AMA Christopher Tan
Asked by Anonymous
Asked on 24 Jan 2019
CPF is risk free, but there is a component of liquidity risk unless at 55 right?
Top Contributor (May)
Dear anonymous, thank you for your question and sorry for replying late. My conviction has always been that insurance is not meant to be an investment. The word "insurance" tells us that it is meant to "insure", to protect us. Insurance as a saving and investment tool is expensive and the returns may not be suffiient for us to reach our goals. However, if you really want to use insurance for savings, using endowment plans are acceptable, though really not what I prefer. Using ILPs is a no no because it is too expensive.
Investment need not be complicated. It is only complicated when you have to guess what to invest, when to invest and when to pull out. The truth is, even professionals do not know for sure and are simply guessing. There are enough studies to show that active managers (those who try to guess when is the best time to get in and out) do not beat the market and eveb if they do, they do not beat it conistently. So some words on investments:
Do not time the market
Use low cost instruments such as ETFs and Dimensional Funds. Low cost = less than 0.5% p.a in management fees
Stay invested over the long term (10 years and above)
If you do that, you will get sufficient returns to meet your goals.
As for CPF, it is true that when you contribute your CPF, you cannot take it out until age 55. However, it is not true that you have no liquidity. You can still use your
OA - For paying mortgage, lend it to your children to pay their fees if they study in local tertiary institutions and you can also invest monies in OA.
SA - You can invest your monies (although I strongly discourage you to do so)
MA - You can use it to pay medical expenses and premiums for approved insurances.
Hope this helps.
Is this a trick question? I sincerely hope its not.
1) What has insurance got to do with investment knowledge? What is the basis of insurance? Why not understand what is insurance in the first place?
Insurance is a financial hedge tool against unknown known risk. (E.g gives you money when you die so that your dependents will not suffer financially if you are not around anymore etc). or (e.g gives you money to cover the income due to a cancer / extreme heart attack, so that you can focus on recovery while not worrying about no income).
Whole Life insurance - Protects your dependents in your life time (aka 99 years). Protects you from longevity risk (living longer than normal) by having a sum of money when you outlive 100 years old.
Term Life - Cheap cover for a term (period of time) rather than 99 years. (except that there is now 99 term insurance now).
Investment knowledge - Knowledge to do investment, reading charts, reading economy, reading the interaction between economies (or just business sense but buying other people's business aka stocks). Reading profit and loss (basically a lot of reading ops).
So back to your question... you should buy insurance only if you have a need for them.
(2) Health (that's why people buy health shield to cover hospitalisation)
(3) Health / Critical Illness coverage (for income replacement if necessary, most of the time 5-7 times annual salary)
(4) Accident (to claim accidental issues)
(5) Disability income (imho, only value if you earn 6k or more).
So its all about your needs. Nothing to do with investment.
(2) CPF has no liquidity risk. Rather, its more about policy and governmental restriction risk, that contributed to the liquidity risk. The goalpost may be shifted. The government has spoken (or at least drop lots of hint telling us they want us to retire at 70 instead of 65). You can still retire provided you do not require much from CPF. If you like more formal and in-dept answer, you need to give us more information.
Hope this helps.
Well you can always 1) Get investment knowledge or 2) Outsource those investments. Even crappy investors through MAS-licensed platforms will probably make you some money. Or you can brainlessly invest in the STI ETF, which is pretty awful to knowledgeable investors but its not like you'll lose money across a 20 year period (and I can say that confidently because if you did it basically means we're stagnant for 20 years and totally screwed).
You could get a whole life insurance plan if you like, or buy a term plan and savings plan separately. That would make life pretty easy, make money and get coverage without needing to stress on things you're not interested in or don't know about. It's incredibly inefficient to stress on said things when you should be focusing on being the best you can be at your job (and thus increasing your earning power ballistically).
I'd say CPF has liquidity risk. It's naive to think that it'll stay at its liquid point of 55 forever, based on the many changes made in the last 15 years. It might be for your good, but it wouldn't change the fact that its up for grabs regardless of what you want.
Do talk to me if you'd like a consult on what kind of plans you should get.