What happens to our CPF money at age 55?

Reader's email:

Dear AK,

I have been following your blog regularly for the past two years. 

I found it very educational and useful for me - an ordinary worker trying to strive for financial freedom.






Among the discussion, I had also paid close attention on those mentioning taking advantage of the 4% interest in CPF-SA. 

Over the last two years, I had made a substantial amount of transfer from my OA to SA account. 

With this and my continued contribution, I'm quite confident that I will be able to meet the enhanced retirement sum at 55 years old. 


This year, I'm also considering voluntary top up to my CPF-SA account.





My question for you is that should i still perform voluntary top up to my CPF-SA given the new regulations ie only $5000 withdrawal allowed at 55 years old and 20% at 65 years old? 

In the event that I continue to perform voluntary top up, amount of funds in CPF-SA will exceed enhanced retirement fund at 55 years old however withdrawal of only $5000 is allow. 

Will the balance in the CPF-SA in excess of enhanced retirement sum be unnecessarily locked up without me having access to it?

thank you.

Warmest regards
C









My reply:

Hi C,

Welcome to my blog. :)

My understanding is that at age 55, we will be allowed to withdraw a lump sum that is in excess of the prevailing minimum sum at that point in time. 





Those who are not able to meet the minimum sum will get only $5,000 at age 55.

You might want to double check with the CPF Board to be sure. ;)

Best wishes,
AK

Who are the right people to ask?

Reader's reply:

Dear AK,

Thank you for the very prompt reply. I finally managed to get through to the cpf board today. You are right! :) 

Lump sum withdrawal in excess of the prevailing minimum sum still holds true with the new changes although the staff I spoke to couldn't provide me more info on the 20% withdrawal at 65 yo.

Will have to wait for more info on the latter as more announcements are being made.

Thanks once again for your help! :)

Warmest regards
C





Always the best to hear from the horse's mouth. Make sure it is the right horse. ;)

Related posts:
1. Tea with EY: CPF questions.
2. Videos on reaching 55 and CPF Life.

How did AK create a 6 digits annual passive income? (How did AK achieve financial freedom?)

(Be better savers sooner.)



The original title for this blog post was:

"How did AK create a 6 digits annual passive income after almost 20 years with a mid to high 4 digits monthly salary? Secrets revealed."

I decided it was too long and, perhaps, too dramatic.




This was the email that started it all:

Hi AK,

I am a new follower of your blog. I have questions which are a bit sensitive if you don't mind. If you do not answer, I understand.

You said you make mid to high 4 figure monthly salary. 

I estimate $60,000 to $100,000 a year. 






Over 20 years, if you don't spend money, you have $1.2m to $2m. If we invest for income, at 5%, it will give $60K to $100K of passive income a year. You managed more. How?

I am even more confused because you have a war chest which is spare money. 

So, it means you have even more money on standby. It seems impossible. 






Please enlighten me how you do this with your salary?

I ask because my salary is like yours and I am in my mid 30s. 

I cannot imagine I can do what you have done.

Sincerely,
LL

Money magic?

My reply:

Hi LL,

Welcome to my blog. I guess the easiest thing for me to do is to ask you to comb my blog for the answers and, trust me, the answers are there in past blog posts. 

However, I know navigating my blog is like walking in a labyrinth. That's my fault. -.-"

OK, this is going to be a long email. 






Here goes:

1. It is difficult but not impossible for anyone who has the kind of earned income that I have to achieve what I have achieved financially. 

The most important thing to remember is to be careful with our money. 

A penny saved is a penny earned. Try to make some extra money on the side (e.g. tutoring) in our free time. 

As we make more money, don't spend more, save more.

Don't say I say one.

2. Do not wait 20 years before investing for income. Like you said, if we saved all our earned income and not spend a single cent, with my kind of earned income, 20 years later, investing for a 5% dividend yield would give us (only) $60K to $100K in passive income. 

Of course, it is impossible not to spend a single cent in those 20 years!





3. Start investing in the stock market early (once all the basics have been taken care of). Don't just leave money in our bank accounts. 

