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Planning a $1.4m legacy but be aware of this.

Saturday, June 17, 2017

Reader:

I have an idea to bounce off you. Just chit chat. I know you don't give advice.

I am 54 and just became a father. I married rather late in life.





As a father, I am thinking about my child's future. I am well aware that by the time he is 21, I would be 75 if I am still alive by then.

Next year, I will be able to withdraw more than $100K from my CPF account as I have already met the minimum sum for my age. I am thinking of putting the money into my child's CPF SA instead of leaving it in my OA.

I could top it up to $166K and do a one time top up to his CPF SA and, compounding at 4% a year, he will have a retirement nest egg of more than $1.4 million when he turns 55. I won't be here for most of his life and this is something I can do for him.



AK:

You have to remember that your CPF money is meant to help fund your retirement. If you have other ways to fund your retirement adequately, then, OK.

Yes, your child won't be able to touch the money until he turns 55. If your plan is to help your child be financially secure in his old age, I would say that this is a very generous and thoughtful thing you are doing for him. 





However, remember, the CPF SA interest rate could change over the very long term and 55 years qualifies as very long term. After all, the plan is to peg it to long term government bond coupons eventually, if I remember correctly.

When would this happen? 

I have an inkling that this might happen when the 10 year SGS bond rises to a level that is at 4% or a bit higher. We will have to accept higher or lower returns on our CPF savings in future from then on.

So, we won't be wrong to expect CPF SA interest rate to fluctuate over the very long term. So, don't think of 4% as something that is sacrosanct.

Even so, at 3.5% per annum, $166K will become $1.1 million in 55 years. At 3% per annum, it will be about $844K in 55 years. Still quite a bit of money.

Your child won't have to worry as much about retirement funding and can be quite comfortable as a working adult, I imagine. Lucky kid.

A father's love. :)





Related post:
Make CPF part of child's savings.

17 comments:

apex property investment said...

I beg to differ. At this point of time, you can buy a legacy plan to be bequeath to your son upon your passing. This is way better than the CPF SA. you can will it to be set aside some money into his SA and then another sum to fund his lifestyle.

AK71 said...

Hi apex,

I know some people like SMOL would say we shouldn't coddle our children. I tend to agree.

However, I am not a parent and I know that there are many parents who would want to leave something for their children.

As for whether a legacy plan will return more than the CPF-SA, I am skeptical as it is usually a universal life insurance and annuity bundled. As returns go, what the CPF-SA and later the CPF Life offer would be hard to beat.

Of course, if the intention is for the son to access the money earlier and not when he is 55, your suggestion is the better option. :)

AK71 said...

Luis Tan:
How about 60k to SA, the remaining into investment vehicle? Still need cashflow as education fund for the child? 60k shld be able to help the son to him MS when he retire... that shld be sufficient

AK:
I don't know if the reader has more savings elsewhere or if he has other sources of income. I only know he is thinking of what to do with the money he is withdrawing from his CPF account next year. I guess it is better to transfer the money into his child's SA than to keep it in his OA if he has no other plan for the money. :)

ED said...

Hi AK,

I know that most parents want to leave something for their kids when they are gone. Me included. But after reading this article:

http://www.marketwatch.com/story/why-you-might-want-to-disinherit-your-kids-2017-06-14

It maybe wise to not leave them too much.

I think, forcing our kids to donate away part of their inheritance will greatly humble them. A good life lesson to pass on, besides money.

Ed

ED said...

Hi AK,

I know that most parents want to leave something for their kids when they are gone. Me included. But after reading this article:

http://www.marketwatch.com/story/why-you-might-want-to-disinherit-your-kids-2017-06-14

It maybe wise to not leave them too much.

I think, forcing our kids to donate away part of their inheritance will greatly humble them. A good life lesson to pass on, besides money.

Ed

apex property investment said...

AK71, I come from a point that the money had more flexibility as a legacy insurance than to put into the SA, which is stuck for a VERY LONG time.

AK71 said...

Hi ED,

When I read that Warren Buffett would not leave his children any of his abundant wealth but is giving everything away to help the poor, I thought it was a bit extreme but he really believes that they don't deserve it and that there are people who need his help more.

AK71 said...

Hi apex,

Yup, I know. That was why I said if he wants his child to be able to access the money sooner than later, your suggestion is the better option. :)

Cory said...

The best way I feel to show love is to equip our child the skill to survive well.
We do have to remember the inflation monster after 55 years means the effective amount is not going to be enough vs a good education effectiveness.

Laurence said...

Jackie Chan has also been doing great charity work in china, building schools for the poor. He has also declared he will donate everything to charity. Many other ultra rich in the west are doing similar or at least giving away a huge chunk of their legacy to charity or charitable foundations.
It's also my intention to leave everything to children's charity, although by then there might only be peanuts left.

http://www.atlnightspots.com/jackie-chan-to-donate-entire-fortune-to-charity-and-leave-nothing-for-son

AK71 said...

Hi Cory,

Most parents would worry. It is normal. However, when we are 6 feet under. Cannot see liao. Sometimes, it is not even about money. I look at the current saga with the Lee family and I shake my head. -.-"

AK71 said...

Hi Laurence,

I believe a significant portion of my assets will go to charity too when I pass on. :)

Kevin said...

How about topping up a portion to his child's CPF OA as it can greatly help him or her in purchasing his/her first home upon marriage in future(that is if no properties are going to be bequeath by the 54 yo father)?

AK71 said...

Hi Kevin,

Sacrificing some interest income to do a regular voluntary contribution is a good idea if the intention is to help the child fund his local tertiary education or to purchase his first property in future.

Such a voluntary contribution would see funds channeled into the OA, SA and MA. However, it would be subjected to the CPF annual contribution limit. For a sum of $166K, it would take about 5 years to complete.

AK71 said...

但你不可忘记,公积金特别户口的利率长期而言可能会变动,而55年是属于一个很长的年期。毕竟,如果我没有记错,公积金特别户口的利率最终是会与新加坡政府债券收益率挂钩。

这个情况何时会发生?

我大略知道当10年期新加坡政府债券利率升高至4%或更高时,这个情况可能会发生。到时候,公积金存款利率升高或下跌,我们都要接受。

因此,公积金特别户口利率长期而言是会波动。我们不可以认为4%利率是坚定不移。

但尽管年利率只得3.5%,16万6,000元在55年后也会变成110万元;如果是3%,55年后也大概变成84万4,000元。

Full translation at:
http://cj.sharesinv.com/20170627/47832/

RayNg said...

Instead of get lock-up in CPF-SA, he may consider to invest lump sum into STI ETF or similar market index.

STI ETF historical CAGR is ~9% excluding ~3% dividend.

55 years invested STI ETF may leads to ~$19 million as compare to CPF-SA of $1.4 million.
On the worst case if STI CGAR is 6% (33% down), it still yield $4.1 million

On top of that, he will have a modest dividend of 3%.

p.s. assume he has a discipline 1) ignore market volatility, 2) "lock-up" this investment and never sell them till 55 years later... 3) This is a surplus cash that he has 'donated' to his son.








AK71 said...

Hi RayNg,

Investment grade bond versus a basket of local equities.

Of course, no one can say for sure what the future will be like for either option.

I wonder what would he choose to do. ;)

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