What does it mean to treat CPF SA as bond component? - Seedly
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Anonymous

Asked on 29 Oct 2020

What does it mean to treat CPF SA as bond component?

Is it to cater some % to RSTU via CPF (safe) and the rest of spare cash can be deployed 100% for more risky equities? (Of cos with emergency funds set aside).

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The CPF accounts gives pretty good fixed income returns, bonds or treasury bills nowadays don't give returns higher than the CPF accounts. Thus, some choose to see allocating money to CPF accounts as "buying bonds"

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Yes, you are right.

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Hi anon,

To treat CPF SA as a bond component just means that you are utilizing the fact that it is backed by a triple A government give a (pretty much) fixed coupon of 4%, that's reinvested.

After 55, when you can withdraw your CPF in excess of FRS, your SA is pretty much a perpetual bond giving a 4% coupon that you can either reinvest or cash out.

However this assumes a very long horizon (till 55) and CPF should not be treated as something that can be liquidated in an emergency. You should, as you have said, ensure that emergency funds are still available.

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Yes I believe so. Essentially you can treat ur SA as part of your bond portion and invest the rest of your spare cash towards a larger proportion of equities, since your SA guarantees returns of 4% p.a.

However, do take note that if you plan on liquidating your investments before 55yo (when you can draw out the excess from your CPF after setting aside the minimum sum), then it might be wise to instead not treat the SA as a bond component, since that sum of money inside can't be used for your shorter-term investment goal. This is to hedge yourself from downside risk for your shorter-term investment.

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