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.

The head of a typical HDB flat household speaks (Part 3).

In part 3 of our correspondence, we talked about investing in real estate for rental income:





Hi Ak

Another friend of mine (same age as me)is so concerned with unemployment before 50 yr old, that he keeps urging us to buy a condominium and then collect rental income on it. 

He already owns an apartment in KL, and claims that he is successfully collecting rent of it. But he always avoid my question when I ask about currency & political risk of owning foreign properties. 

Now he is aiming for his 2nd rental property in Singapore. He said that prices are coming down and good time to buy in 2015 or 16. But again he avoid my question when I ask him about maintenance costs affecting rental yield and the oversupply of condos/ foreign labour cut back in Singapore which makes it risky strategy.

When I suggest buying S REITS as an alternative, he said it's not worth doing it until he has a million dollar capital base.

He also say meeting minimum sum in CPF is no big deal for him..

I am highly suspicious of his recommendation.

Good if I can hear your objective view on owning a physical property vs buying REITS. 

Thank you

C

My reply:

Hi C,

Well, there will always be risks in investments. Risks cannot be avoided but they can be understood and even managed.

Your concerns with regards to buying a property overseas for rental income are valid. I hope that your friend is still doing OK with the RM's decline in value against the S$.

Anyway, is it better to buy properties than to invest in S-REITs? The topic is well discussed by many people before. Personally, I feel that both are good investments as long as the price is right. Quite simple, really.

I don't know what your friend has in mind but if it is something vague like buying properties in Singapore in 2015 or 2016 is a good idea because prices will come down, I think he needs to do a bit more research and analysis.

Personally, I feel that any property investment must be able to provide at least a gross yield of 5% to 6% to make it worthwhile. This is a primary consideration for me and I blogged about the Rule of 15 before. Then, there is a whole gamut of other considerations which I have blogged about in a piecemeal manner before too.

Ultimately, I would say to do what you feel comfortable with. There are so many paths to financial freedom. Choose a path you are not only comfortable with but one which you are sure will bring you to where you want to go. :)

Best wishes,
AK

Related posts:
1. Rule of 15.
2. Journey to financial freedom is not a race.
3. Buying a property in Iskandar, Johor.
4. Don't think and grow rich. 3 points to note.
5. The head of a typical HDB flat household speaks (2).

The head of a typical HDB flat household speaks (Part 2).

In part 2 of our correspondence, I see a millionaire next door in the making:
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Hi Ak,

Since you ask,

A few thoughts to add on my original email-

(1) My friend is single income & same age, he has to support his wife (a stay home mom) and one young kid. His annual income is less than me & wife combined annual income. 

(2) His estimated total condo & car loan (with interest & maintenance) is $X,XXX,XXX ... projected to finish his total loan when he is around 50.

(3) He spends about 8.5 yr of his annual salary to service his condo and car loan. For us, we are cheapskate, we spend only 2.5 yr of our combine income on our flat. 

(4) My wife and I are debt free, except ongoing costs of raising 2 kids. Again we stay simple , they attend close by neighborhood school, no tuition, no karate or ballet classes. We have no TV, read to our kids and only borrow books from library. Our outings are mostly to botanical garden and other public parks (no entrance fee). My wife calls me cheap. 

Oh no my flat ceiling is leaking again, got to go patch it up...

Talk to you soon, hope to hear from you. You are my financial hero. Your reply make my day ! 

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My reply:

Hi C,

Your friend has to understand that his home is a consumption item. I do not know if he has given some thought to planning for his golden years but being in debt till age 50 due to consumption items is likely to set him back.

However, your friend could monetise his condo after staying in it for a minimum of 10 years. The chances of a nice capital gain is actually very good. ECs are usually priced 20% to 25% lower than surrounding private condominiums unlike new launches of private condominiums. So, they provide a margin of safety.

To be fair, your friend could have some plans up his sleeves and he could do very well in his career in future. We wish him the best, of course.

Your lifestyle is simple and it is good to keep it that way. We should remember that how much money we save is more important than how much money we make. I believe you are a millionaire next door in the making. ;)

Best wishes,
AK
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We can be a millionaire next door too if we choose to be a PAW. 

What is a PAW? 

See related post number 1 below.

Related posts:
1. The Millionaire Next Door.
2. The head of a typical HDB flat household speaks.

The head of a typical HDB flat household speaks.

I enjoyed the following email because it seems to be from a guy who is the head of a typical HDB flat household in Singapore. Married with 2 young children, he is trying his best to make sure he is financially secure in his golden years.

From what he has shared in his email and with certain assumptions I am willing to make, I feel that he will be quite comfortable in his retirement. I am sharing our correspondence here:
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Hello AK

Greetings. 

I have been reading your blog for about one year now. Truthfully I think you have been doing a good job in sharing your money saving and investing experience. 

I am 39, married with 2 young children. We just paid off our HDB flat and happily debt free, for now. We are not high income but live simple life. We take public transport to work and our friends (who stay in EC condo & drives a luxury car) make fun of us for staying in a dilapidated flat, but your blog keeps me motivated to achieve Financial Independence (FI) soonest I can. Nothing matters, except to achieve FI for us.

You inspired me to use cash and transfer from OA to max out my CPF - SA, which is on track to hit $161,000 by Dec of 2015 based on my monthly income contribution. 

Judging by our incomes, we'll be lucky to each have about $500,000 in cash savings (not counting the flat)  by the time we turn 55.

I know you a big believer in buying S-REITS and stocks and I agree with you too. The only small issue here is that I have to spend quite a bit of time studying and hanging out with my family, so with limited time to study and select stocks, would you recommend that I just dollar averaging into STI ETF from now until I am 55 years old? Do you know people who have successfully build up a retirement nest egg with this ETF strategy ? The other issue is that ETF does not give out much dividend as compared to REITS.. 

