Reader regrets ILP but what to do?

Reader:
I was introduced by my colleague to your blog and only started to read it last night. Many useful tips indeed and I really regret not reading it earlier. 

I am single and 47 this year. I bought an ILP from Prudential for an assured sum of $100,000 when I was 27 for an annual premium of $2,000 for death, PD and CI. My surrender value now is about $40,000. 

Shall I follow your blog advice to terminate it and purchase a term policy till 62? 

Currently almost half of my annual premiums is used to cover the cost and will escalate once I enter into my 50s. 

Any advice would be greatly appreciated.


What is the purpose of insurance?




AK:
(Alamak, paid $2,000 a year for 21 years and now can get back only about $40,000?)
Since you have read my blog on the subject, you know why we should not mix insurance with investment. I wouldn't touch an ILP even with a five feet pole.

We need life insurance if we have dependents. If we no longer have dependents, we don't need life insurance. 

Even if we do not have dependents, if we do not have a meaningful level of passive income, we still need coverage for CI because we might not be able to work for a long time. 





So, before you terminate your ILP, find out first if you are still able to get term life and CI coverage. 

If that option is still open to you, then, terminate the ILP. You will be saving a lot of money to get the same level of coverage.

Related posts:
1. How many 20 years do we have?
2. Without CI coverage?

CPF-SA savings 10 years from now.

The biggest downside of not being gainfully employed is the lack of mandatory CPF contributions.

To ensure that my CPF savings will become a more significant bond component of my investment portfolio in my golden years, I have been making voluntary contributions.




Checking on my CPF account last night, I wondered how much would I have in my CPF-SA by the time I am 55? 

55 years old. That is also when money from my CPF-SA will be moved into my newly created CPF-RA to fund the annuity called CPF Life.





My CPF-SA savings in January 2017:

$215,862

Assuming that CPF annual contribution limit (now $37,740) remains unchanged in the next 10 years and applying the following allocation rates:

Click to enlarge. Source: CPF Board.

Doing voluntary contributions to the annual limit each year, for the next 5 years, about $8,159 each year will go to my CPF-SA. 

Ratio of contribution to the SA being 0.2162.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

At age 50, I would have $308,588 in my CPF-SA.




For the 5 years following that, about $11,699 each year goes to my CPF-SA. 

Ratio of contribution to the SA being 0.3108.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

At age 55, I would have $441,344 in my CPF-SA.





Of course, all else being equal, the number is likely to be bigger 10 years later as the calculations do not take into consideration the additional 1% interest payable on the first $40,000 in the CPF-SA.

Although it is not $1 million, $441,344 is nothing to scoff at either.





This is why I have told some rather worried readers who are pretty risk averse and who are not investment savvy to seriously consider using the CPF-SA as their primary tool to achieve greater financial security in their old age.

As simple as ABC? 

As simple as CPF.

Related posts:
1. AK showing off his CPF-SA.
2. Average HDB household and $1M.

60% higher interest income from age 55?

Reader:
Would you leave your money in CPF-OA (beyond 55)? 

I can understand CPF-SA @ 4%. 

Wouldnt it be better to move into CPF Life for better returns? 

Noted that leaving it in CPF-OA will provide more flexibility. Thanks.

AK:
We have the option of moving more funds into the CPF-RA up to the prevailing ERS (1.5x the prevailing FRS) at age 55. Is it better? 

If what you want is a higher payout from CPF Life, yes.

However, do note that you will be required to move funds from your CPF-SA first and not from your CPF-OA. 

Only when the CPF-SA has insufficient funds, then, the CPF-OA is tapped.





So, let us say we have quite a bit of money remaining in our CPF-SA after our CPF-RA is created and FRS requirement met at age 55, it is not all that more beneficial for us to move more funds into the CPF-RA because we are not getting a higher interest. 

It is the same 4%, assuming things were to remain unchanged.

However, for someone whose CPF-SA is depleted after the creation of his CPF-RA, if he wants to have the ERS in his RA, he would be moving funds from his CPF-OA and the funds would then be receiving 4% instead of 2.5% interest. 

That is 60% more in interest income!





