Tea with EY: Is our CPF LIFE payout going to be sufficient?

It has been a while but here is another wonderfully crafted guest blog by EY as she asks some questions which we might be afraid to ask ourselves:

Is having a CPF LIFE payout of $2500/month sufficient?

Which do you prefer?

Let your desired quality of life determine your retirement sum?

or

Let your retirement sum determine the quality of your life?

In Singapore, quality of life does not come cheap. More so if we are projecting decades into the future.

Based on 3% annual inflation rate, what we can buy with $2500 today will cost us $5234 in 25 years’ time, $6068 in 30 years’ time, and $8155 in 40 years’ time.

Those of us intending to depend solely on CPF LIFE payout for retirement should do a reality check. Even in the case where we could set aside the Enhanced Retirement Sum (ERS) which is 3 times the Basic Retirement Sum (BRS) and 1.5 times the Full Retirement Sum (FRS).

I have produced a reference table detailing the CPF LIFE payout using the CPF LIFE Payout Estimator based on the FRS and ERS that are adjusted for 3% inflation each year. To derive a more conservative payout projection, I have chosen the uppermost range for ‘Annual Value of Property’ and ‘Annual Assessable Income’.

CPF LIFE Payout

(https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/lifecal/Life_Estimator.asp)

Annual Value of Property (AV): More than $30,000     Annual Assessable Income (AI): More than $60,000         Gender: F

From the table, the FRS will likely be around $236,000 and ERS around $354,000 in Year 2029 when I turn 55 years old. Considering that my current SA balance is >$170,000, and if I continue to be economically active for at least another 5 years, I should have no problem achieving the ERS. This would translate to a CPF LIFE payout of approximately $2300 - $2600 per month at my drawdown age of 65. (NB: The CPF LIFE payout of $2300 - $2600 is extrapolated from the Year 2028 ERS payout as the CPF LIFE estimator caps input for calculation at $350,000)

At 65, what I receive from the CPF LIFE Payout is likely worth only $1131 - $1279 in today’s dollars.

Fast forward to 80 years old in Year 2054, my CPF LIFE Payout is probably worth only $726 - $821 in today’s dollars.

So, if I wish to maintain a quality of life equivalent to $2500 in today’s dollars, I would need an increasing income stream to make up for the loss of value due to inflation. The table below outlines the additional income I need at the various age to combat the 3% inflation that is chipping away the value of my money.

Looks like the comfortable retirement that I desire will have to be fuelled by a lot more hard work now and in the next 10 or even 20 years!

Related posts:
1. Changes to the CPF system. BRS, FRS and ERS.
2. Achieving Level 1 financial security.
3. Upsize $100K to $225K in 25 years.

Tea with EY: Make CPF a part of your child's savings plan?

EY sent me an email and said:

"I called CPF this morning to enquire on the CPF contribution for my children. I have been mooting this idea for some months already and finally decided that I'll take action soon."

In relation to this, EY has decided to share another thought provoking guest blog here:

If you have children, what would you expect their New Year resolutions to be?

Being quite a laissez faire parent, I have never nudged my children to set any New Year resolutions. 

Two weeks ago, I decided it was about time to have them commit to some goals for 2015. Among them were a few financial goals/habits.

Below are the financial resolutions my teenage boys made, or more accurately, I made for them. Oh yes, of course they agreed!

1.      Save $10 per week from the weekly allowance of $25

2.      Save at least $500 for voluntary contribution into CPF OA/SA/MA

3.      Keep an expense journal to record daily expenses

4.      Maintain a cash flow statement at the end of each month

To sweeten the deal, I have agreed to match a dollar for a dollar savings into their CPF account. So if they save $500, I will top up another $500.

Some may ask why do I want my boys to contribute to CPF when they are only turning 15 and 16 in 2015? I have two reasons for this. 

Firstly, I want them to save up and partially fund their own university education. 

Secondly, I want them to actively manage their CPF money and be exposed to more complex financial decision making but within a relatively risk-free environment.

If my boys get into university, they will have 5 to 6 years to build up their CPF OA. CPF allows members to use up to 40% of the OA savings for polytechnic/university tuition fees. 

