10.5% yield but must take a 200% loan.

Reader says...

I have some money in bank and my Relationship Manager is pushing me to buy unit trusts with leveraged.

Recommend me to take 100% loan so the yield will be higher from 5% to 8%.

I could also take a 200% loan to get 10.5% yield.

Good or bad?






AK says...

Gear up 200%!?

Sack your Relationship Manager.

Of course, the bank he works for won't sack him.

You sack him!

I don't borrow money to invest with.






When you buy a unit trust, the only people guaranteed to make money are your Relationship Manager, the bank he works for and the fund managers.

You are the one bearing all the risk.

Do you want to increase that level of risk?

(It is a fact that if you leverage up, they will be guaranteed to make even more money from you while you are only guaranteed more risk.)





Someone I know bought into a REIT mutual fund before the Global Financial Crisis.

It lost about half of its value.

Imagine if he had financed that investment with 200% leverage!

His losses would have been hugely magnified!

Shudder...

Remember that no one cares more about our money than we do and don't ask barbers if we need a haircut.







Warren Buffett believes investors should avoid using borrowed money to buy stocks.

"It is crazy in my view to borrow money on securities," he told CNBC on Monday.

"It's insane to risk what you have and need for something you don't really need."

"My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage," he said.

"Now the truth is — the first two he just added because they started with L — it's leverage."





He shared the data that revealed Berkshire Hathaway's stock declined by a range of 37 percent to 59 percent multiple times over the last five decades.

"There is simply no telling how far stocks can fall in a short period."

"Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary." (Source: CNBC, 26 Feb 18)





AK agrees.

Peace of mind is priceless.

You might want to read these blogs:
1. A great crash is coming!
2. Lost life savings and now in debt.

And also this "e-book":
Survivability and opportunity in times of crisis.





In case you just joined us, another blog was published earlier today.
See: Make investing easy.

Make investing easy by saying 'here are three things'.

Reader #1 says...

I attended few of your "Evening with AK and friends" sessions and like the way you analyse stocks.

Can you share how you filter stocks, any key criteria before you put in your shortlist and start going through in details?






AK says...

Well, I cannot give you a set of criteria.

Like Charlie Munger would say:

"I can never make it easy by saying ‘Here are three things’. You have to derive it yourself to ingrain it in your head for the rest of your life."





However, I would tell you my starting point.

I invest mostly for income.

So, whether a stock pays a dividend is an important consideration.

Then, pick it up from there.





If you were to invest for growth, you would have a different starting point.

It is important to match our motivation and our methods. :)

I have a section in my blog's right sidebar titled "Food for Thought".

You might want to read the books listed there. Good primers. :)

Reader #2 says...
Capital Expenditure is shown in the Cash Flow Statement for some companies like WXXXX but Capex is not shown for other companies such as XXX Holding.

How do I tabulate the "hidden" capex?





AK says...
Hide and seek is something I am really bad at.

If it is hidden, I give up.

Just don't invest in that company. ;)





AK is a simple minded person and tries to keep things simple.

OK lah. AK is just being lazy, as usual.

Bad AK! Bad AK!


Remember what Warren Buffett said.

"Just looking at the price is not investing!"






You might be interested in these:
1. Invest for income, ignore the Ms.
2. Get 12% yield? Ask 2 questions.

Unfair FRS and ERS' CPF LIFE payouts compared to BRS'?

Reader says...
Singapore government seems to be steering the country to be more inclusive.

What does that mean?

It means if you have a lot of money in CPF, it will be used to tilt the balance or contribution to the needy individuals who do not have enough in their CPF.

As in FRS CPF Life is NOT exactly twice payout from BRS CPF Life.






AK says...
Of course. People who have greater ability to help themselves should do so and not lean too much on the government for assistance.

Reader says...
Should do so? Based on?

Retirement planning for someone who painstakingly TOP up with CASH should NOT be used as handouts to others.

This should be done in the domain of income tax... or those with CPF way above FRS or ERS...

FRS and ERS are for the sandwich class.






AK says...
The top ups you are making to your CPF account are not being used as handouts to help others.

It remains your own money as any excess above the FRS, you are allowed to withdraw at age 55.

Your CPF money is not being given away if you have the FRS in your CPF account compared to members who only have the BRS.