Like you said, flexibility is sacrificed but, in my opinion, the loss is well compensated.

Sweet but not available for everyone.

I have the happy problem of having much more in my CPF-SA than the prevailing FRS. 




So, will I move more money into my CPF-RA at age 55 to meet ERS? 

I will decide when I turn 55.





To anyone who just dropped in, another blog on the CPF was published earlier today. 

See:
CPF Life Escalating Plan.

CPF Life Escalating Plan.

Reader:
(On CPF Life)
Is 70 the max age to leave the money there?
Can continue to leave it there, and then bequeath everything?

AK:
We can choose our CPF Life payout start age to be any age between 65 to 70 years old.
If we did not make a choice, the payout will start automatically under the CPF Life Standard plan at age 70.





We must remember that CPF Life is an annuity and not a legacy planning tool. It is meant to help fund our retirement.

If we would like to use the CPF as a legacy planning tool, we could choose to leave some or all of the remaining money in our CPF-OA and CPF-SA untouched from age 55 instead.

On the subject of CPF Life, there is another plan which will be available from 2018. 





In addition to the Standard and Basic Plans, we will have the option of the Escalating Plan.

*Available from January 2018.

I feel that the Escalating Plan will appeal to people who would like to have a later payout start age, later than age 70, because they want a bigger monthly payout to address the issue of inflation.

How is this achieved?

The payouts under the Escalating Plan will be smaller than even the Basic Plan's payouts in the initial years but will grow at 2% a year.





Since the latest payout start age for CPF Life is age 70 which already allows for another 5 years of accumulation from age 65, the Escalating Plan helps to address the desire for larger payouts when members are older by allowing some of the funds to continue accumulating instead of being paid out from the payout start age.

I feel that the Escalating Plan is a prudent one and if we believe that an annuity is a good retirement funding tool in case one should be blessed with longevity, then, the Escalating Plan is the obvious choice for anyone with this belief.
----------------------------
UPDATE (23 Oct 17):
Which CPF Life Plan for me?
----------------------------
Related post:
CPF Life estimator.

Options with CPF Life and SRS in retirement.

Reader:
Just wondering if you have given any thoughts on when you will start your CPF LIFE payout? Do you mind blogging about it?

I have been building up my SRS savings. By the time I hit the Official Retirement age of 62 (for now), if I start withdrawing my SRS at 62 to 72, the annual sum will be equivalent to CPF LIFE.




Now the question is, should I start my CPF LIFE payout at 65 or delay till 70 to gain more interest and thus a slightly higher monthly payout?

According to the picture you posted on 17th July 2017, at FRS: age 65 = $1,380 mthly. At age 70 = $1,840.

What will you do? A bird in hand is better than a slightly bigger bird in the bush?



AK:
With CPF Life, it depends on whether I need the money. At 65, if I need the money, then, I will start drawing from the annuity. 

If I don't need the money, I will leave it to grow, earning a risk free and, hopefully, meaningful interest rate by then.

With SRS money, once I start the withdrawal process, I would have to empty the account within 10 years unless I use the money to buy an annuity. I have some investments in my SRS account and I would probably have to liquidate these. 

So, I would probably consider withdrawing money from my SRS account in a bull market sometime after I turn 62.

So, depending on the situation when the time comes, I could tap either the SRS or CPF Life first or not at all.
---------



Liu Jiayi says:
From Jul 2015, SRS members will be able to apply to their SRS operators to withdraw an SRS investment by transferring the investment out of their SRS accounts (e.g. into their personal Central Depository (CDP) account), without having to liquidate their SRS investments.

(Please see comments section below for the full comment.)

Related posts:
1. CPF Life Payout Estimator.
2. CPF Mobile Service Centre.
3. Lifelong income with SRS.

QAF's 2Q17 profit after tax fell 72%.

Part of QAF's large decline in earnings should not come as a surprise since, one year ago, in 2Q 2016, QAF recorded an exceptional gain of $9.7 million from reducing its stake in Gardenia Malaysia (GBKL) to 50%. 

If we were to exclude that exceptional gain, however, profit after tax still reduced by 58%, year on year. Not as bad as 72% but still rather attention grabbing.