The earlier we start, the earlier we will enjoy another stream of income, passive income. The idea is to have our earned income supplemented by passive income. 

Have a war chest ready so that we can invest more in years when Mr. Market is feeling particularly depressed. 

So, doing this, in effect, my total income grew year after year.





4. I am also lucky. I was lucky enough to win a car in a lucky draw a few years ago. So, my car is actually free. 

I am also lucky that my parents don't need financial support from me. I am lucky that my health is not too bad. I am lucky that I came to my senses very early in life to be prudent with money. I am lucky I don't have any children. 

Well, at least I think I don't have any. All these meant that I avoided wealth destruction.





5. Expanding on the above point on luck, I did a fair bit of trading in the stock market before and I was lucky that I made more money than I lost. 

I bought a couple of private properties at the right time too. I sold them a few years ago, making some hefty capital gains. 

So, I was lucky when it comes to wealth creation and not just in avoiding wealth destruction. Most of the money made went into my war chest. 

I have shared my experience and insights on real estate in Singapore in my blog too, if you are interested to know more. 

It is important to recognise opportunities and not restrict ourselves to any one asset class.




6. The last thing I want to say has nothing to do with your questions but I feel that it is important to make a point that there is always a place for a risk free and volatility free instrument in our portfolio. 

If we believe that investment grade bonds have a place in our portfolio, then, we won't be wrong to look at money in our CPF accounts as the bond component of our portfolio. 

We should let the government help build our retirement fund. 

Why reject highly rated assistance?






So, in summary, for anyone who wants to achieve what I have achieved,

1. Be financially prudent.

2. Monetise spare time.

3. Don't spend more as you make more money.

4. Start investing early.

5. Invest more during bear markets.

6. A bit of luck helps.

7. Accept help from the government.






I hope you won't think of what I have achieved for anyone with a salary like mine as an impossibility anymore. 

It is not easy, I will admit, but it is not impossible.

Best wishes,
AK




Other related posts:
1. 9 wealth building blog posts.
2. Be prepared for war.
3. Retire by age 45.

Where to go for a meaningful and inexpensive vacation?

I have blogged about how we should try to be tourists in our own country, have "staycations" or a vacation in our country. There are so many things to see and do in Singapore.

Some might think that this is just another cheapskate idea from AK. Well, when I think about how foreigners spend a lot of money to have vacations in Singapore and I don't have to, it puts things in perspective for me. Singapore is not a cheap place to have a vacation in! 

A: "Where are you going for your vacation?"

B: "Singapore lah."

A: "Wah, Singapore is so expensive, you very rich."

B: "Hehehehe..."

Today, I decided to visit the National Museum.

Specifically, the visit was to view the exhibits "In Memoriam of Lee Kuan Yew."

Remember what used to be here? See the red bricked gate posts?

This sculpture has been outside the National Museum for a long time.
I always thought they must be Chinese. Look at their feet.

The reason for my visit.

What's this? Want to make a guess?

In Memoriam of Lee Kuan Yew. Respect.

The "In Memoriam of Lee Kuan Yew" exhibition is free to visit and open from 10am to 8pm.

A vacation at home can be a meaningful vacation too without spending too much money. If you have young children and old folks at home, you will appreciate a vacation at home even more, for various other reasons.

So, where are you going for your vacation?

Related posts:
1. A family vacation without spending too much money.

2. Some of AK's other "staycation" photos.
3. Why have I been silent on Mr. Lee's passing?

Thank you for investing in Income for income.

Investing for income has been very rewarding for me and it has helped me tremendously in my quest to achieve financial freedom. 

Some of my investments have been with me for years and in some instances I even "forget" that I have them.







I received a little reminder recently in the form of a letter to thank me for investing in Income. I rather enjoy the pun.

I pay NTUC Income regularly for a couple of insurance policies. NTUC Income make some money from me but because I am a shareholder, I get a share of their earnings. 

It creates a feeling that the insurance coverage I receive from NTUC Income is "free". Nice.