You CPF money is simply paid a lower average interest rate in comparison.

Reader says...
It is NOT equitable.

Your statement of “Your CPF money is simply paid a lower average interest rate in comparison” doesn’t bode well for the middle income who works hard and TOP up cash periodically to secure a comfortable retirement life.

It should NOT at any away tweaked so as to achieve FAIRNESS.

This can be achieved via OTHER means/Policies.






What does AK have to say?

When we reach 55 years of age, we will enjoy 6% interest on the first $30K, 5% interest on the next $30K and 4% interest for the balance in our CPF-RA account.

So, it is true that members who have the BRS will get a higher interest rate on average compared to members who have the FRS or ERS.

It also means that although the FRS and ERS are 2x and 3x more compared to the BRS, the monthly payouts from CPF Life will not be 2x and 3x more than the BRS'.







Although some with the FRS or ERS might think of it as being unfair to them, remember that the extra interest is really a bonus given on top of the floor interest rate of 4%.

Also, although the government might be seen as giving more aid to members with less in their CPF savings, in actual fact, all members are being given the same extra interest on the first $60K in their CPF-RA.

I don't think anyone should be complaining.







As Singaporeans enjoy longer life expectancy today, CPF LIFE helps guard us against running out of money during a long retirement.

Find out how CPF LIFE ensures monthly payouts for life in this video.





Related posts:
1. CPF LIFE Payout Estimator.
2. Remove the CPF Annual Limit and...

Keep $20K in CPF OA when taking HDB loan. (Growing CPF SA after OA was wiped out by home purchase.)

Just as I was about to publish this blog, I saw the news hot from the oven.

"Flat buyers will have more flexibility in using their Central Provident Fund (CPF) money, the Housing Board said as it launched 5,101 flats for sale from Tuesday (Aug 28).

"Buyers can now keep up to $20,000 in their CPF Ordinary Accounts (OA) when they take a Housing Board loan. Before, they had to use all the funds in their OA first.

"The funds can be used for their monthly mortgage instalments in times of need and will improve retirement adequacy if left unutilised."

Source:
The Straits Times





........................
Reader says...
Thank you for sharing so freely.

As like many others, I feel inspired and in awe.

I hope to get some advice if possible.

I recently emptied by OA to purchase a flat (on hindsight not such a great move).

Since then OA has been accumulating till it's about 10k now.






I plan to sell in 5-6 years time (depending on market).

Should I already start to transfer all my OA to SA?

Will there be any repercussions upon selling my BTO in 5 years time?

I am sorry if some of these questions look abit directionless.

Never been good with numbers, learning the hard way now.






AK says...
5 to 6 years from now, if you are not at least 55 years old or if you would be 55 but do not have the FRS in your CPF, you would have to pay back the accrued interest on the CPF money you used to purchase this flat.

I don't give advice but I will talk to myself.






If I had a mortgage now, it would not be a good idea to transfer all the money in my OA to my SA because if things do go terribly wrong, the OA money would go some way to pay the monthly mortgage.

I would keep enough in my OA for 12 to 24 months of mortgage payment (or any number of months that I think I might need to find work offering similar pay I had before).






Then, if I am certain I do not need the remaining OA money for any other purpose, I can consider transfering any balance to the SA.

Please remember that OA to SA transfer will not enjoy any income tax relief.

So, if income tax relief is important to you, you might want to do cash top ups to your SA instead.

Fresh funds from you will be required.






The first $7K of cash top up to the SA each year enjoys income tax relief.

Although OA to SA transfer does not enjoy income tax relief, it is financially less demanding as it is simply moving money that is already in your CPF account and not a demand for fresh funds.

Saving more in the SA is a long term plan to help fund our retirement but we should not do it without first considering our circumstances and what might go wrong.








You might want to read this:
Topping up our CPF savings can wait for some.

AK asks HDB-HIP-VERS can eat or not? Baojiak?

Single or married, if we are looking for a home in Singapore, the best value for money option is still a brand new HDB flat (i.e. BTO HDB flat), if we are allowed to buy one, of course.

Heavily subsidised, brand new HDB flats pass the Rule of 15 test with flying colors.

Don't know what is the Rule of 15 test?

See:
Rule of 15.