Singapore and Malaysia

QAF's share of profits in Malaysia is reduced because of its smaller stake in GBKL. However, the reduction is bigger this quarter compared to the last quarter.

It was revealed that QAF experienced issues in its Johor production plant. This affected sales volume not only in Malaysia but also in Singapore. 

Otherwise, QAF would probably have done better in both countries. There were also some one off cost items due to problems at the said plant.

Philippines

The bakery business in the Philippines is doing well but incurred higher marketing and distribution costs. It was revealed that although costs are heightened, the bakery business achieved higher sales and increased market penetration in the country. 

Looking at the Income Statement, Other Operating Expenses saw the biggest increase of 23% and it was revealed that most of this big increase is due to higher marketing costs in the Philippines. This is also a market in which QAF is planning to expand its footprint.

China

The bakery business in China is still losing money but losing less money. Narrowing losses is good news but if it continues to bleed, it might be a good idea to shut it down. QAF will decide by end of the year if it should continue its business in China.

Australia

QAF's pork business in Australia saw a 20% reduction in selling price due to an over supply situation which led to downward pricing pressure. 

The demand for pork is still healthy but the over supply will take time to resolve. It is hard to say how long the situation might persist but I doubt that it is enduring. 

The situation is probably more cyclical than structural.

One quarter does not make a year. It is reasonable to wait and see if QAF is able to recover earnings in the coming quarters as it pursues growth.

To be realistic, however, any recovery could take some time to materialize as new production plants are built. Also, it is my guess that many of the increases in costs and expenses are going to be sticky.

Having said this, note that QAF is meeting the challenges from a position of strength as its balance sheet remains strong. 

Cash and cash equivalents also increased year on year from $97 million to almost $126 million. 

QAF has a good track record and I like to think that the managerial competence is more enduring than the challenges being faced.

Even with reduced earnings in 2Q 2017, QAF is capable of maintaining a 5c DPS but it is harder to say if a reduction will happen or not. With this in mind, while waiting for improvement in performance, I look forward to being paid.

If Mr. Market were to send QAF's share price tumbling, it would be an opportunity for me to accumulate a larger position in a competently run and financially sound company which is likely to do better again in future.





If there should be a decline in share price, I hope it is a big one of, say, 10% or 20% and not just another dip.

See announcement: HERE.

Related post:
Wondering about QAF Limited.

Centurion Corporation's sky rocketing earnings.

I made quite a few new investments in the last six months to a year but, of these, the largest investment was in Centurion Corporation. 

I was attracted not just by their ability and willingness to pay meaningful dividends but also their clear and viable strategy for growth. 

With insiders eating their own pudding too, it was a vote of confidence which regular readers know I have always liked.

2Q 2017 was another stellar quarter.

72% rise in earnings is definitely nothing to scoff at.

However, what I am more impressed with is the gross profit margin which improved some 7% to 73% while gross profit improved 36%.


Much has been said about the increasingly difficult business environment with many more competitors sharing the Singapore foreign workers accommodation pie.

The stellar results tell me that Centurion's management are not only competent, they are also fast to move into a new growth area and they are masters in branding.



An interim dividend per share (DPS) of 1c has been declared and that makes me happy.

Although I had no idea that Centurion Corporation had plans to list in Hong Kong when I became an investor in February, if that should come to pass, we could see its share price going higher.

Of course, although less important to me than the investing for income angle, a higher share price would make me happy too.

Am I going to buy more now? 

You want to read related post #1.

Related posts:
1. Invest in Centurion Corporation.
2. Centurion Corporation to double.

See slides presentation: HERE.

My family almost went bankrupt.

As my blog grows in readership, there are many more questions which are repeated. There is some level of predictability when it comes to questions from readers, I see.

This is why I find it useful to share some older blogs regularly on my Facebook wall. It is mainly for the benefit of my new readers and also readers who are more forgetful.




A question which I get asked before and which has picked up in frequency in recent months is why am I the way I am? 

This is a question I have addressed on a piece meal basis and to make it easier for me in future, I am blogging a reply in the comments section so that I have something which I can find easily to point to readers.





