I started my Supplementary Retirement Scheme (SRS) account three years ago. The plan was to top up the SRS account every single year for the next 20 years. I figured that if I do it every year, I would have a sizable sum of money for retirement. Plus the fact that I do save on my taxes yearly. However, the downside will be putting my money into an account that I do not have much flexibility.
Anyway, let's do some Maths.
So at the end of 20 years, I will have a sizable savings of S$255,000. This does not include the interest given or if you have diligently invested using your SRS account.
Do consider opening a SRS account as part of your retirement planning.
SRS + CPF adds to your comfortable retirement accocunt.
I will explain the SRS account in more details and how I invest the money from the SRS account in a separate post.
According to Mr Kuo How Nam, President of Credit Counselling Singapore, the percentage of credit card holders unable to pay to in full has remained largely stable over the past five years.
Personally, that to me, is a large percentage. 1 in 3!
Another alarming stat, reported by Straits Time a week ago, was that around 3% of credit card holders - that is about 47,000 people, have debts exceeding a year's salary.
I believe all individual should be responsible for their spending. If you know you are unable to control, cut those credit cards! Use debit cards instead.
You can occasionally spend more to reward yourself, but it not the same as overspending.
If you paying the minimum on your credit card bills or you are borrowing from one bank to pay another, you should know you are in trouble and please do seek help fast.
Decided to buy this book and read it during my business trip. Just wanted to share something in the book that I can totally relate to. It was about Jim's message to his children about saving. I believe this message should be told to every child.
SAVE.
You will meet people who will urge you to spend your money freely; they will tell you, "You can't take it with you!". As you get older, you will probably have friends who eat at expensive restaurants every night, buy the latest gadgets or fashion trends, and spend vacations at fancy beach resorts. You must avoid the trap of spending money willy-nilly simply because you can. Not only is this a road to financial ruin, it can cause you to forget what's important in life.
I am not saying what you should never travel or buy anything nice. I am merely suggesting that you should think wisely about whether the thing you are contemplating doing or buying is really worthwhile or whether its benefits will be, at best, fleeting
Added 2 lots of Starhill Global Reit. Also bought another 300 shares of Nikko AM STI ETF.
October (till yesterday) was a very busy period for me. A new job in a new industry. I had a few business trips that took up a lot of time. Neglected this blog for a period...
But I still stuck to my goal of constantly buying shares each month; especially if there was a dip in prices.
I am an active reader of A Singaporean Stockmarket Investor (ASSI) blog because I am really inspired by AK and his articles. In one of his articles on money management and motivation, an image (left) caught my attention. It was about the end goal of only utilizing your passive income for expenses.
In order to do that, your passive income must be greater than your active income. If you are earning S$100,000 annually (active income), you will need an investment portfolio of S$2 million to generate dividends of S$100,000 (passive income) at 5% yield.
S$2,000,000 * 5% = S$100,000 (annually).
Yes, S$2 million. Seem like a very far goal to reach? Yes. Possible? I strongly believe so.
In order for our passive income > active income to become a reality, we have to take baby steps. Let's start with generating passive income that is greater than your annual savings (from your active income). If we save 10% of our annual active income and invest with a projected yield of 5% annually, it will take approximately 20 years to generate a passive income equivalent to your annual savings.
Using a S$100,000 annual income as an example, see the table below:
What about re-investing your dividends? It will take 5 years earlier to hit your goal. That is close to 15 years.
Generating Passive Income > Annual Savings
This is a very possible target - to be able to generate passive income that is 10% of your annual income. This example does not factor increase in annual income or savings. We would probably be earning more and decide to save a greater amount.
Well, this is not exactly Passive Income > Annual Income. My point is to start early, invest early and let the power of compounding work for you. To reach the stage of generating passive income equivalent to your annual savings first; is one step closer to Passive Income > Annual Income.