Wait a minute. Didn't I say that my H&S insurance is free from the government before? Alamak, I am confusing myself.

Anyway, jokes aside, it takes time to create an abundance of passive income and it doesn't always have to be through investment in equities. Bonds and bond-like instruments could help us meet some of our expenses in life too. 

That is what passive income is for at the most basic level, to help pay some of our bills.

Remember, having passive income will help to reduce our reliance on earned income. It is the best form of insurance we can have. 

Of course, all in good time.

Updated on 31 May 2016:
Another reminder arrived in the mail today:

Q: Can non-policyholders apply for the shares?
A:
No, non-policyholders cannot apply for the shares. Only life policyholders of NTUC Income are eligible to subscribe to Income shares. This is a benefit given to them to enjoy attractive returns on a long term investment.

Q: How can policyholders subscribe to Income shares?
A:
Applications for Income shares have been closed since Dec 2004.
 We are currently maintaining a waiting list for life policyholders who wish to subscribe to Income shares. We offer the shares which are redeemed by existing shareholders to the persons on the waitlist on a first come first served basis.
 Life policyholders who are keen to be on the waiting list may send an email to ms@income.com.sg with their full name and NRIC number. We will contact the persons on the wait list when we are able to process their applications.
Source: NTUC Income FAQs
http://www.income.com.sg/NTUCIncome/CMSTemplates/PrintFaqs.aspx?pId=7099

Related posts:
1. How to get free medical insurance in Singapore?
2. Investing for income: An important element.
3. Building an income portfolio is like building a house.
4. Best insurance to have in life.
5. FCL's 7 year 3.65% bond: Who should buy?

A meal that is good for your body and the environment.

I was back in the gym yesterday and did about 50 minutes of aerobic exercises. I wasn't exercising for a couple of weeks as I wasn't feeling well. Must get the body moving again.

It has also been a while since I made my own lunch. I've been visiting the economical rice store at the neighbourhood coffee shop which is convenient and inexpensive. A typical lunch would cost between $2.30 to $3.50 which would always include a portion of stir fried vegetables which so many readers remind me to consume regularly.

So, what did I have today for lunch? I made my own lunch!

Yummy!

Want to try making what I had today?

You would need all the above items.

Turmeric powder and black pepper in extra virgin olive oil.

Looked really nice after mixing it all up. Add some salt if you like.

I pan fried the tofu using a non-stick pan. No oil.

While the pan was still warm, I toasted two slices of bread. No oil.

I dipped both sides of the toasty bread in the olive oil mixture.

Piled the tofu and cucumber slices on the bread and bon appetit!

I have a sweet tooth and I must have something sweet after a meal:

A banana and a kiwi fruit. Natural sweetness!

Then, I had a handful of these:

Baked almonds. Good for guys, I was told.

"Well, I have been eating less meat recently. This is partly because I think I do not need much meat in my diet as I grow older and partly because I think they make me fat. The fact that not having meat helps the environment is a plus."  Source: Green is not just the color of money.

Burp. I am happy.

Related posts:
1. Be richer with yummy and frugal dinners.
2. One way to save money more rapidly.
3. How to recession proof your life?

Why Gardenia over NTUC Fairprice wholemeal bread?

I have a confession to make.

Last month, I switched from Gardenia wholemeal bread to NTUC Fairprice wholemeal bread after a couple of readers assured me that the latter has improved in quality.

I remember eating NTUC Fairprice wholemeal bread many years ago and found it dry (almost crusty) and bland tasting. It wasn't worth saving money and getting unpalatable bread, I thought.

Anyway, the fact is I decided to give NTUC Fairprice wholemeal bread another chance. Of course, the fact that there was some monetary savings compared to buying Gardenia wholemeal bread was an incentive for me.

Well, although I must admit that the texture and taste of NTUC Fairprice wholemeal bread have improved plus the fact that I saved some money, I have decided to switch back to Gardenia today. Why?

Look at the photos below:

NTUC Fairprice wholemeal bread. 300gm for $1.15.