Singles weren't always allowed to buy new HDB flats.

Although allowed to buy only a one bedder (i.e. 2 room flat), allowing singles to buy new HDB flats is progressive thinking as many more young Singaporeans are staying single.

Space wise, having lived in a shoebox apartment for 4 years now, unless we are hoarders of material goods, I believe there is enough room for a single person in a 2 room HDB flat.

See:
My home is a hut in the sky.





As for HIP and VERS, for those who are not familiar with these acronyms, you are so unpatriotic lor.

Didn't watch National Day Rally 2018, right?

Bad XXX! Bad XXX!

"All Housing Board flats can expect to be upgraded twice during their 99-year lifespan under the newly-expanded Home Improvement Programme (HIP), as part of the Government's public housing redevelopment initiative.

"In a nutshell, all flats will be upgraded when they reach about 30 years of age, and again when they are about 60 to 70 years old."

Read article: 
HERE.


"Under the new Voluntary Early Redevelopment Scheme (VERS), owners in flats aged 70 years and older can vote for the Government to buy back their homes before their leases run out, if their precinct is selected for VERS.

"They can use the proceeds to buy a new flat, while the Government redevelops the precinct. If they vote against such a move, they can continue to live in their flats till the leases run out."

Read article: 
HERE.





Many things have been said by many people about HIP and VERS since NDR 2018.

I was afraid readers might ask me about them and my fear came true.

Why afraid?

Apart from the fact that I am really lazy, I am really unimpressed by HIP and VERS.

To me, HIP and VERS are simply attempts to allay fears of people who happen to be owners of older flats, especially those who might have bought a resale flat that is quite a bit older than they are.

Purely from a value for money perspective, I think it is silly to pay full market prices for much older flats if we have the option of paying a much lower price for new HDB flats which, of course, have fresh 99 year leases.

See:
Affordability and value for money.





HDB flats come with a 99 year lease.

In case you don't understand what that means, it means that we will enjoy them for a maximum of 99 years.

As they age, the remaining lease becomes shorter and shorter.

If we are sufficiently clear headed, it would be quite obvious that HIP and VERS do not address the core issue of a decaying lease.






HIP

HIP simply makes old flats look new again.

The looks are upgraded but the leases are not.

It is like repackaging something with an approaching expiry date to sell to an unsuspecting consumer.

Or imagine an 80 year old granny going for plastic surgery to look young again but it does nothing to extend her lifespan.

Alamak, AK why liddat say?

Bad AK! Bad AK!






VERS

What about VERS?

Surely, it must be a good thing, right?

Well, it is 20 years away and we can't really tell what the compensation quantum is going to be like.

However, we can make an educated guess.

My guess?

VERS is going to be like selling the tail end of the lease to the government (i.e. HDB Lease Buyback Scheme) except that, this time, you get kicked out of the flat.

See:
HDB Lease Buyback Scheme.





You will have to look for a new home.

The monetary compensation from VERS should be higher than selling the tail end of the lease to the government under the HDB Lease Buyback Scheme.

However, the compensation cannot reasonably be expected to be enough to purchase a new home with the same attributes with a much longer lease.

You will most likely have to downgrade or downsize or top up to buy a new home.

What does this sound like?

Sounds like your old home with a much shorter remaining lease which you sold to the government under VERS was less valuable.

See?

It is free market economics.






You cannot reasonably expect to exchange an older batch of produce which is going to spoil soon for a fresh batch that will stay good for some time to come.

Hmm.

Wait, actually, you can.

How?

If you meet a "gong giah" (i.e. "stupid fool" in Hokkien) of a buyer lor.

So, what is the moral of the story?

Look for a "gong giah" buyer lah!

Aiyoh, no lah!

You so terrible!

Moral of the story is don't be the "gong giah".






For some reason, if you are set on buying a resale HDB flat, "bochap" (i.e."ignore" in Hokkien) the hype around HIP and VERS.

They are just noise.

Remember, you must have very good reason to give up the option of purchasing a new HDB flat if you are actually lucky enough to have that option.

Focus on what you need and if only a resale flat will do the job, try not to buy a very old flat.

See:
Buying properties with short remaining leases.






Although you are being a "gong giah", don't be more "gong" than necessary.