You might not have noticed it but you have been leading a financial lifestyle of your choice. A lifestyle that subconsciously direct the way you spend or save money. In general, there are three categories of common financial lifestyle:
A Lifestyle based on Credit (Cards)
You are leading a life beyond your financial means and almost everything is financed by enormous debt. You might be living a "glamorous" life - driving the newest and best cars; wearing the latest high-fashion clothes; living in a private condominium - but you are living on credit. You decide your purchases based on whether you can afford the monthly payments. You might have reach a point that you are not able to finance or pay off the monthly expenses with your monthly income. You would just pay the minimum sum of your credit card bills and roll over the balance. Interest will be charged on your outstanding balance and your debt snowballs.
A Lifestyle based on Paycheck to Paycheck
Unlike the above lifestyle, you are leading a lifestyle that spends with a paycheck mentality. Your monthly income comes in and goes out almost immediately. You consume as much as your income allows you to. Just like the lifestyle based on credit, you buy the latest gadget, clothing and even dine out often. However, you diligently pay off your credit card bills, mortgage and other financing. You do not allow your debt to snowball but you are not able to build your wealth.
A Lifestyle based on Saving
Saving like a scrooge is a lifestyle and this is the extreme end. There are also people who take a better approach and save moderately from their monthly income. Do these people have credit cards and debts too? Yes, of course. But their debt is likely to be for a home mortgage with a payment they can well afford. They will also be using their credit cards for shopping and dinning; however the amount used is after what they have planned to save or have already saved. You might not have the highest income when compared to people from "A Lifestyle based on Credit (Card)" or "A Lifestyle based on Paycheck to Paycheck"; however over the course of your lifetime, you will eventually add (or save) up to substantial wealth.
Are these lifestyles familiar? Do your friends have such lifestyles?
The lifestyle you lead matters. If you do not even have any savings, how do you start investing?
"Sometimes we need a little reminder of how our spending can get out of hand when really, we need to take charge of our money and plan ahead. Especially if we have loved ones, like an elderly parent, who depend on us."
A short video by MoneySENSE encouraging people to take charge of their finance and not get lost in this material world.
Are you overspending? Have you lost control? Do you have unsettled credit card bills? Taking charge of your own money and planning ahead is the first and most important step before you can succeed in attaining wealth.
In one of my previous entry, STI ETF is a Simple Way to Profit, I mentioned that I would prefer to do Dollar Cost Averaging on the Straits Times Index (STI) Exchange Traded Fund (ETF) based on the current level of the STI. The STI is currently trading at 3,337 points after the low of 2,953 points in the first quarter of 2014.
I personally feel that Dollar Cost Averaging is a simple-to-execute strategy and is safer than just 'buying and holding'. So how should we execute this plan?
Invest a Fixed Amount in a Stipulated Period
For example, you can invest a fixed amount of S$1,200 every month into SPDR® Straits Times Index (STI) ETF (ES3). Or you could invest a fixed amount of S$6,000 every quarterly. It can also be investing annually. Once you have worked out the amount you feel comfortable investing and sustaining, fix a stipulated period. It can be the first trading day of every month or the first trading day at the start of each quarter (January, April, July, October).
Consistently Investing the same Amount of Money at the same Regular Interval
No matter what happens to the Index, you consistently invest the same amount of money at the same regular interval. When the ETF price is at S$3.00, your S$6,000 will buy you 2 lots (2,000 shares). Likewise, when the ETF price is at S$1.00, your S$6,000 will buy you 6 lots (6,000 shares). This means you will be buying more shares when the ETF price is low and fewer shares when the ETF price is high.
Takes Away the Emotion from Investing
No matter what happens to the index (whether its goes up or down), you will be investing at your stipulated period. This takes away the emotion in investing in the ETF or even timing the ETF. You just have to stick to your plan for a long term and basically treat it as paying for your "Retirement Fund".
Hypothetical Scenario - 6 Years and Counting STI ETF Plan ...
I was browsing the historical prices of ES3 on Yahoo! Finance. Decided to do some maths on a plan based on a S$20,000 every semi-annually (start of April and October) investment. For simplicity, the cost of transactions will not be calculated. See the table below.