Grateful if I can hear from you, thank you very much

Sincerely,

C

When our home is fully paid, we have control AND ownership.
Before it is fully paid, we have control but NOT ownership.
We cannot say we own our apartment until it is fully paid for.

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My reply to C:

Hi C,

Welcome to my blog and I am glad you have found it useful. :)

Next, congratulations on being debt free! It is a good feeling, isn't it? I don't think your friends staying in an EC and driving a luxury car are debt free. They could be, of course, but if they belong to the same cohort and have similar level of earned income as you, the probability is lower.

If your friends are still servicing a mortgage and car loan, you are being very nice not to laugh at them for being still in debt. OK, AK is being naughty here. Bad AK! Bad AK! ;p

Now, let me say that having $161,000 in your CPF-SA by end of 2015 is an accomplishment at age 40. By age 50, you would have $241,500 and by age 60, if you were to leave your funds in the CPF-SA and, of course, the mandatory CPF-RA, you would have $362,250. This is assuming that there is no more mandatory contribution from 2016 and this is also not taking into consideration the extra 1% paid on the first $40,000 in the CPF-SA. $500,000? I think you have nailed it with this strategy.

Oops, I forgot about your savings in the CPF-OA which will build up from age 40 to 55 (or 62 if you choose to retire later). ;)

As for investing in the STI, you want to read the guest blogs by Matthew Seah. Just go to my blog's left side bar and look for his name under the section that says "Guest Bloggers". Matthew wrote about options provided by POSB and OCBC.

For people who do not have the inclination nor the time to actively monitor their investments in the stock market, index investing is a pretty good choice. However, do take note that the stock market goes through bullish and bearish phases too. So, it is important that you are able to sit out bearish phases and not break into a sweat.

The trick is only to invest with money you can afford to lose and not to use money earmarked as emergency funds or for any other purposes. You do not want to have to liquidate at the depths of a bear market.

Investing will always have an element of risk. Look at the Japanese and the Americans and how their countries' economies went into a tailspin in the past. Investors saw years of gains wiped out. This is why I think that the CPF is an important cornerstone of retirement funding adequacy. It is not only risk free, it is free of volatility.

Continue with a financially prudent lifestyle. Make more money. Spend less. Keep a big enough emergency fund (and I think this should grow in size as we grow older). Invest the rest but always keep a war chest ready to buy more during bear markets. Quite simple. :)

Best wishes,
AK
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We should never laugh at people just because they are staying in homes less "prestigious" or if their mode of transportation is not as flashy. 

There are many HNW individuals in Singapore who stay in HDB flats and take the public transport.

Don't judge a book by its cover. Better still, don't judge. Just a reminder to myself, of course.

Related posts:
1. In my 40s, married with kids? What to do?
2. An essential habit to becoming richer.

One of the most noble things we can do.

In recent conversations, I revealed that one of the things I have been thinking of doing is to set up a foundation to help financially disadvantaged students in future.

 

In the meantime, I have been making regular donations for many years to help fund bursaries for deserving undergraduates in National University of Singapore where I spent 4 years of my life.

I believe that helping financially disadvantaged students so that they and their families will have a brighter future is one of the most noble things we can do. So, if you can afford to do so, you might want to find out more about NUS Annual Giving and how to make a donation: here.

Related posts:
1. Counting our blessings.
2. We can help to lessen the pain.
3. The world is full of nice people.

New year's resolutions to impact your financial security.

There are two points to note in this reply I made to a reader:

"Well, in your case, with $157K in the SA, at age 53, 10 years from now, even without another contribution, the money in the SA will grow to be at least $236K. I say "at least" because I have not taken into consideration the additional 1% interest for the first $40K.

"$236K in your SA at age 53 and without any risk. Sounds good? ;)

"... Yes, it is harder for older workers (to rejoin the workforce). This is also why I said during a discussion in FB that a bigger emergency fund is necessary as we grow older."

The two points are:

1. Help the government to help us meet the CPF minimum sum. Beef up our CPF-SA as soon as possible and let time and the government do the rest for us.

2. The size of our emergency funds should not be static. Depending on our financial commitments and depending on our age, we should make adjustments to reflect new realities. The number of dependents we have and our age are important considerations.





Point 1 has worked out well for me but, of course, past results are not a guarantee of future performance, as some readers have pointed out. 

Point 2 is something I am always mindful of and I keep an emergency fund that is enough to cover 24 months of routine expenses.

With the new year just round the corner, giving some serious thought to these two points could be great new year's resolutions and greater still if some decisive action should be taken.

Related posts:
1. Get a lifetime income of >$2K a month (from age 65).
2. Emergency fund: How much is enough?

Helping more people discover a path to financial freedom.

A couple of years ago, ASSI squeezed into the ranks of the top 1,000 websites and blogs in Singapore. Today, we managed to squeeze into the top 1,000 again after dropping out for 2 years.

Yeah!

With many more websites and blogs in Singapore as time goes by, I have no doubt that being in the top 1,000 again is only possible because my blog's readers are quietly spreading the word and helping to increase readership numbers. ASSI is also very fortunate to have very good guest bloggers who contribute high quality articles which help to enrich the space.

All of you are the other half of ASSI. So, thanks very much for making ASSI the vibrant blog it is today and for spreading the word that financial freedom is not just a dream.

Traffic ranking by Alexa.

Related posts:
1. Top 1,000 websites in Singapore. (2012)
2. Be ambassadors of financial freedom.
"Even if the horse would not drink, at least try our best to bring the horse to water. We could be saving more than one life if the horse eventually drinks."