Should I use CPF to invest in T-bills for a secure retirement?

Recent market data shows that T-bill yields can sometimes exceed the default interest rate of the CPF Ordinary Account. However, before using your retirement savings, it's crucial to evaluate if you should I use CPF to invest in T-bills as part of your financial strategy.

Quick Summary

Using your CPF Ordinary Account (OA) to invest in T-bills is a viable option for potentially higher returns, but requires careful consideration of the trade-off involving lost CPF interest and investment duration. For your Special Account (SA), the guaranteed 4% rate makes investing in T-bills generally unadvisable.

Key Points

• Opportunity Cost is Key: Investing CPF-OA funds into T-bills means forfeiting the monthly 2.5% CPF interest during the investment period. The T-bill yield must be high enough to offset this loss for a net gain.

• SA is Better Left Alone: With a guaranteed 4% p.a. return on your CPF Special Account, the low-risk T-bill yield is unlikely to justify the risks and lost guaranteed interest.

• Consider Your Horizon: T-bills are short-term investments (6 or 12 months) that offer relatively quick returns, but may not be ideal for a long-term retirement strategy focused on maximum growth.

• Understand the Requirements: To invest with your CPF-OA, you must have an investment account with an agent bank, complete the SAQ, and maintain a minimum balance of S$20,000 in your OA.

• Risk vs. Guaranteed Return: The decision boils down to whether you prefer a potentially higher but variable T-bill yield or the security of the CPF-OA's guaranteed 2.5% p.a. interest.

• Factor in Timing and Fees: Your timing for T-bill applications can affect the amount of CPF interest forfeited. Also, remember to account for agent bank fees when calculating your potential returns.

Understanding the CPF Investment Scheme (CPFIS)

To use your Central Provident Fund (CPF) savings for investment, you must participate in the CPF Investment Scheme (CPFIS). This scheme allows eligible members to use a portion of their Ordinary Account (OA) and Special Account (SA) savings to invest in approved financial products.

CPFIS-OA vs. CPFIS-SA

It's important to differentiate between using your OA and SA for investments:

• CPFIS-OA: Requires a minimum balance of S$20,000 in your OA. Allows investment in a wider range of products, including T-bills, stocks, and unit trusts. Uninvested OA savings earn a risk-free interest rate of 2.5% p.a., with extra interest on the first S$60,000 of combined balances.
• CPFIS-SA: Requires a minimum balance of S$40,000 in your SA. Restricts investments to lower-risk products. The guaranteed interest rate for SA savings is higher, at 4% p.a., with extra interest on the first S$60,000 of combined balances. This higher rate makes SA investment less compelling, as the potential gains from a low-risk product like T-bills may not justify the risk and opportunity cost.

T-bills vs. CPF Interest Rates: The Crucial Calculation

The primary motivation for using CPF to invest in T-bills is the potential to earn a higher yield than the default CPF interest rate. However, this comes with a significant trade-off: lost CPF interest.

The Opportunity Cost of Lost Interest

When you use your CPF-OA funds for a T-bill, the invested amount will not earn the standard 2.5% p.a. interest during the investment period. This is because CPF interest is calculated on the lowest balance of the month. The investment process often causes you to lose up to two months of CPF interest, impacting your total return.

For a T-bill investment to be worthwhile, its yield must be high enough to compensate for this lost interest plus any brokerage or agent bank fees. The break-even yield for a T-bill using CPF-OA is therefore higher than its stated yield. This calculation is crucial for older adults who rely on the compounding effect of CPF savings for retirement.

Recent T-bill Yields

Historically, T-bill yields have sometimes offered better returns than the 2.5% p.a. from the CPF-OA. However, these yields fluctuate based on economic conditions. As interest rates change, T-bill yields can decrease, potentially dropping below the CPF-OA rate. It is essential to check the latest T-bill cut-off yields before making a decision.

Risks and Considerations for Senior Investors

While T-bills are considered low-risk, using your CPF for investment is not without considerations, particularly for those nearing retirement.

• Market Volatility: While T-bills are generally safe, CPFIS investments are subject to market fluctuations. Should you decide to sell your T-bills on the secondary market before maturity, you could receive a lower price than you paid.
• Lock-in Period: Once CPF funds are invested, they are locked in until the investment matures or until you reach 55, when you can withdraw after setting aside the Full Retirement Sum. This reduces your liquidity, which may be a concern if you need the funds for housing payments or other commitments.
• The SA Closure: With the SA for members aged 55 and above closing in early 2025, any balances above your Retirement Sum will be transferred to your OA, which earns a lower interest rate. This change affects the overall interest earned on your combined savings and underscores the need for sound financial planning.