The ES3 (SPDR® STI ETF) has a board lot size of 1,000 units. Therefore, at S$3.13 on 1st April 2008, a lot of 1,000 ES3 shares will cost S$3,130 and the maximum number of lots you will be able to purchase is 6 (S$20,000 / S$3,130 = 6.39).
In the Dollar Cost Averaging strategy, you will consistently invest the same amount of money at the same regular interval. From this simple plan, you would have acquired 86,000 shares and invested a total of S$243,000 over 6 years. Based on the current price of ES3, S$3.37, your total investment will be worth S$289,820 now. That is an unrealized paper gain of S$46,820. We have not factored the dividends collected.
Just for the record, based on the accumulated 86,000 ES3 shares, the dividends collected in April 2014 will be S$3,698.
Does Dollar Cost Averaging Method beat the Buy-And-Hold Method?
The Dollar Cost Averaging method does not always outperform the Buy-And-Hold method. For the Buy-And-Hold method, it really depends on the price you purchase the ETF for. Nevertheless, the Dollar Cost Averaging method prevents you from buying the Index ETF at an all-time high point, only to see the value of your investment reduce when the prices fall drastically.
Start Small, Start Early ...
If you are planning an investment for the long term, Dollar Cost Averaging the Index ETF is a viable option. You can start early by investing S$300 every month for the next 30 years. You should do the maths and see if this investment will grow to a decent amount.
The cost of commission and brokerage fee has to be considered when you plan your stipulated interval for Dollar Cost Average. To keep it simple, you generally make more money if your fees are lower. I will highlight some alternatives in keeping your transaction cost low in another entry.
CPF Board is going the distance to communicate with Singaporean with their latest video. A simple video to explain:
1. What happens to your CPF when you turn 55?
2. What happens if you do not meet the CPF Minimum Sum?
Understanding how the current CPF system works is important for you to make your retirement plans. When you reach 65 years old, your CPF savings will provide you with a monthly income for as long as you live. If you believe that the monthly income will not be able to sustain your retirement lifestyle, you have to supplement your monthly income from other sources (retirement savings, other private annuity plan, etc). So are you going to wait till 55 years old before you start planning? Think again.
Apart from planning your retirement lifestyle, you should also have sufficient savings to meet your medical needs in your old age. Medical expenses will increase significantly as your grow old. Definitely! Medisave is unlikely to be sufficient. I will encourage all to consider buying a suitable medical insurance plan to help mitigate large medical expenses.
In the National Day Rally 2014, PM Lee announced that the Lease Buyback Scheme (LBS) will be extended to 4-room HDB flats. Other changes were announced yesterday. All changes will come into effect on 1 April 2015. See the info-graphic, provided by the Ministry of National Development, below.
Source: Ministry of National Development - dated 4 September 2014
Extended to 4-room HDB Flats with S$10,000 Cash Bonus
The LBS, as mentioned by PM Lee, will be extended to 4-room HDB flats. 4-room HDB flat owners will receive a S$10,000 cash bonus per household when they sell the tail-end lease of their flat to HDB. The cash bonus is on top of the proceeds they received. The cash bonus for 3-room HDB owners participating in the LBS remains at S$20,000.
To qualify for the full cash bonus, there is always a "However".
However, the household will only get the full S$20,000/S$10,000 cash bonus if the household's total CPF top-up is $60,000 or more from the LBS proceeds. If the total CPF top-up is less than S$60,000, the household gets a pro-rated cash bonus of S$1 for every S$3 CPF top-up.
Income Ceiling for participating in the LBS to be raised to S$10,000 per month
The income ceiling for participating in the LBS will be raised to S$10,000 from S$3,000 per month. This will make more seniors eligible for the scheme. I believe this is in line with the Government encouraging elderly to continue working, if possible, and still qualify for these monetisation options in this LBS. Please note that the income ceiling is based on the gross monthly household income.
Top up of CPF Retirement Account with the LBS proceeds will be relaxed
This is probably the most attractive change in the LBS. Instead of topping up to the full age-adjusted prevailing Minimum Sum to his/her CPF Retirement Account, each owner of the 3 or 4 room HDB flat will only be required to top up to half the age-adjusted prevailing Minimum Sum.