Along the way, I will encourage them to work during their school holidays and increase their voluntary contribution to CPF. 

Hopefully, they will accumulate enough to pay school fees for 1 semester. 

After they graduate, they will to pay back their own CPF OA. 

I want them to experience some form of financial obligation when they start work so that they won’t take on debt too readily.

Once they have settled their school fees for 1 semester, they shall decide what they want to do with their CPF OA. Let it accumulate slowly to more than $20,000 and use the excess to buy stocks subsequently?  

Or transfer the OA savings into SA to take advantage of the higher interest rate? I’ll leave it to them. 

For illustration sake, I’ll show them that at 4%, $5,000 in SA at 21 years old will grow 4.8 times to almost $24,000 when they reach 65 years old. 

Hopefully, this will inspire them to grow their SA more consciously and plan for retirement adequacy earlier. 

My children’s New Year resolutions will mark the beginning of my attempt to formally introduce financial literacy at home, which happens to be one of my own New Year resolutions. 

To keep all of us on track, I have downloaded the CPF voluntary contribution form from the CPF website and shall do the inaugural contribution using my boys’ current savings within the next week or so.

That shall be a good start to a prosperous 2015 and beyond!

Remember the POSB mascot, the squirrel? 

We might see a couple of squirrels on steroids here! Good one, EY!

EY's guest blog jolted my memory and I remember I started my CPF account before I had mandatory contributions too but it was for those discounted SingTel shares. 

I am sure some of you might remember the year that happened. I still have those shares today.





Thanks, EY, for providing munching material for consideration.

Read other guest blogs EY: here.

Related post:
Financial freedom is a family affair.

Tea with EY: Get a lifetime income of >$2K a month.

I am very pleased to publish another thoughtful guest blog by EY. If you are concerned about retirement funding adequacy and if you wonder how it could be achieved in a risk free manner, you should read this:

What can we learn from squirrels?

A big part of my retirement planning revolves around optimising my CPF-SA to generate at least $2,000 of monthly cash flow at 65 years old. With this in mind, I set the target at 32 years old to meet the CPF Minimum Sum by 40.

I hit 40 more than a week ago and have managed to accumulate $161,671.23 in my CPF-SA which coincides with the CPF Minimum Sum of $161,000 effective 1 Jul 2015.

Assuming that I continue to contribute $4,800 (based on approx. 14 months of income) to CPF-SA till 55 years old, my CPF-SA balance would grow to $391,833 by then.

In 15 years’ time at 55, I would expect the CPF Minimum Sum to be adjusted to $200,000. After setting aside this amount in the CPF-RA account to participate in the CPF LIFE plan, I would have $191,833 left in my CPF-SA.

If I stop contributing to my CPF-SA at 55 years old and leave the balance to earn 4% interest, my CPF-SA would have grown to $285,991 at 65 years old.

At 4% interest, I could collect $11,652 per year or $971 per month, without touching the principal amount.

For the CPF-LIFE plan, I intend to participate in CPF LIFE Basic which allows me to leave a larger bequest for my family. With $200,000 in RA at 55 years old, the monthly payout at the draw down age (DDA), currently at 65, is $1,316 - $1,467.

This would mean I would have a life time monthly income of $2,287 - $2,438 each month.

When I kick the bucket, my family will receive the following bequest:

Now, the pertinent question – ‘Would $2,000+ of income a month be sufficient to meet my retirement needs in 25 years’ time?

I don’t know. Really. What I do know is not putting all my humpty dumpties in one basket. Besides this fixed income plan, I will be actively building up other income sources.

Related posts:
1. Level 1 financial security for Singaporeans.
2. The best insurance to have in life (is passive income).
3. Millionaire or not, plan early for retirement.

Tea with EY: Questions for the CPF Board (Part 2)

Q:
For the Medisave balance in excess of the Medisave Minimum Sum (MMS), i.e.[MCC] $48,500 – [MSS]$43,500=$5,000, would CPF automatically transfer this amount to the member’s OA when he/she reaches 55 years old or would CPF allow the member to maintain his/her Medisave balance up to the MCC of $48,500?

