Are There Fixed Income Replacements for CPF SA's 4% after age 55?
You can find a place to put your funds for a similar 4% return by taking on credit risk.
It is not exactly difficult to find fixed income replacements that can match the CPF SA account return of 4%.
After age 55, the CPF SA will be closed after conversion to a RA.
However, in investments, nothing is guaranteed. You have to take on more risk to earn that 4% income, even in fixed income.
Short term solutions like SGS T-Bills offer about 3.5% return for 6 months and 1 year. Money market funds also offer returns between 3 to 3.5%. Of course, these short term bills and money market instruments fluctuate depending on where the US Federal Reserve decides interest rates. They may offer 3.5% now, but may not in 2025 or beyond.
How to earn 4% return in fixed income in 2024
To earn a higher 4% return for a longer period of time, you have to take on two additional risks: credit risk and duration risk. That is, you have to buy longer dated bond funds.
Actively managed bond funds are also not free. In return for distributing a regular income of about 4%, you have to pay a management fee of about 1-1.5% for portfolio managers to manage credit risk and duration risk. They can also pick mispriced bonds for the fund, leading to further yield pick-up.
The 4% dividend some bond funds distribute may also fluctuate from year to year, as it is not guaranteed.
These are the bond funds that I am looking at for my own income portfolio. They are by no means an endorsement.
You can also do the same, by going to FSM One (www.fsmone.com) under Fund Selector, and select your required parameters, such as currency and asset class.
FI Option 1: Fidelity Enhanced Reserve A MINCOME(G) SGD
This is a SGD-hedged sub-fund of the USD927 million Fidelity Enhanced Reserve A Minimum Income Fund.
This is a fund that’s more focused on income distribution (dividends of about 5% before fees) than capital appreciation. Most of the fixed income funds with dividends are.
An unexciting fund, it is 20% invested in US Treasury bills. Otherwise, it is well diversified geographically and across sectors.
Dividends are estimated at 5.4%, before net expense fees of 0.63%.
Do note that dividends are before management fees.
Do also note that despite their conservative risk ratings, fixed income funds can still lose a part of your principal, though the risk of doing so is theoretically less than in equities.
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