Owners will be able to retain more cash upfront from participating in the LBS. Alternatively, owners can also top up their own CPF Retirement Account beyond the minimum required up to the prevailing Minimum Sum to get a higher monthly payout under CPF Life.
Please note there is a S$100,000 cap on the household's cash proceed. Owners are required to top up the excess of S$100,000 into their respective CPF Retirement Account.
Here are the age-adjusted Minimum Sum based on the prevailing Minimum Sum of S$155,000:
Flexibility in the Length of Lease to Retain
Instead of having the standard 30-year lease, owners will have the flexibility to choose the duration of lease to retain, subjected to a minimum lease based on the age of the youngest owner (See table below). Nevertheless, a household must have at least 20 years of lease to sell to HDB to be eligible for the LBS. Those that prefer a longer lease can choose to retain more than the minimum required for their age, in 5-year increments, up to a maximum of 35 years.
Eligibility Criteria - Most Important to Note
Age & Citizenship
All owners at CPF Draw-Down Age (currently, the age is 63 years old) or older
At least one owner is a Singapore Citizen
Income
Gross monthly household income of S$10,000 or less. Please note it is the total household income.
Flat Type
4-room or smaller HDB flat (exclude HDB terrace houses)
No concurrent ownership of second property
All owners have lived in flat for at least 5 years
Have at least 20 years of lease to sell for proceeds
How the LBS works - Putting everything together
The Straits Times graphic provides a good understanding of the LBS:
Source: Straits Times - dated 4 September 2014
Enhanced Lease Buyback Scheme definitely gives more Flexibility
The enhancement in the LBS definitely provides greater flexibility to suit different preferences in terms of the duration of lease and cash. I personally think that being able to retain more cash upfront from the LBS proceed is attractive. In the past, 3-room HDB owners that were complementing to participate in the LBS would be put off when they were required to top-up a large part of their LBS proceeds into their CPF Retirement Account to meet the Minimum Sum. With this relaxation, owners can choose to retain more cash or top-up their own CPF Retirement Account beyond the minimum required.
Monetizing your HDB flat is one way of supplementing your retirement income. The LBS may take away the option of bequest but I feel your retirement should be your main focus. If your monthly income (from all sources) is insufficient, LBS can be explored. I believe your children will be happier to know you are leading a good retirement.
For more information on the LBS, please call HDB Branch Service Line at 1800-225-5432 between 8 am and 5 pm from Mondays to Fridays.
Apart from winning the lottery, compound interest can slowly transform your small investment account into large fortunes over time. Some people have all the luck to win 4D or Toto (Singapore's versions of lottery). Before I ever get lucky, the power of compound interest will be my best friend.
I will list the top few facts that caught my attention:
1. 99% of Buffett's wealth was earned after his 50th birthday.
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5. In 2014, Buffett made on average S37 million per day - that's more than what Jennifer Lawrence made the entire year.
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13. If you have invested $1,000 in Berkshire Hathaway in 1970, you'd have $4.86 million today.
14. If you have invested $1,000 in Berkshire Hathaway in 1980, you'd have $531,165 today.
15. If you have invested $1,000 in Berkshire Hathaway in 1990, you'd have $28,785 today.
16. If you have invested $1,000 in Berkshire Hathaway in 2000, you'd have $2,218 today.
17.
For the rest of the interesting facts, please read the article.
The article, not only states how rich Warren Buffett is, but indirectly points out how compound interest builds wealth over time (See fact 13-16). The rate of return definitely has an impact on how fast your investment grows as well. However, in all common sense, the earlier an investor begins, the more wealth he or she will accumulate.
Rule of 72
The Rule of 72 is very simple. Most of you have probably heard about this rule. To determine how many years it will take an investment to double in value, simply divide 72 by the annual rate of return. For example, an investment that returns 5% annually doubles every 14.4 years (72/5 = 14.4). Similarly, an investment that returns 8% annually doubles every 9 years (72/8 = 9).
