Building a cornerstone in retirement funding with CPF.

I try to be holistic in my approach to wealth building. 

So, ASSI is not about investing in the stock market per se, it is about personal finance in general. 

One topic that comes up pretty often is "retirement".

All of us want a comfortable retirement. 

Who wants to be old and destitute?





Unfortunately, many people don't plan for retirement and I do know a few myself. 

I also know a few who over-plan for retirement. 

Actually, I could be one such over-planner and I have been trying to moderate myself. 

Hey, if a worrier like AK thinks you are over-planning, then, you are probably over-planning. 





Anyway, an important part of retirement planning for Singaporeans is understanding how the CPF works and how we could be maxing out the benefits. 

These are benefits we could and should enjoy as Singaporeans.

The CPF is one of the very little welfare Singaporeans can get from our non pro welfare country. 

So, if you are still clamouring for some welfarism, hey, get moving.





I blog about the CPF often and I notice that the subject generates a lot more interest than when I blog about investing. 

I guess it is something that more people can understand and are able to participate in with less fear.

So, I am inspired to come up with another "e-book" which is really a collection of some popular blog posts on the CPF for ease of reference and sharing. 

This is probably something I should have done sooner:

Chapter 1:
The original mission of the CPF is to help members fund our retirement. 

However, many have said that the CPF is not enough to retire on. 

Sharper ones will ask if they have done anything beyond complaining? 

Yes, it is true that the CPF is not enough to retire on but we can certainly make it a larger amount to retire on.
See: How to upsize $100K to $225K in 20 years?





Chapter 2:
The government has implemented some changes to the CPF system to help give a boost to retirement funding for CPF members. 

Count our blessings. Every little bit helps.
See: 2016 changes to the CPF and SRS.


Chapter 3:
Bearing in mind the original mission of the CPF, remember that if we should use more of our CPF funds to pay for our home, we would have less money in our CPF. It is not magic. 

It is math. 

Yes, there is such a thing as over-consuming when it comes to housing.
See: Buy the biggest and most expensive home we can afford.





Chapter 4:
Hate the idea of having to pay accrued interest for money we took from our CPF accounts for housing? 

We might want to think about voluntarily refunding money we borrowed from our own CPF accounts to pay for our homes. 

Why pay interest to ourselves when we can have the government pay us instead? 

Duh.
See: How to stop the interest we owe ourselves from growing?





Chapter 5:
All of us are worried about costs. 

Rising cost of healthcare is probably one at the top of the list. 

We need to have insurance. 

This is the only way to get a handle on the issue. 

However, what about the cost of insurance? 

Ah, but this is more manageable because we can budget for this. 

Hey, did I tell you it is possible to get free health insurance in Singapore. 

Don't believe me?
See: How to get free medical insurance in our old age?





Chapter 6:
I have shared my CPF OA, SA and MA numbers in a shock and awe tactic but remember Rome was not built in a day. 

It has been a 20 years journey for me.
See: AK is showing off his CPF numbers.

Chapter 7:
Of course, all of us have different circumstances in life. 

However, if we share the same philosophy and goals, we will all move in the same direction. 

The magnitude of success is not as important. 

Everyone who has taken affirmative action is a success story. 

Start and stay at it.
See: Two friends and their CPF savings.






Chapter 8:
The CPF Minimum Sum or what is called the Full Retirement Sum now is not impossible to reach. 

The constantly increasing level is not impossible to keep up with. 

In fact, we might not even have to do anything to keep up with the increases.
See: If I had done this, I would have hit the MS too!


Chapter 9:
If we want a basic level of certainty in retirement funding, we would probably do well to consider getting an annuity. 

You know what? 

The CPF Life which starts paying us monthly for life from age 65 is the best annuity there is.
See: An annuity: Would you rather have it or not?





Chapter 10:
Lastly, for the investors amongst us, if we believe that we should hold some investment grade bonds in our portfolio for diversification, then, the CPF is the most attractive AAA rated sovereign bond there is and with very attractive coupons to boot. 

Of course, it could be considered a long term or short term bond, depending on our age. 

A risk free and volatility free investment? 

You want?
See: AK is buying a AAA rated bond.





It is not magic. It is just math.

If AK can do it, so can you.

(There are hundreds of blog posts on the CPF here in ASSI. So, it is probably a good idea to treat this "e-book" as just an introduction to the topic. Use the "Search ASSI" function at the top of the blog to read more.)

UPDATE: 14 August 2016

Another investment avenue - using CPF savings - is the recently introduced Lifetime Retirement Investment Scheme (LRIS), mooted by the CPF Advisory Panel. The LRIS is an alternative, simplified investment option that will offer a small number of low-fee, well-diversified and passively managed funds. It is targeted at CPF members who do not have the financial expertise or time to select and monitor their investments.

