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

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. 

That is 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.

Want to withdraw $500,000 from CPF at 55?

Reader says...

A quick intro about myself.

I am 34 this year, staying in a bto hdb flat and have existing housing loan of $20k outstanding (serviced by my wife and myself).

Checking with you on my strategy for CPF.

I have around $5k in ordinary account, and $145k in special account.






Already met my min sum for medisave. Am hoping to hit my S.A. min sum when I reach 35yo.

My thinking is that once my min sum (FRS of $166k) for S.A. is met, all employment contribution will flow into my ordinary account(~$2k a mth), and I would be able to hit around $500k when I reach 55 ( $24k x 20yrs - not including contribution from bonuses) and withdraw this amount.

Am I missing out on anything here? Thanks!








AK says...

Once you have hit the FRS, you will still be making mandatory contributions to your SA. 

So, monthly CPF contribution goes to OA and SA but nothing to your MA if it has maxed out.

When you hit 55, the prevailing FRS goes to the newly created RA and you can withdraw whatever is left in your OA and SA, if you like.







If we do the right things, we could withdraw a more meaningful sum of money from our CPF account at age 55 instead of a token $5,000. 

Do you like that? 

I know I do.







Related posts:
1. Changes to the CPF and SRS.
2. My CPF-SA (Jan 2016).

A big loan to buy a condo and CPF not enough.

The focus should be on the CPF but I cannot help but wonder if Kelly has little money, why is she spending it on dogs and cats?
Shouldn't she use the money to better prepare for her old age?
(Credit goes to Raymond Ng for sharing the above with me. )

Reader (not Kelly):
I came to know of your blog recently and find it to be full of useful information.I regret that I did not know what you know and had not done what you've done in terms of CPF voluntary contributions when I first started working.

I've recently bought a condo and borrowed serious money from a bank to do so ,so much so that I can only pay off the housing loan at the age of 65.:(

I've attended trading courses/read up on trading for the past few years and through my experience,have some confidence in generating returns of 10-20% /annum

If you were me and have some confidence in beating the CPF rates,would you still consider contributing voluntarily to CPF or try to 'frontload' and payoff the housing loan first as the loan amount is much much more than what I currently have in my CPF?

I'm also conflicted towards contributing to CPF as it will still eventually go towards paying off (at least the OA portion) the loan and I may be able to generate more( in terms of %) on my own through trading.

Hopefully you can shed some light on what you would do if you were on a similar situation financially (short of selling the condo).



"...higher income ceilings for new HDB flats..."

AK:
We are all made differently. So, we will look at things differently.

However, I think we should be able to agree that there is a place for risk free and volatility free savings instruments in our life, especially one that rewards us relatively well like the CPF.

We can be confident as an investor or a trader. Confidence is a good thing but we should also be sensitive to the fact that things do go wrong and sometimes very badly wrong.

I am reasonably confident in my ability as an investor and I used to trade quite a bit as well but I did not chuck CPF in the back seat and I am still contributing to my CPF account in my retirement.

What would I do if I were in your shoes? I don't really know because I would not ever put myself in such a position.

I don't know if you have read my blogs on how our homes are really consumption items. Something that costs more than $1 million, which does not generate income and which requires me to borrow hundreds of thousands of dollars to purchase is mind boggling to me.

I can only say don't discount the importance of the CPF in your life especially if you believe in having a risk free and volatility free bond component in your investment portfolio.

Best wishes,
AK

Why do we buy insurance? To transfer risk because bad things do sometimes happen in life.

What about the CPF? 

I told friends and family years ago that if all my investments failed, I would still have my CPF money.

I am sure Dr. Lee Wei Ling would agree with me. To recapt,

Related posts:
1. 4 ideas on housing loan repayment.
2. We need a home but a condo?
3. $1.2m in my CPF acount by age 65.

CPF members above 55 should use it as a savings account. (Deposit for 5 years 11 months for higher returns?)

Some readers might remember this blog post:

http://singaporeanstocksinvestor.blogspot.sg/2016/06/mom-stunned-at-what-happened-to-her-cpf.html





My mom has met the minimum sum for her cohort and she has also maxed out her CPF-MA. So, guess what my reaction was when she sent me the following SMS:

"I went to XXX bank because my fixed deposit matured and they asked me to deposit for 5 years 11 months. Get 1.6% per year for first 5 years, Balance 11 months see how is performance. Get minimum 1% and maximum 2%. Principle guaranteed upon maturity but suffer penalty if withdraw before maturity. Can put or not?"

Noooooooo! 

A thousand times, nooooooo!







I told her she might as well put the money in her CPF account and enjoy 2.5% interest per annum. She is allowed to withdraw the money anytime she likes too.

5 years 11 months? 1.6% per year? Penalty for early withdrawal? 

You must be kidding me.







For those who do not wish to deposit more money into their CPF accounts, they could enjoy similar returns by simply parking their funds in Singapore Savings Bonds (SSB).

Held for 10 years, the SSB yield is about 2.1% per year but if withdrawn after 5 years, the yield is about 1.6% per year.  (See: Daily SGS Prices.) Safer and no penalty for early withdrawal too.