The Magic in Compounding - A Hypothetical Scenario
At age 30, Ali invests S$5,000 annually in "I-will-earn-you-8%-annually" fund for 10 years and stops investing. His total investment is S$50,000.
Muthu, at age 40, invests S$5,000 annually in the same "I-will-earn-you-8%-annually" fund for 30 years. His total investment is S$150,000.
Finally, at age 70, both Ali and Muthu decided to use their investment fund to enjoy their retirement. Ali's fund will be worth S$787,176 (after investing S$50,000) and Muthu's fund will be worth S$611,729 (after investing S$150,000). By starting 10 years earlier and making one third of the investment, Ali ends up with more.
Start Early
Leverage your time (by starting early) to make the power of compounding work for you.
Last night, I was reading some financial news on my iPhone when I came across an article on CNBC - "Start retirement plans ... NOW! (dated 28 Aug 2014)". The headline caught my attention. However, the excuses for putting off retirement planning at the end of the article are what I would like to highlight.
So here are some popular excuses (used by the Americans) for putting off their retirement planning:
1. "I am just too busy."
2. "It's too soon to think about retirement."
3. "I waited too long, so it's too late for me to put enough money away."
4. "I can't do it now, because my finances are a mess."
5. "I don't have enough money to start planning for retirement - but my kids will take care of me."
6. "What's the different? My plan is to work until i drop dead, anyway."
The Americans seem to have pretty much the same excuses. Thinking that you are still far from retirement is definitely a valid excuse. I used it, especially in my early 20s. Naive thinking. 10 years have passed so quickly. Filial piety is considered a key virtue in Asian culture. I believe your kids will definitely (hopefully) take care of you as you age. But they probably would not be able to provide you an income that you were earning prior to your retirement or an income to sustain your lifestyle. Anyway, I wonder what are the other excuses that will be used by Singaporeans.
For satirical purpose, let me propose a few Singaporean excuses:
1. "No need plan la. Government will take care of me!"
2. "I got CPF. I got HDB (housing). More than enough."
3. "I don't know how leh..."
For most of us, excuses will just derail any retirement plans you intended to have. For these people, my advise is to start early. There will always be temptation to buy an expensive continental car (even with our super high COE; even though cars in Singapore are the most expensive in the world); go on an European vacation or multiple vacations to Bangkok; or indulging on our favourite hobby - Shopping. Yes, we have to indulge at times after working so hard. But do it with your retirement plan at the back of your mind.
Let us not be excessive in our spending (splurging on unnecessary items) or saving (save like scrooge). A balance approach is always better.
Buying an Exchanged Traded Fund (ETF) is just like buying any stock in the Stock Exchange. As such, there is a capital gain when the prices of the ETF rises above the purchased price. Some ETFs, like the SPDR® Straits Times Index (STI) ETF (ES3) and NIKKO AM Singapore STI ETF (G3B), also pay dividends. Again, I will use the STI ETF to explain how good an investment it is.
"If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately SS$4,00. Likewise, if the STI has a bad run and drops to 2,000 points, both mentioned ETFs will be traded at approximately S$2.00."
Performance of STI ETF simply relates to Straits Times Index
As such, the returns of the STI ETF will definitely be similar to the STI. According to an article in Motley Fool, the STI, over the 10 year period ending February 2014, has generated a 64.7% price return without dividends.
"Over the ten year period ending February 2014, the STI generated a 64.7% price return without dividends. This meant that before dividends the annualized price return of the Index over the 10 year period was 5.1%.
..., the SPDR® STI ETF has been available to investors since 2002. Without out dividends, over the ten years ending Feb 2014 the SPDR® STI ETF gained 63.9% in Net Asset Value. Including dividends, the 10 year return came to 123.56%. This meant that over the past 10 years, with dividends included, the SPDR® STI ETF returned 8.4% on an annualized basis."
These are all just historic returns. So what will be the return of STI in 2015? I will not know and I believe no Investment Analyst will be accurate as well. But what about the return of STI in the next 10/20 years? I can safely say it would probably be ranging from 7-9% over the long term.