"When the new LRIS is rolled out, Mr Wong can consider investing monies accumulated in his Ordinary Account for higher expected returns, if he is prepared to take some risk," said Mr Tan.

Source: ST, 14 Aug 2016

My take:
Since I treat my CPF savings as a risk free and volatility free component (i.e. AAA rated sovereign bond) of my investment portfolio, I am unlikely to take part in the proposed Lifetime Retirement Investment Scheme (LRIS). Of course, money in the CPF-OA doubles up as a war chest which could be deployed in the event of a stock market crash for possibly better returns than what the LRIS could deliver.

Related post:
My CPF-SA outperformed in 2015!

STE: "I lost money enough to buy a 5 room flat in 2015!"

I always enjoy reading STE's very thoughtful guest blogs. Regular readers would know who I am talking about.

If you are new to my blog, you might want to read STE's other guest blogs as primers. You will find his name in the left side bar of my blog under the heading "Guest Bloggers".

Here is STE's latest contribution:

Honey, I lost a 5 room HDB## value in our stock investment in 2015!

Yes, that’s how our portfolio value fared as compared to Dec 2014 …but honey, don’t worry, market is such volatile in nature and this decrease is quite mild as compared to real crisis time e.g 1998 / 2000/ 2008 etc, which any portfolio value could be wiped out by 40 – 60%.

“But how about next year’s performance ?”

Well, we don’t have “ crystal ball “ to make any forecast, it might be better or worse . If anyone said they could give you a forecast or figure on stock’s performance next year, just listen with wide smile and walk away quietly .

Market is “random “ in short term and we should not be “Fool by such randomness “ ( read the book by Nassim N Taleb and Burton G Malkiel ). As I said, market could be worse or better next year, it could have another double digit drop in STI by end 2016!  It is anybody’s guess (read the book by Nate Silver ,, The Signal and the Noise ).

“In such volatile market, do we need to sell our share to avoid further loss in capital?”

Well , it depend on the stocks in your portfolio, any selling should be done based on changes of fundamental or underlying business of the stock and not the price. Panic selling based on price will not be good or help in your long term investment journey. We might be tempted to sell in panic ( read the book by Jason Zweig : Your Money and Your Brain and Richard H Thaler : MisBehaving ) but beware of the consequences of “market timing  as it may affect long term return of your investment .

“Well , you said investing in STI Index fund should be more stable and less risky, giving us around 8-9 %  average return p.a in the long run but why STI is down by more than 13% this year? Is Index investing safe?”

Ummm…. 8-9 % Index return (market return)  is being drawn on very long horizon (say 20-30 years). As mentioned, market is very volatile in short term, it can fluctuate from – 20 to 30% to  + 20 to 30% at any time.

Even in index investing, we should not lose faith in such investing strategy due to short term market volatility. Well, this is the “ Flaw of average “ ( Read the book by Sam L Savage : The Flaw of Average ). We tend to take the average figure by granted, eg we “anchor “ the figure of 8-9% return as benchmark of our return, but that average figure derive from long period of time .

“ What should we do if our portfolio value down by another 20%-30% next year? We may lose the value of a condominium then? “

Well , remember the concept of “ Mean reverting “ in my earlier post here in ASSI? The market moves in cycle and tend to revert to mean.

As mentioned earlier, “volatility “ should not be purely associated as risk … opportunities for profit are inseparable from RISK.

Honey, we deployed some of our cash to buy some stocks in 4^th Qtr 2015, well , price may drop further , really nobody knows but we see some value based on historically and statistically speaking . 

We often asking what will be the return of our investment in coming months or years.  But the more appropriate question to ask should be: “what will be the chances / probability of having returns in coming years.”

Allow me to quote: "Investors want certainty, and we cannot give them certainty. We can give them high probability; we cannot give them certainty" by Charles William Hamilton.

Statistically speaking, if market down by another 20-30%, chances of rebound in following year will be high if we could hold it for much longer period ( not using much leverage in stock investing ). We should deploy more cash if that really happen as what we did in 2009/2010.

Long term Market return of SP500 from 1924 till 2012:

“Do you think now is right timing for us to put our money into the market?”

Well honey, again, investing is about 3M = Market , Mind and Money Management.
 

Market :

As mentioned , market is volatile and unpredictable in short term , but we can see the trend in long term.

Market is not really cheap or deviate very far from long term mean / regression line but at the same time market is also not in very high valuation from long term mean. That’s why I said not too cheap and also not too expensive. Statistically speaking, it could down much from current level if real crisis hit . That’s why we are not deploying all our cash into the market at this point of time.

Always have “margin of safety “ and remember,   market could be irrational much longer than your think.  Buying at market PB of close to -1 SD will definitely give us some margin of safety.

