National Day Rally 2014: Retirement (funding) adequacy.

I enjoyed the National Day Rally by PM Lee this evening. 

He talked about many things but it was the segment on retirement adequacy that I paid extra attention to because of the unhappiness in certain segments of the population with the CPF in recent times.




PM Lee's speech on retirement adequacy was quite clear and free of financial jargon. 

He clearly showed how having savings in the CPF and ownership of a HDB flat will work well to fund our retirement. 

This is not something new but the way the message was delivered in a story telling fashion with PM Lee pretending to be a financial planner advising a fictitious Tan family in Singapore made a difference, I feel.

It is quite clear in the PM's speech that he sees HDB flat ownership as a pension that can be drawn upon in retirement. 

This is something I blogged about before too. See related post #1 at the end of this blog post.




There are many ways in which seniors could monetise their flats:

1. Rent out a room.

2. Rent out the entire flat and stay with their children.

3. Downsize or rightsize to a smaller flat which will pay them a Silver Housing bonus as well.

4. Do a lease buyback with HDB.

https://www.mnd.gov.sg/yourhousingjourney/seniors.html

With point number 4, PM Lee said that it was only available to 3 room flat owners but because many seniors who stay in 4 room flats would like to have this too, preferring not to move from surroundings familiar to them, the lease buyback scheme will be extended to 4 room flats by the HDB too in future. 

This change will bring cheer to some seniors. 




With this change, the lease buyback scheme will become available to more than half of all HDB flat owners.

This is all said with the understanding that the minimum sum (MS) of $155,000 is really insufficient to provide adequate monthly lifelong income from age 65.




Estimates show that a MS of $155,000 at age 55 would provide some $1,200 a month in lifelong income from age 65 when members of the audience mostly thought $2,000 a month is a more realistic figure. 

When PM Lee asked for a show of hands, no one thought $1,000 a month is sufficient.

So, there are ways to make up the shortfall and to ensure retirement funding adequacy for owners of HDB flats.

PM Lee then went on to say that the MS will be tweaked one more time next year to $161,000. 

There is no need for anyone to make anymore wild guesses. However, it will still be only enough for basic retirement funding, in my opinion.




Although PM Lee says that he does not think there will be need for big adjustments beyond that, the MS might need to be adjusted from time to time and they will have to study how this should be done.

Apart from what has been said so far, PM Lee has announced a major concession in the CPF scheme and that is to allow seniors to take out a bigger lump sum in their retirement (i.e. from age 65, not 55) if they wish to but it has to be within reason. 

There must be a limit of, perhaps, 10% or 20% of what is available in their CPF-RA. There should be valid and good reasons for seniors to do so.

If you get to choose, choose wisely.

However, the seniors who choose to do so will have to fully understand the trade off. 

They would have less in their CPF-RA after a bigger lump sum withdrawal and, so, the monthly payout from CPF-Life would be reduced.

PM Lee also announced a Silver Support Scheme which is to help the elderly poor, acknowledging the fact that there are seniors who do not have much in CPF savings and who might not own a HDB flat. 




They might not have family support to fall back on either. So, the government will do more to support them and they will be given yearly bonuses from age 65. Details to be announced in next year's budget.

The PM reminded us that the CPF is there primarily to help members achieve retirement adequacy and, together with home ownership, the vast majority of Singaporeans will be OK financially in retirement. 

However, he said that there will be exceptions and there is room for flexibility. The measures he has announced, I believe, will help address these issues.

The PM did not give details but I look forward to announcements by the Ministry of Manpower at a later date on how the CPF could give people more options in retirement in future.




What is my take?

In general, I think the CPF is a good system and provides basic retirement funding for its members. 

I like its reasonably good risk free returns and how it helps people who help themselves.

Since most in the audience felt that $2,000 a month is more realistic to fund retirement more comfortably in today's money in Singapore, the current MS is not excessive. 

In fact, next year's MS is also not excessive. In fact, it is too low.




Although PM Lee has suggested that citizens have "savings" locked up in their HDB flats and he suggested an average of $300,000 for 3 room flats and $400,000 for 4 room flats, I would like to caution that depending on HDB flats as pensions (i.e. for partial retirement funding) has its own set of risks.

With the MRT link to Johor and the high speed rail connection to K.L., there is no guarantee that property prices here in Singapore will continue to increase meaningfully. 

So, asset rich and cash poor Singaporeans who form the majority of the population here could find themselves in a bind 10 or 20 years later.




Therefore, not to be complacent and too dependent on our homes as pensions, efforts to improve financial literacy and to encourage financial prudence in our citizens must be strengthened. 

A national financial education program in schools should be introduced as soon as possible.

PM Lee suggested that people who are still healthy and who are able to continue working in retirement continue to do so. 




Although I like the suggestion and applaud the spirit of seniors who would like to continue working, I would like it more if they work because they want to and not because they have to.

