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Tea with EY: CPF Life or ETF for retirement?

Monday, January 20, 2014


Annuity - It's Income Insurance!
Thanks for doing up a nice summary on Value Investing Summit (VIS) Day 1. I left during lunch and not attending Day 2. Decided that the takeaways are too marginal for me to spend my weekend there. But I must say, VIS is really useful for those who are rather passive or inexperienced in financial planning. :)

About the not buying annuity, I can't agree entirely. I used to hold the same perspective but when I got down to map out my retirement planning using CPF SA savings (please see attached), I had a different realisation.

From the computations on the last slide, you can see that $200,000 in the CPF SA transferred to RA at 55 years old could give us a monthly income of $1,325 to $1,479 till we konk off, regardless of rain or shine. How much is the FV of $200,000 at 65 years old? It's about $300,000. So that will be about 30% of the $1m which we need for retirement.


Click to enlarge

Personally, I believe in diversifying my retirement income. I don't know for sure if my mental faculty can be as sharp when I grow old and for how long I'm still able to manage my investments. If I have to depend on my family to invest for me, wouldn't it be additional burden for them?

I take buying an annuity as some form of insurance on income. I would have some peace of mind if I were to live up to 100 years old (choy! touch wood, touch wood!!). If I don't and I konk off at 85, there is still $100k left as bequest. If I were to go even earlier at 75, there would still be $200k left. This is if I choose the CPF Life Basic Plan.

To balance the need to leave behind a larger legacy, I'll invest the $700,000 in different income generating assets. If I can achieve an average of 5% returns, that will be $35,000 a year, or $2,916 a month. At 6% returns, that will be $42,000 a year, or $3,500 a month. Add that to my annuity plan, I will have $1,325+($2,916 or $3,500) = $4,241 or $4,825 a month.

My point is, we must be clear of our financial planning/retirement objective. Do we expect passive income generation with absolutely no effort? Then there is a trade off on capital preservation. If otherwise, it would mean some work or a lot of work, depending on the monthly retirement income we are after.

My strategy is to build up the CPF SA savings to buy my income insurance, i.e. the CPF Life Basic Plan. If we have $150,000 in CPF SA at around 40 years old, and continue to have contributions up to 60 years old, we would have $600,000 at 65 years old if we delay our withdrawal.


Click to enlarge.


Click to enlarge.

After buying the annuity, I would still have $300,000 available for other investments. If $1m is the target amount for retirement, technically, I should have accumulated $400,000 outside my CPF SA savings by 65 years old. Assuming I have no savings at all at 40 years old, I would need to save $9,600 each year or $800 per month, for the next 25 years, with a CAGR at 4%, to reach $400,000 at 65 years old.

The above calculation is based on the assumption of hitting the CPF contribution limit on $5,000 monthly income. 

The Retirement Savings calculator and the Compound Interest calculator can be found on CPF's website: http://mycpf.cpf.gov.sg/Members/Calculators/mbr-Calculators.htm

New calculators on CPF's website:
https://www.cpf.gov.sg/members/tools/calculators

Related post:
A cornerstone in retirement funding...

27 comments:

sillyinvestor said...

Hi EY and AK,
EY, thanks for sharing. Is there a cap for amount to be vested into cPF life? I am under the impression that the maximum u can have is 120k...

If one has 300k, can he/ plough everything back?

Personally, I quite often transfer money from OA to SA. First additional 1% for first 60k is attractive for me, even 4% is good.

I know I might beat 5% when I actively select stock.

But we dun put 100% of money in stock, since we need war chest, we also do not automatically plough in our dividends back into shares.

In CPF, all your capital plus interest will automatically become new principal for earning interest of 4%. All these with a piece of mind, which I think is really attractive.

AK71 said...

Hi Mike,

Exactly. Peace of mind is priceless. :)

I transferred every bit of OA money into my SA in the first few years of active employment and I see the fruits of that decision now. Time and the government have helped me to meet the minimum sum requirement earlier. ;p

Glad to see that you do not belong to the "100% invested in equities" camp too. :)

sillyinvestor said...

Er... Blushing blushing

I am 100% vested of now, I went in aggressively when the market correct last year.

I felt I will always have 2 tranches of savings each year, (bonuses) which I can invest, so I am not worried about 100% vested when I see good buys.

Foolhardy, I will most prob build cash this year, unless the market correct more than last year.