The Best Time to Buy an STI ETF?
No one can predict how the Singapore Market will be like in 5/10 years time. Will it go up to 5,000 points or drop to 2,000 points? Will there be another Great Financial Crisis?
Let us just take a look how the STI has traded over the last 5 years:
Prior to 2010, STI was trading below 2,600 points. In 2011, the STI traded above 3,200 points before falling back to 2,600 points.
If you have bought 10 lots of SPDR® STI ETF at $2.60+ (when STI was trading at around 2,600 points), you would have invested about S$26,000. At this current point, your investment will be around S$34,000. That is a 30% profit over a span of 3-5 years depending time of purchase. That easy? No!
Looking at historic data, it is always easy to predict when you should have invested. So should you invest in the STI ETF now? Over the long term (10-30 year period), the STI has always trend higher over time. From this perspective, if you adopt a Buy-and-Hold-Forever approach, you should be able to achieve long-term returns. However, at current level of the STI, I am not sure if it will go higher in the short term. There might be uncertainties and you might have to sit on unrealized losses for months or years during bad periods. I would rather recommend a Dollar-Cost-Averaging (DCA) approach that I personally feel is safer. The DCA approach involves buying a fixed dollar amount of STI ETF at regular interval (monthly, quarterly, annually etc) regardless of price.
I believe there is no best time to buy the STI ETF. Just Buy, and Keep Buying, and Keep Buying and Hold for a long period of time.
According to Investopedia's definition, an ETF is a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange.
To simplify:
1. ETFs are basically mutual funds that trade like stocks on an stock exchange.
2. ETF tracks a particular index. There are ETFs that track Singapore or Foreign stock/bond indexes.
3. Unlike mutual funds, which are priced only once at the close of business by the fund company based on the value of the securities owned by the fund, ETFs are priced continuously throughout the day.
Still do not understand? I will use a Singapore Index ETF as an example to explain.
People are more familiar and often see the Straits Times Index (STI) being reported on the news. The STI shows the performance of the Singapore stock market. As I am writing, the STI is up 0.36% and is at approximately 3334 points (see left). The STI comprises the top 30 stocks listed on the Singapore Stock Exchanged (ranked by market capitalization) as shown below:
There are two ETFs that track the STI in the Singapore Stock Exchange - SPDR® STI ETF (ES3) and NIKKO AM Singapore STI ETF (G3B). The SPDR® STI ETF has been listed since April 2002 and the NIKKO AM Singapore STI ETF has been listed since February 2009.
SPDR® STI ETF and NIKKO AM Singapore STI ETF are Designed to Mimic the STI
These mentioned ETFs are designed to mimic the STI. If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately S$4.00. Likewise, if the STI has a bad run and drops to 2,000 points, both mentioned ETFs will be traded at approximately S$2.00.
Why the discrepancy in price between the mentioned ETFs?
In all ETFs, there is always a tracking error. A tracking error tells us how much an ETF would deviate from the index's performance. A high tracking error may result in an erosion of index's gain by the ETF.
Owning an STI ETF is like owning 30 Different Stocks
By owning units of an ETF that tracks the STI, you are basically owning 30 different stocks as mentioned above. On top of getting the diversification, you are able to purchase as little as one lot to gain exposure to the Singapore market. You gain the same exposure without having to spend more money buying the component stock of the STI. Can you imagine owning just one lot of every stock in the STI? S$17,950 for just one lot of DBS shares.
But with ETFs...
The two ETFs have different board sizes - 1,000 shares for SPDR® STI ETF and 100 shares for NIKKO AM Singapore STI ETF. At the current price of S$3.37, the minimum investment in SPDR® STI ETF will be S$3,370. At the current price of S$3.42, the minimum investment in the NIKKO AM Singapore STI ETF will be S$342. Both the minimum investment excludes the broker commission and transaction fee.
To Summarize...
1. There are various ETFs - different types of ETF that tracks Stock or Bond or Commodity Index.
2. ETF's objective is to mimic a specific Index.
3. ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day.