Read only if you are interested in my psyche:

I have some deep seated insecurities which I can never be rid of. I have provided glimpses of these in my blog before. They are, of course, very piecemeal in nature and scattered. 

I cannot remember where they are in my blog exactly. I do remember that I shared in the comments section but I have never really blogged about these insecurities in their entirety. 

I try not to relive those years.

So, I will be brief. 







My family almost went bankrupt when I was entering my teens and our financial hardship lasted many years. Those years left a mark on me. 

I hinted about the financial hardship my family went through in a few blog posts before and one which I can remember is:

The secret to avoiding financial ruin.







My family learned first hand that banks are fair weather friends and I developed a strong aversion to debt. I try to avoid borrowing money for anything.

Sleeping in the living room of a HDB flat for some years as a teenager was a humbling experience. It was awkward too.

I learned early on in life how finances could go wrong so badly and so quickly and how not having enough money was a terrible thing, how being indebted was much worse. 






Living with the constant threat of losing whatever we had left was very stressful but my parents tried to give us as normal a life as they could.

Those years of financial hardship left me with scars and I believe that anyone who had similar experience will always have shadows haunting them.

"Do I have enough money? Maybe, it is not enough. What about my parents? Do I have enough to take care of them? What about my younger siblings?"

So, I tend to overcompensate. 






I tend to save as much money as possible. I put away much more in my emergency fund than what some people think is necessary. 

I do this although, financially, we became more comfortable as I graduated from university and started working. 

I craved greater financial security. 







The CPF-SA was a natural candidate and I blogged about how I transferred funds from my OA to my SA in the first few years of my working life and that was almost 20 years ago.

There are many clues littered throughout the blog about the way I think and why. 

Of course, I don't expect anyone to piece all the clues together to understand AK the giam siap fellow. 







I vowed not to grow old and destitute.

The End.

Another peek into my past:
With some difficulty, AK says good bye. Thank you, mom.

Wondering about QAF Limited (Updated).

Pulled pork as Rivalea calls off IPO
The Australian, November 7, 2017
(See Comments section at the end of this blog.)

--------------------------------

7 October 2017

Reader:
Hi AK, thanks for the session (i.e. Evening with AK and friends). 

QAF has received shareholders approval to list it's primary production on the ASX. 

Since management has not indicated that the proceeds from listing will likely not translate to special dividend for shareholders, hopefully they can put the money to good use to expand their operations in the Philippines. 

Wonder when the share price will be appreciated by investors and truly appreciate upwards.




AK:
I dunno if the share price will move up or not. One off gains are one off. So, don't place too much emphasis on that. 

Although QAF has a good track record, we could see lower share price if the pork oversupply situation in Australia is prolonged and lasts for several quarters. Earnings will continue to suffer then.

Off the top of my head, in such a situation, we could see $1.00 - $1.10 a share then. 

As QAF should be able to maintain its dividend, I am staying invested and getting paid while waiting.



-------------------------
Reader #1:

I wonder if any of your readers have written to you recently about the longer term aspects of QAF- both in dividend yield and share price?

Reader #2:
Hi AK, I know you are an investor in QAF Limited. Any reason why the share price is plunging? I know a long time director just stepped down last year. Do you think that has an effect?

Singapore's Longest Sandwich

AK:
Don't ask me about share price. Ask Mr. Market. There is no way I can tell how prices might move now or in the future (with certainty). Past prices, I can tell you easily.

Dividend yield? That partly depends on share prices. Refer to what I said above. ;)

There will always be challenges in business. I will say that QAF's track record is a good one and I can only hope that they continue to bring home the bacon (and bread). ;p



Of course, QAF is not just about Gardenia bread although that is what most of us know them for. QAF is also in the business of pork production in Australia (i.e. Rivalea) which is doing very well. 

It was only a few years ago that Rivalea's viability was still a big question mark and some readers might remember that I blogged about it too. 

Now, Rivalea stands shoulder to shoulder with Gardenia in importance to QAF.

Of course, with the strategic review to improve value for shareholders still underway, it is difficult to say what will happen in future but it is reasonable to assume that any action taken will probably result in value being created.

