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Free "e-book": Achieving level one financial security for Singaporeans.

Sunday, June 1, 2014

When I mused on how I should perhaps start grouping blog posts together to produce "e-books", I was really kidding because it sounds like work and I am too lazy to want to have more work. However, readers responded so well to my first "e-book" that I thought maybe I should try my hand at another one.

This time, I am inspired by a conversation with a friend over dinner last night. He was complaining about the CPF and how it should be abolished. I told him that it is extremely unlikely that the CPF would be abolished and since it is here to stay, we should learn to play the game and play it well.

In a way, I told him, the CPF is like his mother-in-law. If he is not prepared to divorce his wife, he must accept his mother-in-law. Similarly, if he is not prepared to renounce his citizenship, he must accept the CPF. He laughed and asked me how to play the game and play it well?

OK, before I start, I think that I have played the game pretty well but I am almost certain that it could be played even better.

What does this show? 
Would you like to make a guess?

We must first understand that the CPF is a tool that is primarily meant to help us meet our retirement needs. So, if we can make use of the tool to help us towards this purpose, why not?

Chapter One: Do you want 2.5% to 5% risk free rates?
Often, we hear people saying that we can achieve a higher return if we invest our CPF money. Well, how many of us are savvy enough to achieve 2.5% to 5% compounded annual returns? If we are that good at investing our own money, we should have more success stories than sob stories with the CPF-IS. Unfortunately, the opposite is true. Investing in the stock market is never free of risk while the CPF's rates are risk free. Leaving money in fixed deposits to earn 1%  return a year is, in fact, a higher risk proposition for any amount above $50,000.
See: Securing risk free returns early for our retirement.
See also:
How to upsize $100K to $225K?

Chapter Two: Do you want to pay less taxes?
While saving towards retirement, we could also pay less taxes. Sounds good, does it not? We could also help our parents become financially more secure and to pay less taxes. Again, how could this be a bad thing? If our parents are financially more secure, so are we. So, how do we do this? We do this by voluntarily contributing funds to our CPF-SA (MSTU. Now known as RSTU.) and CPF-MA.
See: Build a bigger retirement fund with CPF-SA and Voluntary contributions to CPF.
See also:
Know how to grow our CPF savings.

Chapter Three: Do you want to buy an apartment?
Realise that when we use our CPF money for housing, we are giving up on pretty attractive risk free returns. So, when we want to buy as pricey an apartment as possible with our CPF money, think again. It is an opportunity cost. For people who buy BTO HDB flats, I think that it is a safer use of their CPF money because these flats are subsidised. However, for people who use their CPF money to buy resale flats or private housing, there is a higher risk of losing money on their purchases. We should not take too much risk with our CPF money.
See: Buying an apartment: Considerations.

Chapter Four: Do you want free medical insurance?
One of the biggest worries many of us have must surely be the rising cost of healthcare in Singapore. I am certain that by the time I am a senior citizen, healthcare costs would have become even higher. So, what do we do? Buy the best H&S policy we can find. Pay 10% of our hospitalisation bills and the insurance company pays the rest? Sounds good. Of course, this does not come free. There is always a catch. Insurance premium must be paid. However, we could help the government pay this for us. Huh? Clue: The CPF-MA pays 4% in risk free rate per annum!
See: How to get free medical insurance in Singapore?

Chapter Five: Do you want more money at retirement?
Having said all this, the money we have in our CPF will never be enough to provide for our retirement. So, make use of the SRS which will help us pay less income tax as well and be more pro-active in growing our wealth towards having a financially secure retirement. Towards this end, we need to learn how to invest our money too.
See: SRS: A brief analysis and Young working Singaporeans, you are OK?
See also:
Made $1M investing for income.