Gardenia Super Soft & Fine wholemeal bread. 300gm for $1.90.

I was not getting good value for money with NTUC Fairprice wholemeal bread. Its lower price was a reason for me to make the switch last month and I was wrong.

I also found out that NTUC Fairprice wholemeal bread contains a lot more iron (8.8mg per 100g) compared to Gardenia (3.72mg per 100g) and we really don't need too much iron in our diet as we grow older. NTUC Fairprice wholemeal bread also has more saturated fats (2g per 100g) compared to Gardenia (0.86g per 100g). The levels of vitamin B1 (Thiamine) and B3 (Niacin) are lower compared to Gardenia's too.

Overall, Gardenia wholemeal bread seems like a healthier option to me and switching back to Gardenia will cost a bit more money but this is money well spent.

Related posts:
1. Eat wholemeal bread and win a holiday.
2. Visit NTUC Fairprice and learn about investing.

Tea with Ms. Y: Single, turned 35 and getting a resale flat?

A guest blog by Ms. Y who recently turned 35 and got herself a resale HDB flat:

I'm just a regular white collar worker with not bad a job. Work hard and long hours and get decent pay. However, I do need to provide for my parents as they age. My biggest concern is that they do not have much insurance coverage (but might be different now with Medishield life!) Anyway, they both have some medical condition which doesn't allow them to get insurance coverage now. I'm also now eligible to buy a hdb flat!

I don't worry abt a 1 time operation need. 30k or 50k, it's not difficult to fork out of my savings or even if I have to borrow, it's not difficult. What I worry is about the long term chronic illness such as chemo for cancer and kidney dialysis that is very cash draining. Who knows? I may even have to take no pay leave to look after my parents. Or at least until I can arrange nursing home, domestic help, etc. I don't know how much all that will cost but if I have to fork out 2 to 3k per month, my finances would be drained surely.

So, my plan is to buy a cash generating asset. Need to generate 3k cash per month by renting my flat in the event of need (moving back to parents' place to take care of them as reason for renting out whole flat b4 meeting 5 years minumum occupation period can be approved by hdb).

Of course, my plan needs to be backed up by a good financial standing by complying with the TDSR and MSR. MSR is only applicable to hdb flats purchased. So, I'm using less than 30% of my monthly salary to service my loan calculated at an imputed interest rate of 3.5% by regulation. Tip: b4 buying property, get a mortgage broker to calculate all these. I did so even when I studied the regulations and calculated a couple of times.

Anyways, after getting an approval in principle from 2 banks (w help of mortgage broker), I went shopping for a flat. To yield 2 to 3k of cash flow, it has to be at least 4 room flat and at a good location. Then I checked hdb website for such rental yield and decide amongst them one of a cheaper place for such yield.

Also, I'm quite sick and tired of the >1 hr travel each way to and fro work. So, I'm getting a flat near to town area. It is expensive no doubt, but it is serving my purpose. 

Oh yeah, another reason why I do this is because I know myself. I'm not such a stock whiz that I get great returns in the stock market. Not so good in fact. I do well by squirreling cash away. Out of sight, out of mind. So, I don't spend it. Haha....I have most of my savings tucked away like this. I can say that I can afford this flat quite comfortably. In fact, after I have bought it, another transaction was done with price higher than mine.....hit above the 1 year high. Seems property market is going up again.

My flat is less than 5 years old. So, I plan to stay in it as long as I can. I will downgrade when I am retired to realized gains for retirement (hopefully). Or I'll just leave it and rent it out to finance my stay in a nursing home when I need it.

I have some amt in OA tied up in investments and paid 15% downpayment, stamp duty and lawyers fees. Found that I still have a small excess in OA. I just transferred them to my SA. My mortgage loan is ending when I am 60. So, I plan to pump up my SA now with min sum cpf top up and any excesses in my OA will be trf to SA. Trying to get govt to pay for part of my flat when I am 55.  4% interest in SA vs the around 2% mortgage interest....decision making is a piece of cake.  ;)

A nursing home in Singapore run by First REIT.