See also the related posts at the end of this blog.

OK, I am packing and rushing to the airport to catch the next flight out of Singapore now.

Hopefully, it is going to a country that does not have an extradition treaty with Singapore.

Alamak!

Bad AK! Bad AK!







Related posts:
1. Older flats are problematic.
2. HDB flat is 37 yo but son is 8 yo.
3. $1M for 30 year old flat and now?

Another blog was published earlier today:
CPF SA time and income lost!

CPF SA time and income lost due to peer pressure.

Definition of "peer pressure":

A feeling that one must do the same things as other people of one's age and social group in order to be liked or respected by them.

(Source: Merriam Webster Dictionary)






Reader says...
In my 20s, I already had the intention of transferring the monies from my OA to SA.

I also intended to make voluntary contribution to my CPF accounts at that point of time.

I told my friends about my intention and they criticised my plan and called it a "stupid" idea.

As a result, I did not execute my plan.

I finally took action when was 38 years old two years ago. 

I transferred the maximum allowed from OA to hit FRS in SA without telling anyone then.






Of course, my OA was significantly reduced after the transfer.

Going forward two years, my OA balance surpassed my SA once again due to mandatory contribution from my active employment.

I have no regrets doing the OA to SA transfer.

I only regret succumbing to peer pressure and not doing this in my 20s.






AK says...
Yes, doing OA to SA transfer in our 20s would make the government work a lot harder in building our CPF savings to meet the FRS much faster.

People sometimes say that 4% interest in the SA is only 1.5% more than 2.5% in the OA.

I always tell them that it is not 1.5% but 60% more!

Add the magic of compounding, it becomes much, much more. ;)






Peer pressure can be a terrible thing.

Some things we should never do despite what our peers tell us.

Some things we should go ahead and do despite what our peers tell us.

If our facts are right and if our reasoning is sound, stick to our plan and ignore the noise.





AK anyhow talking to himself only lah.

I am not peering at you.

I am not giving you pressure.

No peering and no pressure hor.

Related post:
1. Bigger retirement fund with CPF-SA.
2. Much money in SA from the government.
3. Hit FRS in SA by age 32!
4. FRS in CPF SA at age 30?

Good men top up their wives' CPF accounts!

Reader #1 says...
I have decided to use cash, $10K annually for 18 years to top up my non-working spouse's CPF SA.

She currently has only $10K in her CPF SA.

In this way, she should be able to meet the minimum sum by the age of 55 and join the CPF Life.

10K annually will be the minimum top up and will be around $280K by the time she is 55 if my calculation is correct.

Any extra will be bonus.





We are not very well-to-do, so we hope that with both of us on CPF Life, we will not burden our children when we aged.

Just like to thank you for sharing your thoughts/talking to yourself on the CPF system, so that we can better understand it!

And thank you for taking your time to reply me with the link.

What u are doing is truly out of good will.

Good karma for good hearted people! 善有善报！😊






Reader #2 says...
I had just hit the FRS in SA and the BHS in MA as some of your readers did.

Wah, feel happy and looking to grow my spouse's CPF account as my next objective.

She is a SAHM (stay at home mother).







AK says...
The CPF system is one that helps members who help themselves.

It is a system that rewards the gainfully employed.

Housewives are usually disadvantaged, therefore.

So, good husbands like you guys are needed!

Doing a good job! Gambatte!





Imaginary Reader says...
What about you, AK?

Are you doing a good job too?


AK says...
B.Y.H.W.

Wealth destruction!

I lucky I no wife. :p

Yes, I know.

Bad AK! Bad AK!

What is behind hitting the FRS and what is our plan?

In the last few days, I have been sharing stories of young readers hitting the FRS in their CPF-SAs.

Although it is meant to be encouraging, it has also caused some readers anxiety.

I guess it is just like getting mixed response from readers after sharing my own CPF numbers over the years.

"One type of rice feeds hundred types of people."

Direct translation of a Chinese saying.






How we respond to something depends on our own beliefs and situation.

However, there is no doubt that all of us need to be financially secure in our retirement.

It is a basic requirement for a worry free retirement.

So, take inspiration from what others have achieved but we must have our own plan which means doing what we are capable of doing.