Chapter Six: Do you want to invest with your CPF money?
Do not invest for the sake of investing. Be educated and do your homework. Money in the CPF is almost sacrosanct to me. I will not utilise it unless the benefits are almost guaranteed. I will not utilise it unless I could get a much higher return. There will always be people who will make guarantees and try to make us part with our money. If you are ever in doubt, stay out. It is better not to make money than to lose money, especially our CPF money.
See: Nobody cares more about our money than we do.

Probably, the biggest advantage of the CPF is that we cannot take out any of the money including the interest earned until we are pretty old. Huh? This is an advantage? Yes, the magic of compounding will naturally work in such an instance.

Just ask people who are trying to save money whether they have ever been tempted to use their savings for something else? Or have they ever given themselves a break from saving money due to some reason. I am sure many are less disciplined than they believe themselves to be. CPF is a form of forced savings and probably the best form there is.

At a risk free rate of 4% per annum, money will grow 50% every 10 years without any additional funds injected. Of course, the more time there is, the greater the effect. So, if you have never looked at the CPF this way before, you might want to start now.

Time is required to make this work. The earlier we start, the better off we are going to be.

Related post:
Free "e-book": Retiring before 60 is not a dream.


pf said...

Great ebook!

I believe in forced savings. To the point that I forget about it. And by the time I remember, I realized I did ok without that money. We all have the ability to adjust. So, yeah...I'm going to do the min sum top up end of this year. :)

AK71 said...

Hi pf,

Hahaha... Yes, for some of us. Forced savings is the way to go. No kidding. :)

This reminds me of another blog post: Don't see money, won't spend money.

AK71 said...

From my FB wall:

Fast Twitch:
If government does not increase the minimum sum and does not increase the draw-down age, I would be most willing to top up of CPF-SA to enjoy 4% risk free returns.

I received more than $7,000 in interest payment for the money I have in my CPF-SA in 2013. Of course, I received interest payments for my funds in the OA and MA too. Basically, the government has helped me to meet the increase in the minimum sum required in 2014.

This favourable outcome is possible because I did not hesitate to beef up my CPF-SA during the first few years of my working life. Essentially, I am letting time and the government grow my CPF savings, risk free.

This is what I mean when I say we could play the game and play it well. The choice is ours to make.

pf said...

Actually I did a calculation, with compounding, there is a point in time which letting the SA account grow organically to reach min sum by 55 (my own projection)

In other words (for me), there is less number of years for me to take advantage of the tax relief. This prompted me to start topping up soon. Or else, I might lose out on this incentive.

Gary said...

I'm just wondering how the CPF maintains 4% p.a??? How does it churn the returns?

Anonymous said...

Hi AK,

With the ongoing heated CPF discussion going on. I was wondering when you will have a discussion on this. :D

I totally agree with you on the merits of CPF and how it is really there to help Singaporeans manage their retirement, own housing. And I am love the power of compounding! Every dollar spent is a loss in compounding too! Haha

The main red flag that I have is if more could be done to grow the egg even though the egg is relatively risk free now. The current CPF-OA at 2.5% is actually moving too closely to the recent years inflation rate which is of discomfort to me because the power of compounding diminishes and hurts CPF basis for force savings.

I read recently that MAS estimates the core inflation rate (this rate removes housing and cars) to be around 2 to 3% this year after reviewing April figures. Core inflation rates for the past few years:

year 2010 = 1.5%
year 2011 = 2.2%
year 2012 = 2.5%
year 2013 = 1.7%

The recent rationale for increasing the minimum sum is also to deal with the increasing inflation.

Hence, I hope the government will pay more (no pun intended haha) attention to ways to beat the
inflation rate such as keeping CPF
rates competitive over and above the raising inflation so that the power of compounding is not lost. The government is a savvy investor in their various ventures. I am sure they can do that. :D


AK71 said...

Hi pf,

You have cracked the CPF-SA secret code! :)

That is the power of compounding and although I have blogged about this many times before, it is hard to convince detractors. I don't understand why. I guess the proof is in the pudding.