I came across an interesting article from Dr Wealth website today. Dr Wealth (http://www.drwealth.com/) is an online platform managed by a team that provides financial advisory ranging from personal finance, insurance, retirement to investment education.
The article (How Much Returns Do You Really Get From CPF Life? The Truth About CPF Life Premiums - dated 25 Aug 2014) articulates the returns from CPF Life hovers around 1.3% to about 2.5% between the age of 60 and 80. This is lower than than the CPF Retirement Account rate of 4%. Based on their calculation and estimate, the premiums we pay for CPF Life significantly reduces returns by approximately 2%. Dr Wealth further explained that based on their model, the CPF Retirement Account reaches zero by about age of 77, and that is when the returns from CPF Life go up dramatically. In short, the longer you live, the higher the returns from CPF Life (duh!). Another interesting conclusion pointed out in the article was that you have to wait until about 90 years old before the compounded annual returns reach 4%.
Is CPF Life good then?
This is an interesting take about CPF Life based from an investment returns' perspective. From an investment return point of view, the premiums are "force eating" into the returns which makes it less attractive. From a retiree's - that needs a monthly income to sustain - perspective, CPF Life is probably a good idea. A retiree is probably not interested in the CPF returns, especially when there is no opting out from CPF Life. He just want his monthly payout.
So should you pledge your property and half the Minimum Sum?
The current Minimum Sum is S$155,000. By pledging your property, you will only need half the Minimum Sum (S$77,500) in cash held in CPF. This will half your monthly payout to approximately S$600. So, again, from an investment return point of view, it is probably a good idea to pledge your property as advised by Dr Wealth. This will reduce the CPF Life quantum by half. However, at age 60+, how risk adverse are you? With S$77,500 in your hands, are you willing to get a higher return investment? If you have never started investing before, what are the chances that the money will just be deposited in the bank?
With No Plans, pledging your property will be worst than the Old Minimum Sum Scheme!
So pledging your property is an individual call and it is based on many individual factors. With no plans in mind, it will be worst than the old Minimum Sum scheme that works on a draw-down basis. The paltry interest rate from the bank is far lower than the old Minimum Sum scheme. And with no discipline, the S$77,500 will be spend sooner.
If you did not plan when you are Younger, you will probably have no plans at 55 years old?
It pains to imagine someone receiving a sum of money from CPF and being clueless about what he/she should do with it. The most important aspect at that age, I presume, is to have financial stability and independence. This means a regular monthly income (that does not deplete) which is more than the monthly spending.
The most-last-minute plan is probably...
Buying another annuity. So if that is the case, should people, with no clue, still pledge their property?
Let us just look at NTUC Income's Guaranteed Life Annuity. The following is an extract illustration that is based on male aged 55 who invested S$100,000 on the Annuity plan with payout starting at age 65:
It seems that CPF Life is a better option without the Non-guaranteed portion (S$77,500 that pays out approximately S$600). The Non-guaranteed portion is always a projection. If fulfilled, the NTUC Income's Guaranteed Life Annuity might give you a better monthly annuity payout as you age. It is difficult to do a detailed comparison. It will be better to contact your Insurance Agent for more clarification and do your calculations from there. Any Private insurance company will be willing to explain their products that is similar to NTUC Income's.
Retirement should be something you can look forward to..
And financial stability is something you must have to maintain your retirement lifestyle. I have always emphasize to start your retirement planning early. A retirement plan that gives you a monthly income with no limits to the withdrawal period.
Start Young and do not be clueless at 55 years old... If you have been actively building your retirement next, my best guess is that you will be happy to pledge half your property.
It came to my attention that the fictitious Mr Tan's - who was made famous in the 2014 National Day Rally - current monthly salary of S$4,500 would place him around the 25th to 30th percentile of Singapore household income ladder. According to the Department of Statistics, in 2013, the average monthly household income for the lowest 10 per cent of resident households was S$1,711.
