Retirement: AK is buying a 12 year tenor AAA rated bond.

Reader:Hi AK, can i do volunteer top up to OA and SA if i hit the 170k ?

AK:If you are talking about doing voluntary contributions to OA, SA and MA when your SA has already hit the prevailing FRS, you can if your yearly mandatory contributions do not hit the annual contribution cap. I know because this is something I do. 
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It is the first Sunday of a brand new year and there are only 12 years left (including this year) before I turn 55 in 2026. 

I will soon be considered a senior citizen and I am rather looking forward to it. 

I have no fear of retiring because planning for retirement is something I have been doing for years.




I am going to do something else that will help to make my retirement 12 years later more comfortable. 

I am going to buy a 12 year term AAA rated bond with an attractive coupon tomorrow. 

Which bond am I going to talk about? 

I think some of you can tell what I am going to say next but it is going to be delivered with a twist.

Before I reveal what I am going to "buy", I think I won't be wrong to say that one of the biggest complaints people have about the CPF is that their money is stuck and they cannot touch it when they turn 55.

Of course, they should know that this is only the case when they cannot hit the minimum sum by then and I have blogged (many times) about how we could let the government and time help us hit the minimum sum required by age 55. 

So, I am not going to talk about that again in this blog post.




In this blog post, I am going to talk about people who have hit the minimum sum required or who are planning to hit the minimum sum pretty soon and are in their 40s like I am. 

For us, planning for retirement doesn't stop once we have hit the minimum sum. 

The retirement tool that is the CPF should not be stored away once we have hit the minimum sum. 

The tool is still useful and for people in their 40s (and early 50s), it is even more attractive than ever.

Do you feel the twist coming? Here it comes:

As we have hit the minimum sum and because we are closer to 55, we can consider voluntary contributions to our CPF to be purchases of government bonds with maturity dates. 

They will "mature" when we are 55. 

As with regular bonds, upon maturity, we are returned our money and, in this case, with interest accumulated over the years.





So, if you are my age, these "bonds" will "mature" 12 years from now. 

If you are 49, they will "mature" 6 years from now. 53? 2 years from now. 

The closer you are to 55, the shorter the time to maturity and the better the deal because we are all getting the same "coupons".

The idea is to max out the contribution limit of $31,450 in 2015 and the contribution limits in all the following years until we reach 54. 




So, if our mandatory contributions for 2015 is estimated to be $20,000, for example, we can make a voluntary contribution of $11,450 this year.

This voluntary contribution is like buying a AAA rated sovereign bond with a tenor of 1 to 12 years (depending on whether we are 54 or 43 years of age at the time of "purchase") that pays a coupon of 2.5% to 4% as some of the money goes into the OA while the rest goes into the SA and maybe the MA.

Print form: here.

Some have described the CPF as a cake that we can see but cannot eat. Well, it is possible to have our cake and eat it too. 

In fact, the twist in this blog post shows how the CPF can be like a high quality durian. 

It too can be "bao jiak" (Hokkien for "definitely good to eat").

Reference:
CPF Contribution and Allocation Rates.

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"From 2016, the CPF Annual Limit will be increased correspondingly from $31,450 to $37,740 (equivalent to 17 months x CPF salary ceiling of $6,000 x 37%)."
Updated blog post on changes to CPF: here.
Related posts:
1. A lot of money in my CPF-SA is ...
2. Buy a bond fund that pays 7% a year?
3. Nobody cares more about our money than we do.

A lot of the money in my CPF-SA is from the government. (AK reveals his CPF-SA numbers in detail for the first time.)

Following my last blog post on a reader's predicament and an earlier blog post in which I said people are naturally attracted to large numbers, I decided to share my CPF-SA numbers publicly for the first time and hope that it will have some positive impact on anyone who might still be wondering if beefing up his or her CPF-SA is a good idea.

Facebook (31/12/16).

I have been pretty consistent in my message that beefing up our CPF-SA early would help us achieve retirement adequacy in our golden years.

Even if we were to stop mandatory contributions after some time, once there is a critical mass in our CPF-SA, the interest received annually would go a long way to meeting the (much feared) annual increases in the minimum sum over time.