Now I have half the current prevailing min sum amt in SA and hit the ceiling of my MA. The only issue I have is that as my SA hits min sum earlier, I may not be able to make further contribution for tax relief purposes.

So, this is the story of my flat. :)

Congratulations, Ms. Y!


TDSR:
Total Debt Servicing Ratio refers to how much of our monthly income do we use to pay our debts. MAS policy is that TDSR cannot exceed 60%.

MSR:
Mortgage Service Ratio refers to how much of our monthly income do we use to pay our debt secured by properties (i.e. mortgage).  Applies to HDB flats and ECs only. MAS policy is that MSR cannot exceed 30%.


Related posts:
1. Buying an apartment: Considerations for first timers.
2. Build a bigger retirement fund with CPF-SA.
3. Don't see money, won't spend money.
4. National Day Rally: Retirement funding adequacy.
5. Millionaire or not, plan for retirement.

An eye on Accordia Golf Trust, Croesus Retail Trust and Saizen REIT: 8.1 magnitude earthquake in Japan and the Yen.

On Vesak Day, a huge undersea earthquake was reported 874 kilometers from Tokyo. The epicentre was deep in the Pacific Ocean. Seismologists warned that another quake could be coming. See report here: Japan Today.

Expecting some negative reaction from Mr. Market, I looked at the prices of Accordia Golf Trust, Croesus Retail Trust and Saizen REIT this morning. Of the three, the unit price of Accordia Golf Trust retreated by almost 10%. It was a big decline but it probably had to do with the fact that the counter went XD as well.

Accordia Golf Trust announced their maiden DPU of 5.71c for the 8 months period since its date of listing. This included non-recurring gains. Based on the regular operation of the golf courses under management, it was estimated that full year DPU could come in at 6.23c. However, this was based on an exchange rate of S$1 to JPY 88.4. This was a couple of months ago.

Of course, the JPY has weakened significantly since then. The rate is now S$1 to JPY 92. This rate was last seen in late 2014 and could be the reason for the particular weakness in Accordia Golf Trust when the unit prices of both Croesus Retail Trust and Saizen REIT held up rather well. Accordia Golf Trust is, after all, the only one of the three that does not hedge currency risk and we must rightly expect DPU to reduce in S$ terms, therefore.

If we expect the DPU to reduce proportionally, we might see a revised full year DPU of 5.91c. Buying more at 71c to 72c a unit today means a distribution yield of 8.2% to 8.32%. If we need a minimum yield of 8% to make the investment worthwhile for us, then, based on the current weaker exchange rate, all else remaining equal, we should be able to accept a unit price of up to 74c or so. Coincidentally, this was the entry price of my current long position too.

Further weakness in the JPY cannot be discounted but I have made a case before on why I think the JPY's biggest declines are probably behind us. Getting into Accordia Golf Trust at its IPO was a bad idea for various reasons. At current prices, I believe that the business trust presents a decent enough investment for the income investor.

See an article in NextInsight on Accordia Golf Trust: here.

Related posts:
1. Accordia Golf Trust: Yield of 12.16%?
2. Croesus Retail Trust: ONE's MALL.
3. Saizen REIT: Deeply undervalued.

Should a young person contribute to his CPF or SRS?

A conversation with a reader:

Hi AK,

As i browse through your blog, I realized that I do have another question. 

I am wondering if you would recommend individuals to open a SRS account to have tax relief first or to top up and ensure our CPF has met the mim sum first? 

Which option would be a long term wiser strategy to go for?

Regards,
C

My reply:

Hi C,

The CPF is always my first preference because it earns relatively attractive risk free returns of 2.5% to 5.0% per annum. 

For MS-Top Ups of up to $7K a year to the CPF-SA, we will enjoy income tax relief too. 

The downside is the minimum lock up period to age 55.





The SRS is called "Supplementary" for a good reason. 

If our income is higher and we would like to enjoy more income tax relief, the SRS is a good idea to help us save towards retirement adequacy.

There is some flexibility for early withdrawal with the SRS (but this comes with a penalty) while there isn't any such option with the CPF. 