The S$2,000 projected retirement income for Mr Tan, in today's dollar value, would therefore put him among the lowest 10 per cent of resident households which is considered to be enough for basic or subsistence living. And with inflation, the real value of the S$2,000 retirement income will be paltry.
So is S$2,000 (monthly) enough for basic living?
A S$4,500 to a S$2,000 lifestyle is a big adjustment. Are you willing to make such an adjustment? Even if you are, please do consider inflation. Are you willing to believe that the two pillars (CPF and Home Ownership) are enough? Think hard. The best lessons are to look for examples - your parents', your seniors' - and ask yourself could they have done more.
PM Lee in the recent concluded National Day Rally spoke at length on a few key points - 1) Honoring our Pioneers (especially our first President Yusof Ishak), 2) Education (is not just the academic route), 3) A new Municipal Services Office (a single point-of-contact to sort out municipal issues), 4) Announced the Redevelopment of Jurong Lake District, and lastly 5) Assurance in Retirement (the most awaited topic).
PM Lee outlines CPF options for retirement
PM Lee explained the CPF minimum sum and other retirement related issues as a 'financial planner' in this year's National Day Rally (see attached YouTube video below).
The info-graphics (below) sum up the 4 key points:
1. CPF and home ownership go hand-in-hand in providing for your retirement.
2. The current Minimum Sum is not too much.
3. If you own a house, you only need to set aside half of the Minimum Sum - or S$77,500 - for those who turned 55 this July.
4. You have many options to get money from your house.
Source: PM Lee's Facebook page.
Key Changes that will aid your Retirement Plan
1. Silver Support Scheme. PM Lee announced a new scheme, called Silver Support, that will be setup to give lower-income Singaporeans with little or no CPF saving an annual bonus from the Government. More details will be announced at a later date.
2. Flexibility for Lump Sum Withdrawal. There will be more flexibility for CPF members, who are retired (65 and over), as they will be allowed to take part of their savings as a lump sum during retirement. However, it is subjected to limits. Again, details will be announced at a later date.
3. Leased Buyback Scheme extended to 4-room flats. PM Lee also announced that Leased Buyback scheme will now allow 4-room flat owners to sell part of their 99-year lease to the Government in return for a regular income.
4. Minimum Sum will be raised to S$161,000 in 2015. PM Lee revealed that the Minimum Sum will be raised to S$161,000 for those turning 55 next July. He also said that he did not see a need for further major increases and stressed that the Minimum Sum will stay.
5. Government to set up an advisory panel to study the CPF changes, including how CPF savings can be invested more widely.
CPF and Home Ownership go hand-in-hand in providing for your Retirement - Enough?
The question is how much do you need when you retire? You have to decide.
Let us use PM Lee's example of Mr and Mrs Tan's retirement plan.
Mr and Mrs Tan's Retirement Plan - Screenshot from The Straits Times - dated 18 Aug 2014
We know that the Minimum Sum will stay. How much will it be in 20-30 years time? No one knows. How much will the payout be? Should be more than S$1,200 if we are able to have at least S$155,000 in our CPF Accounts.
A hypothetical scenario:
1) We are able to pledge the required Minimum Sum in our CPF retirement account without pledging our property. The Minimum Sum will be S$161,000 in year 2015. To simplify the scenario, the payout will be S$1,200.
2) We are also able to fully pay for our 4-room flat and was able to rent the whole flat out for S$2,500. There are many 'ifs' here - if we are able to rent it out for the long term, if we are able to stay with our children etc.
In this hypothetical scenario, we are actually in a better position. The monthly and regular income will be S$3,700. A decent amount for retirement.
As PM Lee said, if the Tan Family has both CPF and Home Ownership, they will be a happy couple. True to a certain extend. There are adjustments that you have to make, like renting out your home. What if we cannot monetized the flat? What if the regular payout from CPF Life is all we got - S$1,200 monthly?
I believe...
The CPF and Home Ownership are already pillars most have for their retirement. If you and your wife can set aside 10% of your salary or more, to slowly build another investment nest - another pillar, you and your wife will truly be a happy couple. Start early.