90% of market movement in the short term is by psychology and only in long term , it shown an upward trend due to increasing economic value by demographic / technology innovation / productivities etc.
 

Mind :

 

Andre Kostolany, Germany's Stock Market Guru, said "Psychological create 90% market".
 

Investment is driven by "Psychology and full of Fear and Greed". Be a stoic investor and minimize our “Emo and Ego” throughout the journey of investing.

Understand the pitfalls and shortcomings of our Mind will help ( read book by James Montier : Behavioural Investing ) to know better about bias  ( Confirmation biases / Over-Confident / Anchoring / Loss Aversion / Endowment effect / Mental Accounting / Money Illusion etc ).

This might avoid common mistake of “selling in panic / buying hot stock / keeping loss stock (even knowing Fundamental has change and hoping for rebound ) / trading too much / looking at 52 weeks high / low as selling or entry price etc.
 

Money Management :

As I mentioned in earlier post, understanding our Cash Flow / expenses/ debts level  is very important even before we talk about Investment.

"Well, honey, don’t worry, we still have positive cash flow even our stock value dropped by that much. We could still save more than 60% of our “portfolio income “ after all expenses in 2015."

We live like it is before my “sabbatical leave “ in Nov 2014 , we manage our expenses by not spending on things beyond our mean. Our standard of living has remained the same.

Life is about making choices and what kind of life style we want is a choice. Everyone has expectations on the life they want to live with. We cannot really say my life style is good but it suits my expectations.

We are happy that we could go on 3 holidays and have more quality time with our kids in 2015 since my early retirement.

“Honey, some people said “dividend income “ is just from “right pocket to left pocket “ due to price change after XD, what do you think about this ?

Ummm… is quite subjective. Let’s see if I could explain better based on my own understanding.

 

Well, at least some institution or government agency do not recognize “dividend“ as income. I have seen this recently in one of the blogs post that he is facing problem is explaining “dividend“ as income in getting his domestic helper since there is no CPF contribution from employment or IRA’s statement to show that.

"Honey, we may face the same problem since these agency / financial institution do not recognize “dividend “ as income"
(hahaha.  that’s just side joke …but is true and facts.)

Well, you may notice that I use “portfolio income“ and not “dividend income“ in above mentioned. Dividend from stocks is just part of the income generating from one of the asset class. Income can come from Fix Deposit with bank / rental from housing / interest from Bond etc .

Each asset class is having their own Risk/Reward characteristic. Even cash or FD is subject to risk of value depreciation due to inflation and bond also could subject to default by issuer .

With stocks, we could see prices fluctuate second by second. We don't see this fluctuation when collecting rental from real estate which we rent out, for example. We don’t get quotation on the value of our house minute by minute (since we do not intent to sell it).

Stock prices are not static. Sometimes, stocks can be overvalue or undervalue. In an extreme example, if price stay at $1 and the company announce 10cts of dividend each year, price adjust after ex-d, will the price become –ve in Year 11? No, as people will see the value from the asset which generated the consistent cash flow and reflect in stock price eventually. It is not a zero sum game. Well, accounting is useful but sometime is not meaningful.

It would be more practical to look at the capability of the underlying business in generating the “cash flow“ to pay out the dividend or is the dividend declared from cash flow derive from “debts“ or other source of “creative accounting “.

As AK mentioned, a “Healthy cat“ is more important than “regardless white cat or black cat , if it could catch the mice“.

Lastly , look at our cash flow and spending money wisely is more important than defining the “cash flow“.

Appendix :

STE's Portfolio Income generated from share (exclude Bond / FD /CPF) in 2015 : $ 180,454

** We should  treat CPF interest as part of our total income as this will be our money eventually .

We continue to do voluntary contribution in 2015 although we don’t have contribution from employment .

Combining average interest of around 3.1 % (OA/SA/MA) is rather high since we treat it as AAA low risk bond rate .

Well, this another “margin of safety“ in our portfolio, with combine interest of more than $20+ K p.a from CPF, this would gave us another $ Mil upon reaching our withdrawal age of 55 .

 

“We will be fine, honey! You know, we are very “kia shi“ type of people that having more than 30 stocks in our Portfolio as we diversify across sector and industry.” This is to ensure that we will not have any problem in case any counter went “kapuk“ in our portfolio since it will not take more than 8% of our total value.

Well, same time we will not see our portfolio value growth much since it is very diversify and a ten bagger in our portfolio will not increase the value much. Again, it suits our investment strategy.

Lastly, wishing all A very Happy and Prosperous New Year in 2016 and hope all will have a very successful investing journey ahead! Cheers!

A big thank you to STE for this guest blog which is loaded with wisdom.

Related posts:
1. Invest for income and ignore the two Ms.
2. What to do as stock markets crash?
3. AK is showing off his CPF-OA and MA.