In my case, I significantly beefed up my CPF-SA in the first 4 years of my life as a working adult. 

That would be from my mid to late 20s. 


I transferred all the funds in my CPF-OA to CPF-SA in those years. 

From time to time, I would make voluntary contributions too.




I am 44 this year and here is what I have to show for my efforts today after 19 years in the workforce:

AK's CPF SA.

I still do some voluntary contributions which I have marked with the letters V.C. above.




As I am still gainfully employed, I still have mandatory CPF contributions. 

What I want to draw attention to is the interest paid to my CPF-SA: 

$7,651.65.

As a sum of money, it might not look like much but if we were to think deeper, we would start to look at it differently. 

What do I mean?




Now, I know that many people complain about how the minimum sum keeps increasing and how they find it difficult to meet the minimum sum running on their own steam. 

Well, many years ago, my thought went like this:

"Why not let the government help me meet the minimum sum?"

Get a 4% to 5% coupon from a AAA rated sovereign?

If I were to push the balance in my CPF-SA significantly higher, the government would have to pay me more in interest. 

The much higher interest paid to me would then go towards meeting the minimum sum required. 

Sounds good but does it work?




Well, the interest I received in my CPF-SA has been higher than my mandatory contributions to it for many years by now. 

This means that the government have been working harder than me in those years to help me achieve retirement adequacy.

Don't you like it when others work harder than we do to help ourselves?



If we look at the schedule below, I think it is safe to say that the interest paid to my CPF-SA yearly is more or less able to keep pace with the yearly increases to the minimum sum. 

So, the strategy works!

Source: CPF Board.

At age 55, I could withdraw a nice sum of money in excess of the minimum sum (instead of only $5,000) with a smile on my face. 

I would probably have an even bigger smile on my face when I recall that a big chunk of the money is actually from the government and I am not just taking back my own money.

What? 

You want satisfaction? 

Well, then, why stop at taking back our own money? 

Isn't it more satisfying to take the government's money (legally)?





Related posts:
1. Don't be stupid to top up your CPF-SA.
2. Upsize $100K to $225K in 20 years.
3. Get a lifetime income of >$2K a month.

My parents say don't be stupid to top up my CPF-SA.

Update (31 Dec 16):

A reader told me:


"If I had done this, I would have hit the minimum sum too."

Actions today, results at 55:

A lot of money in my CPF-SA.
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I do not know how best to help the reader here. 

Reader says...

Read one of your post and it says that u often tell youngsters to voluntary contribute to their CPF-SA so that it will reach the minimum sum.

I mention this to my parents, and they said that I am stupid, as withdrawal of CPF $$ is controlled by the government and we will not know when will the government raise the age to withdraw or the minimum amount. 

They still sarcastically said that putting in the bank to earn the meagre interest rate is even better as we can withdraw as and when we like.

seek your advise

pardon my bad english :)

AK says...

It could be difficult to convince anyone who is suspicious of the system. :)

I will say that the CPF-SA is meant to help us with retirement adequacy. 

So, it is not money that is meant to be close at hand, available for withdrawal whenever we might need it. 

The money is locked up till we are 55. 







What is required for the MS will be put into the RA and the excess is available for withdrawal. 

Of course, there must be excess for this option to be available.

If we beef up our CPF-SA in our younger years, we are giving the funds a lot more time to compound and grow more quickly. 

I think the magic of compound interest is easy enough to understand. 






The magic needs time and if the base is bigger, the growth in absolute dollar terms will be more substantial.

Like I said, the problem your parents have is a lack of trust in the system. 

I don't know how to make your parents trust the system. 

Unfortunately, as with certain things in life, only time will tell.

I do know friends and also family members who are deeply suspicious of the system. 

Some are actually extremely negative about the CPF, to put it mildly.

This is a problem that has to be addressed but I suspect it will not be easily solved.


Similar post:
Investing in the stock market makes you a gambler.

Related posts:
1. "Return our CPF" protest in Hong Lim Park.
2. Balancing risks, returns, facts and fallacies.
3. An(other) open letter to the Prime Minister.

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.