Being overly suspicious and not taking appropriate action is going to be a major stumbling block in meeting the minimum sum which, as it stands, is really minimal in meeting our retirement needs.

AK71 said...

Hi Gary,

Amazing, isn't it? ;)

When the government dishes out good stuff, I don't question. I just take. ;p

If the government should one day default, all of us Singaporeans are pretty much fried anyway. -.-"

AK71 said...

Hi Rusty,

I hear you and I agree! Higher interest rates for our CPF savings? I must be bonkers if I should disagree. ;p

What is the probability of higher interest rates happening? I would say quite good. I mean if we look at history, the government did make a change to pay 1% more in interest on the first $60K in our CPF savings. So, there was a precedent. :)

Any increase in CPF interest rates will benefit all members but it will benefit those members who are believers more and those who have been doing the right things to grow their CPF funds more rapidly. ;)

Unknown said...

Hi AK,

Two question:
(i) Can we ever take out the "minimum sum" amount from our CPF? My understanding is that your minimum sum is like a passport which enables one to get an annuity payment (until death) when one reaches the age of 65. So that means in a way we will the minimum sum will always be with the government?

(ii) The tax benefit for voluntary top up is at S$7k no? And this is offset against taxable income? That means the max tax savings (assuming one is in the highest income tax bracket) is only S$1,200 (20% * 7000).


AK71 said...

Hi JW,

The minimum sum cannot be taken out in a lump sum. It will be used to fund the CPF Life which will give us a monthly income for life.

You might want to read more about this: A simpler CPF Life

Your understanding of the tax savings we can get from a voluntary contribution to our CPF-SA is correct. Up to a maximum of $7K of our taxable income could become non-taxable in such an instance. :)

pf said...

But the exponential power of that 7k thru compounding over many years is not capped. :)

AK71 said...

Hi pf,

Oh, indeed. $7K compounding at 4% per annum will amount to quite a bit of money over 30 years. If our CPF-SA has yet to hit $40K, this $7K will be compounding at 5% per annum! ;)

Unknown said...

Thanks for the Clarification.

Planning to transfer a significant portion (80%) of my CPF ordinary account to the special account.

I don't see myself making a significant drawdown on my money from my OA.

What's your philosophy on OA & SA split?


AK71 said...

Hi JW,

I like the way you put across the question. What is my "philosophy"? It is safe for me to answer this question since it won't be seen as giving advice. ;p

If you are pretty sure that you will not be using your CPF OA for housing or anything else, yes, a transfer of funds from OA to SA will benefit you immensely as funds for your retirement compounds at 5% for the first $40K and at 4% for the rest. I find this exciting. :D

If I were very sure about not having any need to draw on my OA money, I would transfer as much of the money to my SA as possible to grow my retirement funds more rapidly.

Money in the SA will grow more rapidly as it earns 60% more in interest compared to the OA. Before you know it, the time will come when you are not allowed to transfer from OA to SA anymore because you have hit the ceiling. A happy problem. ;p

However, if you are planning to buy a property in future and you think you need to utilise your OA money, you want to make sure you have enough money kept in your OA for a 10% down payment on your property. The actual amount will depend on the price tag you have in mind, of course. :)

AK71 said...

Hi JW,

I went back to read your earlier comment. You have to remember that a transfer of funds from OA to SA will not give you any tax benefits. Only a voluntary contribution in cash up to $7K will.

Unknown said...

Hi AK,

I'm a long time reader but only posted for the first time. Just want to know your thoughts on the CPF SA top up.

Putting money in CPF SA to grow at 4% is one way to grow to meet minimum sum but is it good in most cases or only applies to specific scenarios?

For my case, I already have more than 40k in SA so the rest are earning at 4%. If I transfer some money from OA to SA, I just earn a mere 1.5% extra but will limit myself to a smaller amount to investing in stocks(35% of OA). Currently holding some OCBC stocks @$9.31. I still have some left over in the 35% limit but I wanted to keep it in case OCBC decide to call for rights issue for getting cash for the Wing Heng purchase.