The "worst" thing that could happen from the review is for QAF to maintain the status quo. To an investor for income, this is probably not really a bad thing but to a speculator, it could be.

Know our motivations as investors and know our investments. Then, we will know if the investments are appropriate for us.

If they are appropriate investments for me, I will stay invested. The day they are no longer able to do what I think they should do for me is when I would probably let them go. Time will tell.

Que sera sera.





Slides presentation on Rivalea:
HERE (published in June 2017) 

Related post:
How much is QAF worth?

Healthy cash flow is most important.

Reader says:

Time flies and I'm glad to have taken your advise previously to do well in studies. 

I am currently reaping what I've sow for my study & career.

Good news is that i have gotten a job that pay me well compared to my first job 3 years ago; i got close to 50% pay increment!

However, my life had been quite a drama due to conflicts at home. 


So, i end up moving out, renting a room to keep myself in peace. 





With that, expenses increased and i am having difficulty sustaining it.

As i am single (28 years old) and I have to wait to reach 35years old to be eligible for a hdb bto 2 room flat (considering the waiting time for BTO or higher price of resale flat). 

I am currently thinking of getting private property (studio) which if possible, i would like to save enough downpayment before committing to own one.

i calcluated at least 3-4 years of saving to reach that goal. 

Do share with me your opinions too to handle my current situation






AK says:

Whether to buy or rent a property, especially if buying a property is going to strain your finances, the Rule of 15 helps you to stay grounded.

http://singaporeanstocksinvestor.blogspot.sg/2017/05/to-rent-or-to-buy-rule-of-15-revisited.html

Think carefully what is the financially most prudent thing to do when it comes to housing for you now.





Reader says:

That is a interesting rule to use as a guide, but does other factors affect the outcome if we factor in the inflation, demand & supply of housing and uncertainty of the house value in future?


AK says:

It is about cash flow.

How can we tell what the demand and supply situation is going to be like in future?

The Japanese didn't know they were going to suffer 2 decades of decline in housing prices.

The Americans didn't know they were going to suffer a huge crash in housing prices that wiped out 10 years worth of wealth.

If cash flow is going to be an issue, forcing ourselves into buying a private property because we fear prices are going up higher in future is silly.

Too many people have too much of their wealth stuck in their homes. 

This is why so many people in a wealthy nation like Singapore must work till the day they die.





Reader says:
I see, thats is a very good insight for me to learn. 
i trust your experience in this.

AK says:
Alamak. 

Don't trust me. 

I don't have a crystal ball. 

I cannot see what the future is going to be like.

I am just saying that we should stay prudent especially if cash flow is tight.

If you have plenty of money lying around and cash flow is not an issue, then, if you want to take a bet on property, go ahead.

Having healthy cash flow is always important.





Related posts:
1. Property market.
2. Slaving to stay in a condominium.
If to stay in a condominium, we are forced to live like paupers, the price is too high.

HWZ says AK "self-victimise himself".

A friend read something in hardware zone and thought I would like to know. He had a good laugh and I had a good laugh. 

I am sharing it here so that maybe many more people would have a good laugh.




Now, read this with an open mind. There could be some truth in what the person says.

Oh, and this video clip is just for dramatic effect.



HWZ forumer, w1rbelw1nd:

I dont think very positively on local bloggers, frankly. Yes, most of them may be altruistic and do it out of interest and passion, but also because of doing it for interest they have a tendency to interact with people of the same mindset (a sinkie tendency, no doubt), rather than challenge their own thinking. 

Just take a look at ASSI facebook page.

Quite recently there was a reader commenting that he should share more on his failures and bad picks. 

ASSI immediately (IMO) self-victimise himself and say things like "yea maybe i should take a break from blogging, since my sharing has adverse impacts on readers" and lol all the ASSI white knights come in and comfort him. 

The point is, under an environment where like-minded people seek each other, and just parrot each other, can these bloggers give a truly learned, informed and balanced view? 
(Source: HWZ)





Well, it is the truth. What? True?

Yes, it is true that I am blogging because I enjoy it.

I am not blogging because I have to. 

I am blogging because I want to. 