A:

The balance above the latest Medisave Minimum Sum (MMS) in your Medisave Account (MA) at age 55 will not be automatically transferred to the OA.

If you are able to set aside your full Minimum Sum when you turn age 55, you may then apply to withdraw the remaining CPF savings from your OA, SA and any balance above the latest Medisave Minimum Sum (MMS) in your Medisave Account (MA). The MMS is adjusted each year in July.

Q:
To participate in the CPF LIFE Basic plan with the entire MS of $161,000 at 55 years old, what does the member need to do?

A:

When you join CPF LIFE, all your RA savings (except for new money that is paid into your Retirement Account after your drawdown age) will be used for your CPF LIFE plan.

We would like to share that for the CPF LIFE Basic plan, we will take the annuity premium from your Retirement Account (RA) in two instalments.

When you are 55 years old, we will deduct a small portion (about 10%) of your RA savings as the first instalment of your annuity premium. The rest of your RA savings will stay in your RA.

One to two months before your drawdown age (DDA), we will deduct a small portion (about 10%) of any new money that has built up in your RA between your 55th birthday and your DDA as the second instalment of your annuity premium.

When you reach your DDA, you will receive monthly payouts (paid from your RA) starting up until one month before you reach 90 years old. Once you reach 90 years old, you will continue to receive monthly payouts (paid from the annuity fund) for as long as you live.

Singapore citizens and permanent residents who are born in or after 1958 will be placed on CPF LIFE if they have at least $40,000 in their Retirement Account (RA) when they reach 55 or at least $60,000 when they are reaching their Draw Down Age (DDA). We will write to them one month after their 55^th birthday on their participation in CPF LIFE.

For more details under the CPF Life and its plans, you may refer to the CPF Life booklet for more information:

CPF LIFE Information Booklet

http://mycpf.cpf.gov.sg/NR/rdonlyres/09EA0C05-C8E9-4705-9D91-E8BD1D12CF1E/0/LIFEBrochure.pdf?NRMODE=Unpublished&wbc_purpose=Basic&WBCMODE=PresentationUnpublished

Q:
For a member who has participated in the CPF LIFE Basic plan based on the prevailing MS of $161,000 at 55 years old and subsequently, the MS is adjusted to say $200,000 by the time he/she reaches 65, would the member be able to ‘top up’ $39,000 by transferring the OA/SA balance into the RA account and use it to add to the CPF LIFE Basic plan?

A:
In general, the maximum amount that you can commit to CPF LIFE is the prevailing Minimum Sum which is revised yearly (i.e. $161,000 from 1 July 2015). To receive higher CPF Life payouts at your DDA, you can make top-ups into your RA after 55, up to the prevailing Minimum Sum when there is any upward revision in future.

A big "thank you" to EY for graciously allowing me to share some of the questions and answers here in my blog with all my readers.

Related post:
Tea with EY: Questions for the CPF Board (Part 1)

Tea with EY: Questions for the CPF Board (Part 1)

EY asked the CPF Board some questions.

Q:

At 55 years old, if the member does not intend to withdraw any amount from any of his/her CPF accounts and would like to use the entire MS to participate in the CPF LIFE Basic Plan, how would the savings in each of the accounts be redistributed among the OA/SA/RA/Medisave? Is the following balance distribution and interest rate correct based on prevailing guidelines?

OA – $50,000 (2.5% interest)

SA – $39,000 (4% interest)

RA – $161,000 (1st $60,000 at 5%, balance at 4% interest) Medisave - $48,500 (4% interest)

A:

As in your example, upon reaching age 55, the Board will set aside the Minimum Sum in your CPF Retirement Account (RA) by transferring funds in the following accounts and sequence:

(i) funds in your Special Account (SA);

(ii) if (i) is insufficient to set aside your Minimum Sum in full, funds in the Ordinary Account (OA) will be transferred to your RA to make up the Minimum Sum.

The balance (if any) in excess of your Minimum Sum will remain in the OA/SA and will earn the respective interest rates. 

The CPF interest rate for the OA\SA\MA are reviewed quarterly, while the interest rate for the RA is reviewed yearly.

The extra 1% interest per annum will be paid on the first $60,000 of a member's combined balances. 