Not to run the risk of sounding like a broken recorder, for anyone who might be interested in more of my thoughts, see related posts #3 and #4 below.

Related posts:
1. Retiring comfortably with a HDB flat.
2. Housing and the CPF.
3. Achieving level 1 financial security for Singaporeans.
4. Retiring before 60 is not a dream.
5. Purchasing a HDB flat, new or old.

How to make recovering from investment losses easier?

Although we might feel quite clever or even smug from time to time, it is good to remind ourselves that we are not infallible and that we make mistakes.

In the same vein, it is quite impossible to make money in all our investments. Sometimes, we lose money. It is only natural. 





Of course, I always say that if we know our motivations for being invested, we will know what to do when thrown into any situation.

However, what if we were to suffer massive losses? 

Is the decision making process going to be any different?

Well, from a principled perspective, it shouldn't be any different. 

If an investment is no longer the investment it was, if it no longer fits our motivation for being invested, then, it should be removed from our portfolio. 

For many, this might be hard to do.

Avoid investing with borrowed funds.

I am assuming that no one likes a hard time. Normally, anyway. It could mean lots of stress, depression and sleepless nights. 

So, how do we avoid situations like this?

This might not be new to regular readers but if I were to distil what I have to say to just two points, they would be:

1. Do not invest more money than what we can afford to lose.

2. Recovery is made easier when we have a war chest ready.




Yes, AK sounds like a broken recorder but when the same things keep popping up, they are probably very important in one way or another and deserve some repeat mention.

Now, some might remember my experience with China Minzhong. 

I was convinced it made a good investment. 

The outcome was a good one but what if things had gone bad instead?

I said, "it might come as a surprise that I am not too affected by the possibility of a total loss if all allegations by Glaucus Research were proven true in due course...

"However, for people who have invested much more than they should have in China Minzhong, this could be a tall order. This is why I have said time and time again that we should always only invest with money we can afford to lose and not more."




For anyone who might not know what I am talking about or who might be interested in the blog post, here is the link: 

China Minzhong: What could happen and what to do?

In a reply to a reader and guest blogger then, I said,

"It is fortunate that I limited my exposure to S-chips to no more than 10% of my portfolio. It is unfortunate the exposure to S-chips at this point in time is in a single stock."

So, what was the worst case scenario then? 

10% of my investment portfolio could have gone down the toilet. 

Painful? Yes. 

Catastrophic? Not really. 

I could probably recover the potential losses in a year, give or take a couple of months and this brings me to the next point.

Losing 10% of all our bananas?

Not investing more money than what we can comfortably lose in the worst case scenario makes it easier to have closure in case things go wrong. 

However, it is my experience that it is easier to have complete closure if we are able to make up for the losses through future gains.

"Remember, we do not have to be 100% invested all the time although it is easy to feel a bit left out or a bit regretful that we are not putting more of our money to work as stock prices climb higher. Now, it might not be a bad thing to have a war chest full of cash and not do anything with it."

See related post #1.




I have had my fair share, maybe more than my fair share, of bad investments in my life as an investor. 

What I have shared in this blog post, distilled really to just 2 points, will hopefully be useful to anyone who is realistic enough to accept that investments can turn bad and how closure does not have to be too hard a process.

Related posts:

1. Revisiting AK's simple strategy with Charlie Munger.

2. Achieving $1 million in retirement funds.
"... without any money put aside, there is no way we would be able to take advantage of opportunities to buy on the cheap! Indeed, we might not even have to wait for a bear market to buy bombed out stocks as mispricing by Mr. Market could happen anytime ... "

Profitable Plots, EcoHouse, A2A and Macro Realty (The thought process of EcoHouse scam victims.)

UPDATE (3 AUG 17):
Macro Realty Developments Pte Ltd promised returns as high as 18 per cent yearly.

Singaporean police are investigating a property company believed to be involved in a ponzi scheme that conned hundreds of Malaysians investors out of millions.

According to an ABC report, the company is controlled by Australian Veronica Macpherson and received over A$110 million (S$119 million), mostly from Singaporean and Malaysian investors.

Although based in Singapore, Macro Realty Developments Pte Ltd offered investments to fund property developments in Pilbara, Western Australia.

Investors were promised returns as high as 18 per cent yearly.

The investment scheme was reported to have been heavily promoted in Singapore and Malaysia since 2014.

However, KPMG liquidator Hayden White told ABC that the scheme collapsed last year with creditors owed more than A$200 million.

...the alleged Ponzi scheme raised almost A$110 million from its 1,700-plus investors who were told their funds were being used for property developments but were instead used to pay the company's expenses, including the interest payments to early investors.

Source: http://www.asiaone.com/singapore/hundreds-singapore-and-malaysia-investors-duped-millions-property-company

Remember what is the question we must ask?
"How in the world is your company able to pay me XX% per annum when the properties are still being built and not generating any income?"

UPDATE (6 APRIL 17):
Profitable Plots, EcoHouse and now A2A. Why do people keep falling for these?

