Tea with LS: The Pros and Cons of topping up the CPF-SA.

LS left a very good comment on the CPF recently in my blog and I suggested that a guest blog could be next and here we have the maiden guest blog:

Just want to share with you some of my thoughts on the CPF cash top up to SA. Please note that we are talking about CPF cash top up, not transfer of OA to SA.

I know you have being recommending readers to do cash top up to SA early as this will greatly assist them in achieving their Minimum sum(MS) in the future. While this advice is mathematically sound, does it applies equally to all? Is there any cons involved in such a plan? Let’s us look at some of the pros and cons.

Pros

1) You can enjoy up to $7000 in tax relief per calendar year. The amount of tax relief you get is the amount you contribute to OA/SA, up to S$7000. How much saving do you get from this?  If you are earning more than $80k, the tax rate after the first $80k is 11.5%. Which mean you get a one-time saving of $805 from the $7000 top up. That is a very respectable amount for a one time saving fee. Average Singaporean will be earning between S$40-80k so the tax rate is only 7% which work out to be a one-time saving of $490. Still a decent amount. This clearly works better for the higher income earners but the lesser income earners do get quite a bit of saving too.

2) You get free 4% interest (not accounting in the additional 1% interest for first S$40k in SA) from the government. Who do not like free money from the government? Lol. Contributing S$7000 yearly into SA for the first 10 years and leave it to roll for another 15 years will nett you around S$87k in interest alone after 25 years. That is decent return with a contribution of S$70k of your own. S$87k free money after 25 years, risk free J

3) It can also act as a risk free bond portion in your overall portfolio. This will reduce the overall volatile in your portfolio since the SA will not be affected in times of a crash.

Cons

1) While SA is earning us an interest rate of 4%, there are also other options that is earning more than 4% though not risk free. STI ETF (stock code ES3) is having an average return of 8.55%(inclusion of dividends) since inception from April 2002. Rate of returns does matters especially over a long period of time.

2) Opportunities cost. While transferring S$7000 cash per year might means confirmed 4% compounding and one-time tax saving, you will also lose opportunities to invest in cheap bargains if they do come your way (example like OCBC at S$9 last year and Keppel at S$8 this year). We can always alleviate this 4% loss by putting our money in some high yield saving accounts like OCBC 360 account which earns 3.05% with some terms and condition. (Interest will soon be changed with more details yet to be announced) These high yield accounts provide lesser returns but with no lock up of funds until age of 55. Feel like a good alternative comparing to 4% return but no flexibility in withdrawing of funds at your convenient timing. 

3) Lastly, to enjoy the fruit of the accumulated SA, we have to wait until the draw down age which is 64 in 2015, 65 in 2018 (hopefully no more adjustment to a later age though I highly doubt it) or a portion of the fruits at the age of 55 if you have excess of MS. How you will enjoy your fruit of labour is through the policy of CPF Life. You will enjoy life long monthly pay out with the amount depending on how much you have accumulated and which plan you select. What is not widely known is that the monthly payment is not fixed and will be adjusted depending on the money left in the overall pool that everyone contributes in. The solvency of the fund could be affected by many factors. Mr. Wilfred Ling had sent a post to Straits Times and MOM replied. What we are given is just a verbal assurance that CPF Life scheme is designed to be sustainable. But if they are sure, why do they feel the need to include in the non-payment in the case of insolvency in the bill? Isn’t this like preparing a back door exit and they are not as sure as they want us to believed? So is contributing guaranteed cold hard cash of S$7000 into SA really risk free? Could that money be better used investing somewhere so it will still be available if something do happen to CPF or Singapore?

  

Above are just my thoughts and I am just another common man in the streets with limited knowledge. Read everything with a huge pinch of salt and disregard any portion that you find distasteful.

Also feel free to advise me if I am misguided :P

Thanks for sharing, LS. Appreciate it. :)

Related post:

Should I do a CPF OA to SA transfer?

Attended a Dividend Machines workshop.

I was invited by The Fifth Person to attend one of the workshops they are conducting for their course on income investing, Dividend Machines. They informed me that many of ASSI's readers signed up for the course and, I guess, my appearance could be a form of encouragement to my readers and seeing me (in my usual get-up) could also lighten the mood.

From the many dates available, I chose to make my appearance on 5th of April (Sunday) as it was the most convenient date for me. Here are some photos taken at the event:

Door to the classroom.

Remember our primary and secondary school days?
Students standing at attention to greet the teacher....
Kidding! It was an ice breaker they thought of. ;p

Victor Chng was the trainer covering dividend stocks while Rusmin Ang was the trainer covering REITs. I have known both Victor and Rusmin for a while and they are both brilliant investors. Don't let their youthful good looks deceive you. They are really full time investors although they are quick to admit that they do make mistakes and don't know everything.

I certainly hope that everyone who went for the full day workshop took away with them valuable insights. I know I certainly did although I had to leave halfway through the afternoon session.

Rusmin.

Victor.

Investing in the stock market for income is something which anyone who is thinking of generating another stream of income could consider.

Investing for income will empower us in many ways. It starts by giving us a greater feeling of financial security which might translate into financial freedom later on in life. Of course, I know this for a fact and say this with much confidence.

“Never depend on single income. Make investment to create a second source.” Warren Buffett.

Almost 20 people present in the audience were my readers.
That's a good 40%! So, must take a group photo lah.
Very happy to see everyone leveling up.
I was smiling. Honest.

For readers who signed up for the course through my blog,
I was able to deliver the promised surprise in person too. :)
Actually, is there such a thing as a "promised" surprise? Hmmm...

To everyone who was at the workshop, seeing you hard at work to level up was very inspiring. Yes, I know you had to work at the workshop and not just sit there and listen. Hey, I was put to work too, remember? Taihen desu ne. -.-"

Finally, remember that it is always hardest in the beginning but it will get easier with time. Believe me. I know. Gambatte!

Related posts:
1. Listen to AK and create your Dividend Machines.
2. What is the best insurance to have in life?
3. Retiring a millionaire is not a dream.