I can top up SA with hard cash. But is it really a good use of using hard cash to top up SA?
1) I am just a lowly PMET so in term of tax saving, it is not much.
2) I invest my hard cash in stocks as well and maybe due to luck, my gains(capital appreciation and dividends combined) are more than 4%. Shortchanging myself by putting my cash into something that give lower returns(but guaranteed, provided the government do not change its policy) do not really appeals to me.
3) With cash, I have much more flexibility but if I do top up into SA, I will lock up my money till 65(provided they do not shift goalpost again). Even after 65, the amount of payout is not guaranteed...

So in my case, is it still beneficial to do top up in SA?

P.S. my main pet peeve is throwing additional money into a government annuity(CPF Life) that guarantees nothing, do not seems to be sensible. For the sake for that 4% compounding and hitting the minimum sum, I throw in cold hard cash that might(or might not) give better returns and definitely have more flexibility and accessibility at anytime. Do not really make much sense to me...

P.S.S This is repost. Need to edit a typo but realised it do not have a edit button so end up deleting and repost. Also realised my real name is shown. Dear AK, please help me remove the above comment if possible. Thanks

AK71 said...
This comment has been removed by the author.
Unknown said...

Hi AK,

Thank you for the reply.

Confident that I can generate more than 4% returns over long term but cannot guaranteed...Lol

But although the Law guaranteed your 2.5%/4% interest, it does not guaranteed the payout...Lol

CPF Life is guaranteed by law. But the law also mentioned that CPF Life can payout nothing in case the fund is insolvent. Also the amount of payout is not guaranteed. I do not have much faith in such a system that shift its goalpost and revising its payout/policy every few years.

Transferring from OA to SA will gain you an addition of 1.5% interest of the amount you transferred. That is additional of S$150 for every S$10k. How much can one transfer over after a purchase of a home? Usually not much. I will rather have an extra 20-30k sitting in my OA as buffer in case I lose my income(no more CPF contribution). That buffer will help many to cover for the housing instalment for many months during the period of job loss. Also do take note that the first 20k of OA has an interest of 3.5% so SA only have 0.5% interest advantage over the first 20k of OA. The peace of mind with 20-30k in OA outweighs the extra interest earned in SA. Also do take note that transferring of OA to SA is irreversible.

The only reason I invested with OA is because I hope to accumulate more than the minimum sum and able to cash out the excess by the time I am 55. Hopefully by then, I had more than the minimum sum and our government do not change the withdrawal age/drastically increase the minimum sum/or even implement new policy to prevent withdrawal.

Sorry for the pessimistic view on the CPF.

AK71 said...
This comment has been removed by the author.
AK71 said...

Hi Lim LS,

Thank you for sharing your thoughts here. Happy to here from readers always and happier still to hear from a long time reader who has decided to break the silence. :D

If you are confident that you are able to generate more than 4% compounded returns per annum consistently with your cash in hand and if the tax savings is not meaningful for you, do not do any cash injection into your CPF-SA. The same line of reasoning applies to your money in the CPF-OA minus the bit about tax savings.

However, you want to bear in mind that interest income from CPF is risk free. It is guaranteed by law. Also, the SA pays 60% more in interest income compared to the OA. How so? 4% compared to 2.5%. Simple proportion.

My CPF savings are a fail safe for me. For a risk free environment, the returns are pretty good. You can say that it is part of my risk management effort.

If the CPF should go kaput, our goose is pretty much cooked anyway. Singapore is pretty much down the jambun than.

The CPF Life is guaranteed by law. Of course, the law could change but I am confident that if it should change, it would be for the better. This is where faith in the system comes in.

Now, the cheeky bit in AK will say that for people who do not have any faith in the system, they should not even bother to grow their CPF OA through investments. They might not see their money anyway? Right? ;p

I won't tell anyone what to do or not to do. I have presented cold hard numbers and I have shared my own experience with the CPF. Cannot argue with numbers.