Don't ask barbers if we need a haircut.
Also read these which are from my FB wall:

"At 55 and older, cannot top up SA anymore.
And any top up to RA cannot be withdrawn suka suka." - AK

"After 55 (after creation of CPF-RA and meeting BRS or FRS) and if unemployed, yes (the member can still do VC to his CPF and any money in CPF-OA and SA can be withdrawn anytime).
Note that this is for regular VC which puts money into OA and SA when MA is already maxed.
If MA is not maxed, most of the VC will go to the MA for older members and will be locked up.
Top Up to the RA will also be locked up.
At 55 and older, Top Up to SA is not allowed." - AK

If the CPF member is still gainfully employed after 55, withdrawal is allowed once a year.






Shirl Wong:
The rules have changed. Withdrawal not restricted to once a year if employed. I have checked this at CPF board recently.

Desmond Lee:
Yes the rules have changed. CPF officer told me last week and I did a check at their website.

Updated on OCTOBER 17, 2017.





Related posts:
1. Nobody cares more about our money.
2. Bad experience at a local bank.
3. Singapore Savings Bond.

An average HDB household and $1 million.

Some might remember that I talked about an article written by Cai Haoxiang in The Business Times in 2013. He wrote about what an average household's monthly expenses could look like in 2042, using the Household Expenditure Survey 2007-2008 from the Department of Statistics as reference.

1997-1998, an average HDB household's expenses was S$2,681. 2007-2008, it was S$3,138. That was an increase of 17%. By 2042, if core inflation is 2% a year, that number would hit S$6,400. In 3 decades, the number doubled and then some. 

If we were to assume that costs would increase steadily, monthly expenses for an average HDB household could hit S$7,500 by 2052.





Many people say they need $1 million in savings when they retire at 65. I don't know if they know this for sure or if they are just saying it because $1 million sounds like a big deal.

OK, let us look at how long would that $1 million last?

Hold on to your seats.

At a draw down rate of $7,500 a month, about 11 years, assuming that the banks did not pay interest on savings and that there would be no further inflation. 

The money will run out at age 76.

Alamak, how like that? Many people are expected to live till 85 or older these days.

2052. 

Hmmm. 

That is 35 years away.

So, if you are 30 years old this year and you are from an average HDB household, this could well apply to you. 

Aiyoh. Stress.

OK. Before you run around doing a Chicken Little, an average HDB household was assumed to have 3 to 4 members. So, if your household size is smaller, then, expenses should be lower. 




Single or DINK at 65, anyone?

Of course, even for married couples who have children, at 65, their children should be financially independent of them. So, again, expenses should be lower than what is assumed here.

I am going to stick my neck out here and say that, in 2052, $4,000 of spending money a month could probably give most people who are 65 and retired a comfortable life.

If you are 30 this year, have $1 million in savings by age 65, you should be able to fund a $4,000 a month retirement easily into your 90s.

If we max out our CPF contributions annually and top up our CPF SA to hit the Full Retirement Sum (FRS) earlier, we could have this magical $1 million in our CPF account by the time we are 65.

Don't believe me? Read this:

http://singaporeanstocksinvestor.blogspot.sg/2016/08/1m-in-cpf-by-age-65-what-about-12m.html

From an average HDB household? If you do not have the temperament to be an investor, this is something to seriously consider.





Singles and DINKs will find this easier to achieve than those who are married with kids, everything else remaining equal.

Some might have to try harder and some might take more time but if this is important enough to attain, then, do the right thing. Start today.

Related posts:
1. Retiring a millionaire is not a dream.
2. A cornerstone in retirement funding.

Earn $350K a year and on track to financial freedom.

Hi AK,

I hope this email finds you well!

I have been your loyal reader for the past 2 years and have written occasionally to you. I like to share one additional perspective to achieving financial freedom which have not been written as much in your blog I believe:

Focus on maximizing your earning potential so that you have a nest egg to use to achieve financial freedom

I manage to develop my career in a niche field that is sought after and relevant- currently, I am making S$350K per year and will take 3 years to make S$1mil in income. My previous role paid S$250K per year so it took me 4 years to make S$1mil. Before that, being more junior in my career and making about S$150K per year, it took me about 6-7 years to make S$1mil in salary.

So with a high salary income and keeping expenses to a minimum, I have:

- maxed out CPF SA by 42 years old

- ensured my family is well covered with various relevant term insurance plans

- grown and still growing my SG stocks and REIT portfolio towards S$1mil now generating passive income that covers 70% annual expenses

- fully paid retirement plans (~pay out S$2K per month from 55 yr old)

- fully paid house and car (no loans)

- my two kids who are teenagers each have their own CPF SA accounts and $70K SG shares portfolios

I fully agree on being prudent in expenditure and financial planning for the future. But I strongly believe the FIRST step is to properly build your career if you can, so that it can one of your stable pillars to help you gain financial freedom.

I thought I share this perspective to encourage people to take charge of their careers, whatever that may be =)

Have a very happy Sunday!

Best regards,
L

Hi L,

There is a reason why I don't blog about careers much. I didn't really have a good career and didn't make more than $100K a year. Really.

I share my experience to show that we don't have to be high flyers to achieve financial freedom but I have also said that for some who have a very good career, investing for income becomes optional. Just be better savers. :)

http://singaporeanstocksinvestor.blogspot.sg/2016/08/just-be-better-saver-and-forget.html

I will share your perspective in my blog. Thanks for this. :)

Best wishes,
AK

Related post:
Very first step to becoming richer.