As an accountant, I find the P&L approach towards my Income & Expenses and the BS approach towards my Assets & Liabilities to be an effective way to approach my personal finances. After all, the numbers don’t lie and are less open to interpretation. Every month, some of our income goes towards managing our expenses and reducing our liabilities, while the remainder of our income goes towards increasing our assets. However, there is a portion of our monthly income that we never receive as cash and this refers to the Central Provident Fund (CPF) contributions from our employers and us. These contributions get allocated directly to the Ordinary Account (OA), Special Account (SA) and Medisave Account (MA).
CPF is one of those topics that is almost always going to be mentioned in a personal finance blog. There is plenty of online content discussing CPF’s merits and demerits. I reckon it is more useful for me to write about how CPF fits into our asset portfolio. This is important for us to understand considering how a significant portion of our monthly income is allocated as CPF contributions.
How do we view our CPF and Investment Portfolio?
We view the OA and SA as retirement funds (focus of this post) and the MA as medical funds. The purpose of our investment portfolio consisting of the ETF, Share and Other portfolios has always been to be a tool for us to achieve financial independence. This should allow us to focus on work activities that are rewarding & fulfilling and leisure activities that are fun & enjoyable without having to worry about money. This means that the investment portfolio should really be considered as financial independence funds. We tend to view this separately from the retirement funds.
What are Retirement Funds (OA and SA)?
If you think about it on a timeline basis, the financial independence funds are likely to be used more heavily until we are age 65 – 70, since we can still be active in our work and travel. After that, the level of work and leisure activities are likely to start dropping off. Although we expect the remaining financial independence funds to still have a key role to play in our retirement after age 65 – 70, this is where the retirement funds (OA and SA) really step up. In our view, retirement funds (OA and SA) offer a basic standard of living i.e. they should cover our monthly fixed and variable (discretionary) expenses. The rest of our monthly variable (non-discretionary) expenses should be covered by our remaining financial independence funds.
How we allocate funds to the OA and SA?
I have added an additional page (Asset Allocation) to the blog that should provide a good overview of our current asset allocations. The target percentage for the retirement funds (OA and SA) is 20% and the current percentage is about 17%. Since there are monthly contributions to the OA and SA as long as we work, these balances should increase gradually over time in tandem with the rest of our assets. The main considerations are for us to manage the draw down of the OA for our housing, the cash top-ups to the SA for tax relief and the transfers between the OA and SA. I will discuss these issues in the next post.