What remains is really whether people believe in the system. If they don't, then, I will say "If in doubt, stay out." :)

AK71 said...

Hi LS,

No apologies needed. We are all entitled to our own opinions, after all. :)

To trust or not to trust the system? This depends on our opinions. A debate centred on opinions will at best provide some distraction. ;p

I feel that, however, your effort to grow your OA money really has the same purpose as my effort to grow my SA money. The desired end result is the same. So, you really need to have faith in the CPF. Otherwise, why bother to grow your CPF savings at all? ;p

The transfer of funds from OA to SA is a one way street. So, anyone thinking of doing this should think carefully if they will need to utilise their OA money for any allowed purposes in future.

I should provide a link to this guest blog:
Tea with Vic: Transferring funds from OA to SA?


Unknown said...

Hi AK,

Yes, both of us are looking to growing of the CPF. But just commenting on the ways to grow the CPF.

Personally I believed that topping up cold hard cash in SA seems to be unwise as we can see our government coming up with policies the last few years to restrict the withdrawal of CPF. That means these rules are not set in stone and there is possibility that more rules might be imposed and also the chance of not being able to retrieve the money when you need it the most. I feel there is no reason to lock up accessible cash in hope for risk free 4% return(but with uncertain payoff condition). Do not look like a great trade off in my opinion :)

As for transferring from OA to SA, unless you have paid up/almost paid up for your flat(or not going to buy one), and have excess, topping up the SA for additional interest is acceptable since it is almost risk free. Otherwise, using it for paying for home might be a better choice.

But different people, different strokes. Just airing my views and hope to get some insights from the people from the other side :)

AK71 said...

Hi LS,

I agree with you totally about not transferring funds from OA to SA if there is a need to utilise the money in the OA for housing purposes now or in the future.

As for whether we should do voluntary contributions of up to $7K into the SA annually to enjoy tax relief as well as the risk free 4% interest rate per annum, to me, it is really a no brainer because it fits in with my beliefs. Obviously, not everyone shares my beliefs.

What will happen in the future is anyone's guess. All I can do is to make plans with my own understanding of what the CPF can do for me. So far, so good. :)

Where it is a matter of opinion and not based on hard facts, obviously, we can agree to disagree. In fact, that is probably the only sensible thing to do. Everyone will draw his or her own conclusion. ;)

Of course, I am just talking to myself. Not giving any advice. ;p

pf said...

May I remind that for the buying of wing heng bank, there may or may not be rights issue to raise funds....ocbc has recently started the 360 account with 3.05% interest. Thats is the highest interest in the market by far...thats should bring them much liquidity.

Unknown said...

Hi AK,

Hard fact - your SA is growing nicely according to your plans as shown electronically on the CPF website.

And your belief in the system will pay out to you eventually. With this 2, it will be good enough for you.

As for me, my faith in the system had wane drastically after the introduction of minimum sum, followed by CPF Life, revision of CPF Life policy, change of drawdown age from 62 to 65, locking down of a lion share of your CPF straight after 55 as first installment and lastly the recent announcement of the right to pay nothing in case of fund insolvency.

Some will see this as the government is helping the citizen to prepare for retirement while others might see it as the government making it tougher and tougher to withdraw your savings. To make things worse, there is no guarantee to the amount of payout. I'm not sure how many of us here will be willing to use cold hard cash to buy an annuity that guarantee nothing and can shift the drawdown age at its own discretion...

Just voicing my thoughts... not trying to force this down anyone's throat...

As such, I shall embark on a different route to securing for retirement. Any payout from CPF will be considered as bonus.

It is nice to chat with you. Although the opinions are different but the end goal is the same. Finding the best way to grow the money to prepare for retirement.

Good luck to our journey and cheers :)

Unknown said...

Hi pf,

You are correct. There may or may not have right issue. I am just preparing for the "may" scenario...