I hold cash for almost the whole of last year waiting for a chance to invest, I invest 70% of my cash for savings in the last 2 months of the year. I am glad I didn't buy any during the 1st half boom.

I think your war chest approach is more prudent, but I am just starting, my portfolio is small in terms of my annual pay, so I thought I might as well be a but more aggressive when I am still young.

Please do not follow me, I am sillyinvestor hahahahaha

betta man said...

With minimum sum rising every year plus increasing withdrawal age of CPF, it seems that it is getting more difficult to see our CPF monies.

AK71 said...

Hi Mike,

I cannot remember if you told me your age. For sure, if you are still young, you could take a bit more risk. ;)

Anyway, I agree that when Mr. Market is suffering from a bout of manic depression that is the best time to build a portfolio. The risk is, of course, Mr. Market could stay depressed longer than we could stay solvent. OK, I modified the saying. ;p

AK71 said...

Hi betta man,

You know what they say about not being able to beat them, right? Join them! ;p

How? Use the system to help us meet the minimum sum requirement. :)

sillyinvestor said...

Ak,

50 years later, I will still be younger than u.. Muhahaha

I forever young mentally and emotionally .... Can't say that for physically thou...

Age is but a number, money is a number too. Stock investing need both quantitative and qualitative data. So my life is quality life that is hard to quantified.

Sorry, Stress up in work, talking nonsense. Better stop before your supporters throw stones or spit at me, or u block my comment.

AK71 said...

Hi Mike,

Er. Ahem. I don't really understand what you were saying in your last comment but I guess it has to do with the generation gap. I can never understand the young ones these day. -.-"

Song StoneCold said...

Testing

The Sun said...

Like it or not, unless there is a change in govt policy, those turning 55 years in year 2013 or after with at least 40k in their retirement a/c will be automatically included under CPF Life. Thus, for a good number of people who are middle aged or younger now, getting an annuity in the form of CPF Life will be an unescapable part of their financial portfolio.

Unknown said...

Hi AK,

It you got a choice to pledge your property in order to take out half of your cpf money at age 55, would you do it? Or you rather put it in retirement acct as CPF life to get it later at age 65+++?

AK71 said...

Hi Unknown,

Hopefully, I would have managed my finances prudently enough not to have to pledge my property.

If we can do without the money from our CPF account at age 55, why withdraw?

Of course, if we are pretty sure that we can get more than 4% interest income yearly through our own efforts, then, that is another story. :)

SnOOpy168 said...

thanks to AK's blog, I had realized a bit more potential of the SA accounts.

I had difficulty reconciling the interest paid to all 3 accounts and asked a lot of questions.

Basically, the 1% extra are given to the initial $20,000 of OA and $40,000 from SA. Medisave don't earn beyond the current 4%. The 1% interest earned, will be parked in SA.

So, I did transfer a bit from OA to SA to max out this privilege. Let the $ grow. I am still undecided if I should move all funds from OA to SA. The 1.5% additional interest is tempting for a group of $$$ which I am most unlikely to see the lump sum....

Anyway, my feeling is that while we would like to plan and think ahead, it may be wiser to do with whatever resources on hand NOW. Policies, standards and (perhaps) government may change.

I will let 前人种树,後人乘凉 take care of itself in due time.

AK71 said...

Hi SnOOpy168,

People sometimes warn me how policies might change and how I should not be too optimistic about the CPF.

Well, things in life change all the time. Can we consistently make money in the stock market, for example? Can we, like Endrene put it so well, guarantee that we would always enjoy good mental health?

I am not optimistic. I am pragmatic. I work with what I have now and whether people keep their promises to me is not something I have control over. I would say that with a AAA rating, a promise made by our government is likely to be delivered. :)

EY said...

Hi Mike,

Sorry for my tardy reply. Swamped with work these 2 weeks!

Ok, whether there is a cap on the CPF Life annuity. I assume the limit is $200k based on what the calculation tool allows me to key in. I tried keying in $400k and got the response that the amount should not exceed $200k. But it seems that we can buy CPF Life at 55 and $200k then will be worth $300k at 65.

Your question about whether we can get back the $300k from the monthly payout. If $300k without interest, and we receive a payout of $1325X12=$15900 a year, we will breakeven at 18.87 years. 65+19 years= 84 years old. That would mean at 85 years old, the bequest of $100k = 'profit'? :P

Let me try to illustrate it another way, if we live till 90 years old, we would have received a total payout of $397,500. At 95, $477,00. At a century old, we would have gotten $556,500.

