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

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.

Using debt to generate income.

I went for an evening walk earlier and during that one hour, I thought about many things. Well, that isn't unusual for me. I think too much, many tell me. One of the things I thought about was the issue of debt used in investments.

For example, how risky is an investment for which the debt is meant to fund? People always wonder how to measure risk properly and there are people who are paid to study and manage risks. I am not a professional in this area and I only have a very simple understanding of the matter.

One consideration which is probably universal is that of time. Time? Yup, time.

Basically, the longer a business investment makes me wait before I am rewarded, the riskier it is. The prospective returns will have to be much higher to compensate for this risk. So, if debt is used to fund an investment with a long gestation period, I would consider it risky and would require a much higher return to be interested.

If an investment would generate income very soon, then, the use of debt in such an instance could be considered to be less risky. In such an instance, I might be quite happy with a lower return on investment.

Another example of a question to ask is whether the benefits generated from the investment are sustainable. If the benefits generated from the investment are sustainable, then, the use of debt to magnify the benefits would make more sense.

Debt can be good or bad. It is too easy to say that we should avoid highly leveraged investments but we really should examine each leveraged entity closely and not generalise.

Related posts:
1. Don't think and grow rich.
2. Secret to avoiding financial ruin.
3. Get on top of your finances.
4. Snowballing towards bankruptcy.
5. Total Debt Servicing Ratio (TDSR).

Saizen REIT: A foreign talent!

This blog post is written in reply to a comment by a reader with regards to Saizen REIT. Read the reader's comment: here.

My reply:

Hi Simple Boy,

The way in which you annualised the income distribution is valid. It is always an estimate anyway and discussing whether it is accurate or not won't be very meaningful, I feel. So, I shan't be crunching numbers here.

As for comparing Saizen REIT's distribution yield against those of other S-REITs', I think it could be doing Saizen REIT an injustice to do so.

Firstly, different property types will command different yields and certain property types command higher yields. Saizen REIT owns residential real estate which, usually, are lower yielding. However, the demand for rental properties is relatively inelastic, especially in a country like Japan where the majority rent their homes. We don't have another REIT in Singapore that holds residential real estate for us to do a comparison against Saizen REIT.

Secondly, in the world of S-REITs, Saizen REIT is a rather strange animal because it doesn't have any properties in Singapore. All of its properties are in Japan. So, should we really call it an S-REIT or should we call it a J-REIT? I am inclined to think of it as a J-REIT that has a PR status in the world of S-REITs. Foreign talent, you know?

So, if we want to compare apples with apples and if we take a look at J-REITs, we would discover that it is rare to find those with distribution yields of 6% or higher.

Of course, to really compare apples with apples, we should compare Saizen REIT with J-REITs which hold residential real estate. There are quite a few J-REITs holding residential real estate but here are some numbers from 3 such J-REITs with the second last column representing the annualised distribution yields.



Click to enlarge.
Source: Tokyo Stock Exchange.

So, in the world of residential properties J-REITs, Saizen REIT would look very attractive now.

Could we see Saizen REIT's distribution yield declining to become closer to what J-REITs are offering now? I don't know. I need a working crystal ball to answer this question. My bowling ball struggles but cannot make it. However, I do know that distribution yield will decline if DPU falls or if unit price increases. 

So, what should we as income investors do? We look at how the DPU could fall, given all the information which we have. When we do this, we are actually assessing the level of sustainability of the REIT's income. There is no point in wondering how high the price could go or is there?

Of course, if someone would prefer to invest in S-REITs with higher distribution yields compared to Saizen REIT, there isn't anything wrong with that. However, making investment decisions based purely on distribution yields would be somewhat myopic.

Related post:
Saizen REIT: Rewarding patient investors.

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

AK is a lazy fellow who is always thinking about retiring and how he doesn't want to have to work for money. 

So, when AK read a recent article on how most fellow Singaporeans who want to retire before age 60 are unable to do so, the blogging bug bit him.





The article appeared in CNA and in summary:

1. 
54% of Singaporeans would like to retire before 60 years old. Only 36% believe they are able to.

2. 
48% believe that they will have less than $2,000 a month at 60 years old.

3. 
More than 90% have savings.

4. 
56% have started to save for retirement.

Read the article here:
http://www.channelnewsasia.com/news/singapore/many-s-poreans-doubt-they/1122962.html




I believe more than half of the respondents have taken the very important first step and that is to save money for retirement. 

However, nowhere in the article was the word "investment" mentioned. 

There was also no mention of how we could use tools available to us to help grow our funds for retirement. 

Give us enough information to worry us but not give us the solutions? 

Read the article and see if you can find the reason why.

Anyway, as this is a topic I have blogged about frequently, I decided to put together what could be 6 chapters in an e-book which could be useful to anyone who might be interested.

Chapter 1.
Be prudent when it comes to expenses, especially the big ticket items. 

Do we need to stay in a condominium? 

Do we need that car? 

Do we need to send our children to universities overseas? 

We could seriously boost our efforts to save for retirement by having our feet firmly planted on the ground.

Read: Why a wealthy nation cannot afford to retire?




Chapter 2.

If we are saving specifically for retirement, use the SRS. 

Many people I know still do not believe in the SRS. 

I don't understand why.

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer. Charlie Munger.

Read: A brief analysis of the SRS.






Chapter 3.
Time is required for compounding to do its magic.

I still believe that the CPF-SA is a relevant tool and that we should let time help us meet the minimum sum required. 

There are quite a few examples of people who have done this. 

It works.

Read: Securing risk free returns early for retirement.




Chapter 4.
Don't hold on to too much cash. 

We should put aside a meaningful sum of money every month as we save towards retirement but just leaving the money in a savings account is not a good idea. 

Inflation and paltry interest rates mean that our savings will shrink in real value.

Read: Have huge amount of savings and work till 70?






Chapter 5.

Get rich slowly and retire a millionaire. 

Put aside an emergency fund and invest the rest of our savings. 

Never depend on single income. Make investment to create a second source. Warren Buffett. 

Invest for income and that is what I have been doing.

Read: Retiring a millionaire is not a dream.




Chapter 6.
As we save money and build wealth for retirement, we should not forget to also protect our wealth.

Read: Millionaire or not, plan for retirement.

Unless severely disadvantaged, if we do the right things, there is no reason why we would not have enough money to retire comfortably in Singapore. 

We can do it!
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You might also be interested in:
How to upsize $100K to $225K in 20 years?
(Published in August 2014)
An update on AK's CPF-SA.
(Published in January 2016)