Lesson:
Marketing presentation plus a well decorated office is enough to make some people part with their hard earned money.

Lesson:
This is tragic. In our golden years, don't be too adventurous with money. It could turn out to be a case of misadventure.
-----------------
Remember Profitable Plots? It was a huge Ponzi scheme and money paid by Singaporean investors were used to pay investors in the U.K.

Timothy Nicholas Goldring, 60, was sentenced to seven years.

"Investors lost some $3.1 million in the Boron bonds scheme between November 2008 and August 2010. The two directors of land banking firm Profitable Plots promised 12.5 per cent in returns within six months. Most of the money ended up being used for unrelated purposes, including paying off debts to investors from the firm's UK business."

Source: AsiaOne, June 2014.

EcoHouse Group was international too and there were investors who gave money to EcoHouse in the USA as well:

Click to enlarge

Source: Alternative investments.

The blogger and investor has woken up to the fact that it is a scam, I believe.

I share this because I think it is useful to see what an average and reasonably intelligent investor's thought process might look like before he plonked down not an insignificant amount of money in an investment proposed by EcoHouse.

In summary? The investor

1. Liked the promise of very much higher returns.
2. Liked the relatively short investment horizon.
3. Noted a booming economy.
4. Noted the purported track record.
5. Noted the purported backing by the government.
6. Noted the purported 100% security of the investment.

EcoHouse Group was an elaborate scam and they knew how to push all the right buttons to get people to part with their money.

Most investors sucked in by the scam are probably swayed by points 1 and 2 above and were just nudged into the cooking pot by points 3 to 6. They probably didn't even bother verifying the truthfulness of points 4 to 6.

To me, all the justifications made to invest in projects by EcoHouse should have taken a back seat because the most important question to ask should have been:

"How in the world is your company able to pay me XX% per annum when the properties are still being built and not generating any income?"

Now, if we should be approached by salespeople or "advisors" promoting similar investments and I dare say that there are still quite a few around, what should we do?

"Seek as much transparency as possible. If they do not understand exactly how a manager is making money, do not invest. If there is a secret process that cannot be explained, run."

Read:
Samuel Israel, hedge fund manager of a Ponzi scheme.

Related post:
EcoHouse: Questions we must ask and people I detest.

EcoHouse: Questions we must ask and people I detest.

In the Singapore Armed Forces, we have a saying that "TSR is written in blood."

TSR stands for Training Safety Regulations, if I remember correctly. The regulations are written in blood because new regulations are introduced or existing ones improved after some fatal accidents. Unfortunate, I know, but being humans, a failing that we have is a feeling of invincibility until bad things happen to us.

This is why some friends and fellow bloggers feel that the best way for people to learn is through experience, falling down and picking themselves up again. OK, not everyone is able to pick themselves up again which is why I think fall prevention is still the way to go.

Having said this, there is a camp that believes no amount of education is going to work if people are not willing to listen or if they choose not to believe. Fair enough.

How many investment scams have been exposed? How many people have been scammed? How many millions of dollars have been spirited away? How many confidence tricksters have been convicted and put behind bars?

Surprisingly, many people are still falling victim to scams.

Hundreds of investors here, who ploughed millions of dollars into the hands of a developer claiming to be working with the Brazilian government on a social housing programme, were left fearing the worst after the Brazilian Embassy said on Thursday (Aug 14) that its government had no dealings with the company.

EcoHouse, which has abruptly shut down its Suntec offices, is neither affiliated with the Brazilian national housing programme nor registered as a partner of its state-owned bank.

On its website, EcoHouse claims that it was chosen by the Brazilian government as “the only UK company to date officially authorised to build developments under Minha Casa, Minha Vida”, which aims to provide three million homes for the country’s growing middle class.

The company was founded in 2009 by Mr Anthony Armstrong Emery. Various media reports have put the number of Singapore investors in EcoHouse projects at between 800 and 1,500. Up to S$70 million had reportedly been ploughed into three housing projects.

Some investors have begun legal action against EcoHouse to recover their capital investments, which amounted to a minimum of £23,000 (S$47,810) per unit.

EcoHouse had promised a 20 per cent fixed rate of return for a 12-month investment contract, but many investors said they have not received their returns or their capital despite their contracts reaching maturity.

Source: CNA

I feel very sad for these people who have lost their money and I would like to remind everyone that as investors for income, we must always ask the questions that matter. See related post #1 below.

I really detest people who have no qualms about cheating others of their hard earned money. I also detest those who work for them knowing well what they are doing and I do know of someone who was involved in one of those gold investment scams. Just because we know how something works and that we can make money from it does not mean that we should do it. To say nothing of legality, what about ethics?

The Chinese people have a saying:

君子爱财取之有道
"A righteous man makes money in righteous ways."

Related posts:
1. EcoHouse Group placed on IAL.
2. Just like taking candy from a baby.