The priority of the accounts that make up the $60,000 is as follows:

1st        : Retirement Account (RA), including balances used to pay for the annuity premium under CPF LIFE

2^nd        : Ordinary Account (OA), up to $20,000

3^rd         : Special Account (SA)

4^th         : Medisave Account (MA)

The extra interest received on the OA will go into member’s RA (if he is 55 and above), to enhance his retirement savings.

For a member who has joined CPF LIFE scheme, the extra interest earned will be paid into his RA or the CPF LIFE Annuity Fund.

See also:
Tea with EY: Questions for the CPF Board (Part 2).

Tea with EY: CPF Life or ETF for retirement?

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...

Tea with EY: Money talk, money laugh!

One of the most rewarding things about blogging is getting to "meet" people online. Reading comments from readers and replying to them is the most rewarding bit about blogging, I feel.

Don't just take my photo. Talk to me! ;p

Blogging is a form of social media and it is interaction with readers which makes it enriching for me as a blogger, not the paltry income from ads. Do you feel that other bloggers would agree with me? OK, there are XiaXues and Mr. Browns in blogosphere who are more likely to be enriched by income from ads but I wonder how common are they.

In recent weeks, a reader, EY, has been very regular in leaving comments in my blog. A great sense of humour and a sparkling style characterise her writing. Her comments are little gems which never fail to make me smile or chuckle. After my many requests, here is her first and, I hope, not last blog post as a guest contributor in ASSI.

In case you are wondering, no, I did not conduct an interview. The entire episode was conjured up by EY. I hope you enjoy reading the following as much as I did:

Money talk, money laugh!

All things are not created equal. Money too. In our complicated world, discrimination has to have its way. So money can’t just be money. It has to be good or bad, smart or dumb, clean or filthy, quick or slow, or simply put, it has to be juxtaposed. Money, in all its forms, has the largest contingent of believers and is capable of capturing the imagination and the souls of the young and the old, the hot-blooded and the bold. So for this first guest post (and maybe the only one!), AK and I should have a no-holds-barred money talk. I’ll be brutally honest and unabashedly irreverent, just so you would walk away with the last laugh.

AK: What are your views on money?

EY: Money is the loot of all beavers. Everyone would like to have some stashed away and all of us would love to have them grow on trees!

AK: Is there a difference between good money and bad money? How to tell them apart?

EY: Of course, there is.  Good money is the tragic hero that dies young. For no fault of his, he is often thrown after bad money and always dies an untimely death. While both are in the gaseous state after evaporation, good money tends to have a few more water droplets crystalising from the tears of the heart that has gone chilled.

AK: Which kind of money is most sought after?

EY: This is a difficult question. It depends on individual preferences, I guess. But there is no dispute that hot money goes places, for sexy is hard to resist.  It loves attention and has earned the celebrity status. Just be mindful it always sings to the tune that nothing lasts forever. On the other hand, money with hygiene issues is frowned upon by most.  But it is adored no less by opportunists looking to indulge in their washing fetish that would make it cleaner than clean. And then, there are many who think that size matters.  Big money beats small money hands down.  But big money is said to belong to the losers for every one claims he has lost it before. Borrowed money is the most learned of them all.  It chooses to work only for the rich to get enrolled into every asset class. Coffee money is the most eloquent and it speaks the hardest truth. But it has the bad habit of tooting the loudest under the table too. Quick money has its appeal if it is not always in a rush. It promises many spins like the roller coaster and never fails to take you back to where you begin. Then there is also this one kind that plays hard-to-get. It has no charms whatsoever and is only good at making you sweat and toil. It used to be faithful but now, it is only honest, at best. But if you ask me, I find prize money most attractive. I love its effortless beauty and the big bow that steals the show!

AK: So, what would you do to accumulate more money?

EY:  Buy more clothes with deep pockets and more shoes to walk the talk.

AK: What are your parting words to the readers of ASSI?

EY:  Thanks a bunch for the air time and I’ll like to share my favourite quote. Live every moment, laugh every day, and love beyond words. And in this context, it can be interpreted as live every moment for money to find you anytime, laugh every day to the bank, and love beyond words because money is on the other end!