I would think we need to have a mindset change when we use CPF-SA to buy annuity. If we work out the principal amount that we have put in, it would roughly be about $140,000 ($350p.m @4% X 34yrs =$300k). Imagine with $140k we are able to have a lifetime income of $1325 per month or $15,900? The deal to me is not bad at all.

In life, I know I can't win all the time and I don't want to! :P If I 'lose' and konk off at 75 after drawing down the annuity for 10yrs worth $159,000. There is still a bequest of $200k.

My point is, if we focus on the actual investment made, i.e. $140k, would the above not be a great value deal? The best part is, this $140k is probably 'sponsored' by our employers with their 16% contribution to our CPF-SA every month.

The thought of it makes me smile! :D

Cheers,
Endrene

EY said...

Hi betta man and Sun,

It is true that there will be a fixed amount being tied up in CPF after our retirement.

The zen thinking is that the amount tied up would likely be what our employers have contributed to our accounts. We would be getting back it drips and drapes. But hey, take it as delayed bonus payout from our former employers can? Haha.

Getting too hung up about the CPF savings will make us unhappy. Accept the fact and make the best out of it might be a better strategy. :)

EY said...

Hi SnOOpy168,

I like how you put it,前人种树,後人乘凉. That's the spirit! :D

Kyith said...

probably the first person here who really gets what retirement needs and what risks in retirement are.

EY said...

Hi Kyith,

If you are referring to me, then you are probably mistaken!

I'm just finding an easy and lazy way to plan for my retirement. :P

Kyith said...

Hi EY, if you would provide your email i got somethign to share so that can help you make sense of things.

Drizzt

EY said...

Hi Drizzt,

I certainly welcome anyone's sharing to make me more enlightened!

My email address is endrene@yahoo.com.

Cheers,
Endrene

Kyith said...

Hi Endrene,

Will send you some resources to help you make sense shortly.

Best Regards,

Drizzt

Hong Joon Ng said...

I am infuriated that CPF Board took away the choice of zero bequeath + maximum income. I do not have any dependents and so I want maximum income for myself. Sigh.

EY said...

Hi Hong Joon,

I thought it would be nice to have given that option for people who don't want to leave anything behind. But I guess it is the consideration of the even longer life span people have. Imagine you are blessed to live to 120 years old, the high payout to you and those who chose the zero bequest plan would make the underwriter bankrupt!

I'm not sure in your case if you want to just leave the bare minimum sum (including pledging your property as 50% of the minimum sum) as you can maximise your cashflow. Just a thought.

EY said...

Hi Drizzt,

I was a little puzzled initially when you mentioned you wanted to send me something to help me make sense. Then it dawned on me while I was just replying to another comment that it is probably related to the title of this post 'CPF Life or ETF for retirement'.

You are probably going to share with me more about ETF, I suppose? That will be nice!

I thought I better clarify that my post wasn't about comparing CPF Life with ETF. AK wrote the title and I was wondering a bit why he made that comparison. I think it's probably the topic that one of the VIS speaker focussed on when he told the audience not to buy annuity. I wrote AK an email to express my opinion about annuity which I deem as insurance. I wasn't even thinking about ETF at all. It wasn't also intended to be a guest post. I was just sharing my personal plan with AK.

Anyway, to me, ETF is a form of investment. That would fall under the 70% of the funds that I would allocate after putting aside 30% for annuity.

ETF is certainly an option I would consider. If only we can use CPF-SA to buy ETF, I would apportion some of my SA savings to do so. :)

AK71 said...

Hi Endrene,

Yup, Eric Kong made a statement at VIS 2014 about not buying an annuity and how regular investing in an ETF could be a better way to secure retirement income and still have assets to pass to the next generation.

You wrote me an email to offer your perspective on the matter which I subsequently published as a guest blog with your permission.

I don't know what Drizzt offered to send or has sent to you. So, I have no idea how he saw this blog post.

I guess I should have provided a bit of background information to explain the title of this blog post. Apologies. :)

EY said...

Hi AK,

No, no, no. No apologies needed, pls!

Drizzt hasn't sent me anything yet but I dropped by his blog and realised that he's quite a proponent of ETF. So I guess he must have made the connection and I thought some of your readers could also have misunderstood that I'm recommending CPF Life over ETF.

So I thought I'd better clarify. Drizzt is probably trying to pull together quite a bit of things to share with me. Paiseh to make him busy!

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