The downside is that the interest rate for money in our SRS account is very low and we will have to think of investing for higher returns.

Best wishes,
AK

Reader's reply:

Hi AK,

Thanks for your prompt response. 

I now see the CPF as a better option first due to the interest of 5%. 

I am wondering that if currently I have not met the criteria of 20k for OA and 40K for SA before being able to utilize the funds for investment, should I still go ahead and top up my SA? 

(I am going to be 25 this year, and I have just started working for a year, so I do not have a lot of money in my cpf, but I am planning for the future first). 

If I top up my SA now, it's more for tax relief now. I am about 32k away from the min 40k right now, and if i contribute 7k yearly, it will be 5 more years at least before I can use the funds for investment. 

I am quite confused so to what's the best way for me now. 

Regards,

C

My reply:

Hi C,

I think you know what the CPF and SRS are for now and how they work.

The next thing you need to do is to be very clear about what you want to achieve. 

Then, act accordingly.

Take your time to make a decision you are comfortable with. 

There is no need to rush.  :)

Best wishes,
AK







Related posts:
1. Achieving Level 1 Financial Security.
2. Securing risk free returns early for retirement.
3. Retiring before 60 is not a dream.
"Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer." Charlie Munger.

Tea with EY: Is our CPF LIFE payout going to be sufficient?

It has been a while but here is another wonderfully crafted guest blog by EY as she asks some questions which we might be afraid to ask ourselves:

Is having a CPF LIFE payout of $2500/month sufficient?

Which do you prefer?

Let your desired quality of life determine your retirement sum?

or

Let your retirement sum determine the quality of your life?

In Singapore, quality of life does not come cheap. More so if we are projecting decades into the future.

Based on 3% annual inflation rate, what we can buy with $2500 today will cost us $5234 in 25 years’ time, $6068 in 30 years’ time, and $8155 in 40 years’ time.

Those of us intending to depend solely on CPF LIFE payout for retirement should do a reality check. Even in the case where we could set aside the Enhanced Retirement Sum (ERS) which is 3 times the Basic Retirement Sum (BRS) and 1.5 times the Full Retirement Sum (FRS).

I have produced a reference table detailing the CPF LIFE payout using the CPF LIFE Payout Estimator based on the FRS and ERS that are adjusted for 3% inflation each year. To derive a more conservative payout projection, I have chosen the uppermost range for ‘Annual Value of Property’ and ‘Annual Assessable Income’.

CPF LIFE Payout

(https://www.cpf.gov.sg/cpf_trans/ssl/financial_model/lifecal/Life_Estimator.asp)

Annual Value of Property (AV): More than $30,000     Annual Assessable Income (AI): More than $60,000         Gender: F

From the table, the FRS will likely be around $236,000 and ERS around $354,000 in Year 2029 when I turn 55 years old. Considering that my current SA balance is >$170,000, and if I continue to be economically active for at least another 5 years, I should have no problem achieving the ERS. This would translate to a CPF LIFE payout of approximately $2300 - $2600 per month at my drawdown age of 65. (NB: The CPF LIFE payout of $2300 - $2600 is extrapolated from the Year 2028 ERS payout as the CPF LIFE estimator caps input for calculation at $350,000)

At 65, what I receive from the CPF LIFE Payout is likely worth only $1131 - $1279 in today’s dollars.

Fast forward to 80 years old in Year 2054, my CPF LIFE Payout is probably worth only $726 - $821 in today’s dollars.

So, if I wish to maintain a quality of life equivalent to $2500 in today’s dollars, I would need an increasing income stream to make up for the loss of value due to inflation. The table below outlines the additional income I need at the various age to combat the 3% inflation that is chipping away the value of my money.

Looks like the comfortable retirement that I desire will have to be fuelled by a lot more hard work now and in the next 10 or even 20 years!

Related posts:
1. Changes to the CPF system. BRS, FRS and ERS.
2. Achieving Level 1 financial security.
3. Upsize $100K to $225K in 25 years.