There is no point in emulating or trying to emulate what others have done if it is going to cause us distress.

If others are faster in achieving a common goal, congratulate them and we simply soldier on.






I am very pleased to share this message from a reader:

Reader says...
2 years ago, in my early 30s, after reading your wonderful blog, i decided to just pump in 10k into my CPF SA, never mind there is tax relief for the first 7k only.

I do it because i have a bit of spare cash, and to enjoy more interest that ah gong will be giving me.

Never mind about the tax relief (because i dont earn a lot so i dont need to pay much tax in the first place).

Heartfelt thanks to you, AK.

You deserve the praises and appreciations that we readers are giving! 🙂

Keep up the good work AK.

So rare to find someone like you, so rich in love for all of us strangers by sharing your "secrets". Kudos!






The aim is always to become financially stronger over time.

The aim is not to be the fastest in our cohort to become financially stronger.

The important thing is to make personal progress.

Trying to hit the FRS in our CPF-SA is basically trying to save money for our retirement.

That is the purpose of the CPF-SA.





Like depositing coins in a piggy bank when we were kids, every contribution to our CPF-SA, big or small, adds up.

It will take time for us to hit the FRS.

Some of us will need more time than others.

Financial freedom is not a race and neither is meeting the FRS.







Related post:
FRS in CPF-SA at age 30?

FRS in CPF-SA at age 30? Sharing in detail.

For the benefit of younger readers, the reader who hit the FRS in his CPF-SA at age 30 has decided to share his thoughts in great detail.

Reader says...

This is not about me per se. It is also about helping the next young person who is thinking of topping up his CPF. 🙂

Everyone has different backgrounds, incomes, obligations but sharing some reasons for me to hit the FRS early and to fully maximise our CPF systems.



1) The yearly increase in FRS should be covered by the interest of 4% each year.

This means you are likely to meet the FRS when you hit the retirement age.

I estimate the FRS to be approx $346,815 in 25 years assuming 3% increases but my SA would be a lot higher since it is compounded at 4% and my contributions to SA from work is not added in yet as well as the flow over of interest from MA.








2) Hitting the FRS at 30 means that I can allow for the FRS to compound for at least 25 years till the milestone age of 55.

25 years isn’t a very long time away in my opinion but the compounding can be substantial.

It would be about 2.67x the current amount and likely I would be able to withdraw if I need or aim to hit the ERS.








3) If CPF LIFE is still around by my retirement, it will likely be able to provide me with a decent cash flow when I am not working.

In fact, I don’t look to retire early.

I look to still be gainfully employed till as old as I want to.

The key is to allow me to have a choice in doing what I want at that time and this changes with age!









Some tips of what I used to hit the FRS:

1) Do OA-SA transfers when below 30. I fully transferred my OA to SA at one point in time.

2) Do CPF SA top ups yearly since I started work (taking advantage of $7k tax relief at the same time) and in some years I topped up beyond the $7k if I received good bonuses.

3) VC to your OA/SA/MA and thereafter transferring the OA amount to SA.

4) Used my CPF OA to buy stocks before HDB wiped out the full sum for deposit and thereafter sold the stock and transferred it back to my CPF OA, follow by step 1 again.

5) Using full cash to finance your property and leave the CPF accounts untouched.







I also do not advocate paying off HDB early because I treat them as good debt.

The compounded interest in my CPF (at 2.5%/4%) is substantially higher than the interest saved (2.6%) over 30 years.

This point is difficult for most to see because they compare 2.6% minus 2.5% and they think they are saving on the interest.








Separately, I am obligated to get HPS when taking HDB loan so if I pass on, at least the insurer helps me to pay more.

Ultimately you need to manage your property purchase which I feel is the main expense of a typical Singaporean apart from food and there is honestly no need for a car (I have 2 kids).

My BTO cost less than my 3x annual income. (Live within means like what our PM says)








My background:
Went to Poly, NS, 2 years of Private University after that.

Have 2 young kids and my wife stays home to look after them.

I am just a normal salaried worker with starting salary was $3k like most fresh grads but my annual compensation is a low 6 figures now after 6 years. Good luck!








Related post:
1. FRS in CPF-SA at age 30? Yes!
2. How to grow our CPF savings?
3. 4 ways to boost our CPF savings.