would buy. Write down where each figure came from.
Kelvin's inputs, with example figures: S$15,000 of OA money, an example OA rate of 3% (not the current rate), yearly costs of 0.8%, ten years, and gross returns of 3%, 5% and 7%.
Make one column for years 0 to 10. The next column is the amount left in CPF. Each year it is last year's value times one plus the CPF rate. Three more columns hold the amount invested at each return level, where the yearly growth is the gross return minus the yearly cost.
After ten years, Kelvin's S$15,000 left in the OA grows to about S$20,158.75. Invested, it reaches about S$18,646.62 at a 3% gross return, which is 2.2% after costs. At 5% gross, 4.2% after costs, it reaches about S$22,634.37. At 7% gross, 6.2% after costs, it reaches about S$27,373.88.
Add a row underneath with the difference between each investment path and the CPF path. Kelvin's are about minus S$1,512.13, plus S$2,475.62 and plus S$7,215.13. The low case made money every year and still finished behind.
Add one more cell for the break-even gross return: the CPF rate plus the yearly cost. For Kelvin that is 3% plus 0.8%, or 3.8%. Check it by putting 3.8% in as a return level. After costs it grows at 3%, the same as the OA, and finishes at the same S$20,158.75.
Chart the four paths as lines over the ten years, with the CPF line in a different colour. The chart shows the decision at a glance: everything above the CPF line is the reward for taking risk, and everything below it is the cost of being wrong.
If you are looking at SA money, run the sheet again with the SA rate. The break-even jumps, and the low and middle cases usually fall below the line.
Under the chart, write your decision in two or three sentences, then the conditions that would change it. A decision isn't only invest or don't. It can be invest a smaller amount, invest later, or invest cash instead.
Questions that help:
Will you need this money for a home, an instalment reserve or education within the ten years? How confident are you in the middle return, and what does the low case cost you in dollars? The money is meant for retirement. Would you hold on through a fall of a third without selling? Could you take the same risk with cash instead, where gains are free to use?
Kelvin wrote: "Not now. My OA is going into the flat over the next two years, and I would be taking market risk with money I need on a fixed date. The middle case beats the OA by about S$2,476 over ten years, which isn't enough to justify the risk while my OA reserve for instalments is thin. I will look again when the flat is bought, my OA holds six months of instalments above the CPFIS threshold, and I can leave the money invested for at least ten years. I will take my investing risk with cash for now."
Yours is done when it has labelled inputs with today's CPF rate and your full cost figure, a ten-year table with a CPF column and three investment columns, a difference row, a break-even cell that checks out, a chart with the CPF line clearly marked, and a written decision with the conditions that would change it.
Build the sheet with your own amount, account and costs, and keep it with your top-up plan from lesson 3.5, because the two decisions compete for the same savings.
Build the hurdle rate sheet, chart the outcomes, and write your decision on investing CPF and the reason.
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