How to Invest in T-bills with your CPF

If you decide that investing your CPF-OA funds in T-bills is right for you, here are the steps involved:

1. Complete the CPFIS Self-Awareness Questionnaire (SAQ): This is a mandatory requirement for new investors to assess their financial knowledge.
2. Open a CPF Investment Account (CPFIA): You can do this with one of the three CPF agent banks (DBS, OCBC, or UOB).
3. Apply for T-bills: Place your bid through your agent bank, specifying that you are using your CPF-OA funds. Ensure you have sufficient funds in your CPFIA and meet the S$20,000 minimum OA balance.
4. Wait for the Auction Results: If successful, the funds will be deducted from your CPFIA, and you will be informed of the cut-off yield.
5. Reap the Rewards: Upon maturity, the principal and interest will be credited back into your CPFIA, and can be transferred back to your OA.

Comparison Table: CPF vs. T-bills vs. Fixed Deposits

Feature	CPF Ordinary Account (OA)	CPF Special Account (SA)	T-bills (via CPF-OA)	Cash Fixed Deposit
Interest/Yield	2.5% p.a. (guaranteed minimum)	4% p.a. (guaranteed minimum)	Variable (subject to auction yield)	Variable (market-dependent)
Risk Level	Risk-free	Risk-free	Very low risk (if held to maturity)	Low risk
Liquidity	Limited, until age 55 withdrawal	Limited, until age 55 withdrawal	Locked for 6-12 months	Locked for fixed term
Suitable for	Capital preservation, housing payments	Stable, long-term retirement growth	Short-term growth, if yield beats OA rate	Emergency funds, short-term goals
Opportunity Cost	N/A	High (forfeits 4% p.a.)	Loss of OA interest during tenor	Potential for lower return vs. other options

Conclusion: Making the Right Decision for Your Retirement

Deciding whether to use CPF to invest in T-bills depends heavily on your individual financial situation, risk tolerance, and investment horizon. While T-bills can offer a higher return than the 2.5% p.a. rate from the CPF-OA, you must account for the lost CPF interest and potential transaction fees. For those with a low risk appetite or who may need their OA funds for housing in the near term, leaving the savings to compound at the guaranteed rate might be the more prudent choice. Conversely, if you have a long-term horizon and are comfortable with the minor risks, investing could potentially enhance your retirement nest egg.

It is crucial to be well-informed and cautious. For additional authoritative guidance on the CPF Investment Scheme, you can consult the official Investing your CPF savings guide on the CPF Board website.

Frequently Asked Questions

What is a T-bill?

A Treasury bill (T-bill) is a short-term, low-risk debt instrument issued by the Singapore Government. It is sold at a discount to its face value and pays no coupon, with the interest coming from the difference between the purchase price and the face value at maturity.

Can I use both my CPF Ordinary and Special Accounts to invest in T-bills?

Yes, T-bills are on the approved list for both CPFIS-OA and CPFIS-SA. However, given the higher guaranteed interest rate of 4% on the SA, it is generally not a recommended strategy to use SA funds for T-bills, as the yield is often lower than the guaranteed rate.

How do I calculate if the T-bill yield is worth it for my CPF-OA funds?

You must compare the potential T-bill yield against the lost CPF-OA interest. The T-bill yield needs to be sufficiently higher to overcome the opportunity cost of losing approximately one to two months of interest on your CPF-OA funds, in addition to covering any investment fees.

What happens if I need my CPF funds for housing while they are invested in T-bills?

Your CPF funds are locked into the T-bill for the duration of its tenor (6 or 12 months). During this time, you cannot use them for housing loan repayments or other purposes. You must have a clear plan for your housing expenses if you choose to invest a portion of your CPF-OA.

Are there any fees for investing in T-bills with my CPF?

Yes, agent banks typically charge fees for processing CPFIS transactions, which can include administrative fees and brokerage charges. These fees will eat into your total returns and must be factored into your decision-making.

What is the minimum amount I need to invest in T-bills with CPF?

You must have at least S$20,000 in your Ordinary Account to be eligible to invest the excess under the CPFIS-OA. The minimum investment amount for a T-bill is typically S$1,000.

What happens to my invested funds when I turn 55?

After setting aside your Full Retirement Sum (FRS) in your Retirement Account (RA), you can withdraw any remaining investments and cash balance in your CPF Investment Account. You can choose to hold or liquidate your investments at that point.