Just another kaisu Singaporean that like to prepare for worst case scenario :)

Unknown said...

And a side note... I have shifted my emergency fund there. Not sure how long will this interest will last.

Lets enjoy while the promotion is on.

P.S. 3.05% is really nice :)

AK71 said...

Hi LS,

Yes, luck is an important element, for sure, in everything that we do.

Now, I hope that the government will increase the interest payment on the SA to help Singaporeans be better prepared for retirement. There is talk on how best to make improvements. 6% on the first $40K in the SA? Dare I hope? LOL.

I have another 12 years before I turn 55. So, we will know whether I am right to trust the government or not by then. LOL.

Good luck to us all. :)

EY said...

Hi AK,

I'm not sure if people would rather pay 40% taxes and receive social security when they grow old which would also not be guaranteed or have their employer contribute 16% of their pay into their own CPF account. Taxes, I see it as my money. Employer contribution, I see it as 'free' money. I'm sure those who disagree will throw rotten eggs at me. It's simply a perspective that I prefer to adopt as I don't believe that employers would really pay us 16% higher salary if there weren't CPF contributions.

But I'm not for topping up the CPF-SA or OA using cash. :)

To plan for retirement using CPF, I've done the following:

(i) Grow my SA by transferring money from OA to earn the higher interest to ensure that I would meet the minimum sum by 40 so that the compounding will take care of a proportion of my retirement.

(ii) Maximise the 'withdrawal' of my OA. Use most of the money to pay for my mortgage, leaving about $20k in the OA for contingency. Even though the interest in OA is higher than the mortgage loan, in the long run, the asset appreciation and the returns from rental will definitely beat the lost interest. When there is enough of balance in my OA to buy stocks, I would pick up some to earn dividends. I would sell if the price appreciates by 20% - 30% and wait for new opportunities.

Well, no right or wrong approach. We make decisions based on our beliefs and our knowledge. And like you say, the outcome will depend on our luck. Can't rule that out entirely. :)

AK71 said...

Hi Endrene,

No one would willingly give money away to someone else usually. Appeal to a person's sense of charity? It could work but, yes, thank goodness for the CPF. ;p

OA to SA transfer is something I did very early on in my working life and it has worked out very nicely. My SA's organic growth now basically meets the increase in the minimum sum dished out by the government as and when it happens.

For sure, we can make plans but we can only hope that everything works out as we have envisioned.

Could there be a period of time which could see interest rates skyrocket and the rental market dismal? We cannot rule out that possibility. I remember the Asian Financial Crisis and how many had to sell properties at a loss.

I am somewhat more conservative with my CPF money as I think of it as a fail-safe. I guess I am also lucky that I have the option to use cash instead of my CPF money to pay for the purchase of my home now. For people who have to rely on their CPF, then, this discussion becomes academic. :)

Whatever our belief, whatever our strategy, a good dose of luck helps. I certainly hope that everything works out nicely for all of us. :)

AK71 said...

A feisty old gentleman:

Contribute more to the minimum sum?

An option to put more into the risk free scheme?

K said...

Hi AK,

Does it make sense for me to do voluntary contribution to CPF if I am no longer working? I assume it only makes sense if my money is not generation 2.5% returns for me? I am not 55 yet.


AK71 said...

Hi K,

It makes sense for me. I am voluntarily contributing to my CPF account since I am not allowed to do any MS Top Up anymore.

See this:
AK is buying a 12 year tenor AAA bond.

All of us should have a risk free and volatility free component in our investment portfolio and we are lucky to have the CPF in Singapore.

Remember, it is not correct to compare CPF's interest rates with what equities could potentially do for us. That is not an apple with apple comparison. Instead, think from a portfolio management angle. :)

AK71 said...

FB reader:
"I thought u say we not suppose to use cpf buy share. .... also not use cpf buy house. Cpf is meant for retirement. Sorry."

"I think you are mistaken. See Chapters 3 and 6:"

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