So, I don't have to give in to the demands of the audience. I do what I like.

Remember, I am just talking to myself here in my blog. I don't give advice.




If you want to eavesdrop although I don't know why you want to, take whatever I say with a pinch of salt (unless you suffer from high blood pressure).

Alamak! Did I just give some medical advice? 

Die lah. How like that? I blur.

Related post
AK the teacher or the mental blogger?

Investment philosophy and property market.

After my blog about nibbling at Tuan Sing Holdings, a reader commented that I seem to be building up a position in property counters and asked if I am waiting for a rebound in property prices. 

At the same time, a couple of readers shared that DBS is expecting residential property prices in Singapore to recover by up to 10% in the next two years.




Here is what I have to say:

I know some analysts are positive that residential property prices have bottomed and are going to rise next year or the year after. 

Is this going to happen? 

Your guess is as good as mine (or the analysts'). The best anyone could do in such an instance is to make an educated guess. 

When it comes to buying a property, if I am looking at a possible capital gain, I am probably speculating unless I am pretty sure I am buying it undervalued which gives me a margin of safety and probably an arbitrage opportunity. 

The decision should be guided by valuation which should logically be guided by rental yield.




To have an idea of my philosophy when it comes to property investment, recall my relatively large investment in Saizen REIT. 

It was trading at a big discount to valuation although its assets were generating steady and meaningful rental income which, together, offered an attractive yield of about 10% based on my entry price. 

Even if the sale of assets a few years later to another investor at a slight premium to valuation did not happen, it would not have mattered to me. Why? 

Because it was a good investment, not a speculation.





Bombarded by invitations to "invest" in properties, we have to be at least discerning enough to know if these are invitations to "invest" in properties or are they really invitations to "speculate" in properties. 

There is a difference and one that vested interests will not take pains to highlight even if they are aware of it.

I remember a family friend bought a property here during the Gulf War. 

Property prices here plunged back then. 

He went and bought a landed property at a bombed out price. Pardon the pun. 




The observation was that although property prices plunged, rental income was relatively resilient. 

That gave rental yield an uplift. 

For sure, he made a good investment.

Some might remember that I blogged about why I stay in a condo and some might remember that I bought my first condo during SARS. 

Why during SARS? 




Mr. Market was suffering from a severe bout of pessimism and I got a good deal. 

Based on the price I paid, potential rental yield was about 5%. 

This increased to almost 9% by the time I sold. There was a robust growth in rental demand in those years. 

Based on my selling price, however, the rental yield would have been just shy of 4%. 

Prices rose and they rose a bigger percentage than the growth in rental income.

Today, that same property's rental yield is barely 3% based on my selling price but based on the recent selling price of a unit in the same stack, the rental yield is not even 2.7% now. 




Market price of the property is about 10% higher but rental income is more than 20% lower than when I sold the property. 

To any investor for income, this combination should be an alarm bell.

To continue along the same line, I bought my current home during a lull in market activity after all the rounds of cooling measures were implemented a few years ago. 

Back then, the potential rental yield was 6% and I verified this. 




Today, based on my purchase price, the yield has come down to 4.6%. Based on the current market price which is quite a bit higher than my purchase price, it would be less than 4%. 

Again, market price has gone up but rental income has reduced.

So, lowering rental income does not mean that property prices in Singapore could not increase in future. It just means that the property market is simply one that doesn't make sense to the rational investor in me now.

However, Mr. Market can stay irrational for a long time. 

Look at Hong Kong for an example of sky rocketing property prices and miserable rental yields. 

Invest in Hong Kong properties? Not me.





My nibbles in property counters do not represent any belief that property prices will rebound in future.

Instead, they are pretty consistent with my philosophy to buy at bargain prices which make sense to me. 

Being able to own a bit of Tanjong Pagar Centre, OUE Downtown and Robinson Tower at a big discount to valuation is pretty attractive to me.




I emphasize that I will not tell anyone if they should or should not buy anything.

I am only sharing my philosophy and experience in my blog. I am not here to make a decision for you. 

What you do is up to you.

Related posts:
1. Invested in Tuan Sing Holdings.
2. Ask 2 questions before buying.