Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Wednesday, 13 November 2019

What is CPF Basic Retirement Sum (BRS)?


Source: CPF

Today's post: Basic Retirement Sum
It is one of the 3 types of Retirement Sum launched by CPF.
It is currently set at half the prevailing CPF Full Retirement Sum (FRS)
Why would someone wish to pledge their house in exchange for a "large" sum of money?
This post will answer that question.

For more information on the different types of Retirement Sums, click HERE
For more information on the amount on the different types of Retirement Sums, click HERE

Criteria for BRS

1) You need to have a house.
The house will be used and pledged against CPF.
Is your house fully paid or are you still paying it?*

2) You need to have money in excess of the BRS amount
The BRS amount from now until 2020 has been set.
For 2019, the BRS is set at $88,000 for those turning 55
For the years beyond, please look at our post HERE

Advantages

1) You get to withdraw your CPF money
No, you don't get to withdraw all your CPF money.
But you get to withdraw the amount that is in excess of your BRS.
So if your BRS is $90,000; you can withdraw from your CPF money in excess of that $90,000.

Disadvantages

1) Lower Monthly Payouts
Because you currently only have half the Full Retirement Sum (FRS), you will only get half of the monthly payout. But, you have withdrawn the excess amount.

2) You have to Return the Money to CPF
If you sold your house, you have to return the money you have taken out, back into the CPF.
BUT! You can still use the money in your CPF to buy another house and then apply for BRS again to get the excess money out if you have any. For more details, look at our post HERE


*If you have fully paid your house, you can pledge your house to withdraw money in excess of your BRS.
If you have not year fully paid your house, you can still withdraw the CPF money in excess of your BRS after pledging your house.
Your outstanding housing loan, however, will be paid with
       a) your CPF OA money - if you are still working or if there is still money inside
       b) with your cash - if your CPF OA has insufficient money to pay your monthly mortgage
The money in excess of BRS that you withdraw WILL NOT be forcefully used to immediately pay your housing loan.
For more concrete examples, you may refer to the link HERE and THERE

Recommended Read: Why I am NOT Paying Back my Student Loan ASAP


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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
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Wednesday, 30 October 2019

CPF for Young Adults


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CPF, in short for Central Provident Funds, is a "social security system that enables working Singapore Citizens and Permanent Residents to set aside funds for retirement. It also addresses healthcare, homeownership, family protection and asset enhancement.".
Source: https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview

This is quoted from the CPF website and as defined by CPF. While most people would think that CPF is only for old people, youngsters should definitely not neglect it. This is especially true due to the magic of compounding interest. So what are the schemes that people in their 20s should know?

1. CPF Education Scheme
This scheme allows you to use your Ordinary Account (OA) savings to pay for your own, children’s or spouse’s subsidised tuition fees. Applications can also be made to use CPF savings to pay for your sibling’s or relative’s subsidised tuition fees but will be assessed on a case-by-case basis.

However, one point to note is that this is effectively a LOAN from whoever's CPF you are using to pay for your education. Hence, it is necessary to pay back this loan with interest. The effective interest rate payable is then pegged to the OA interest rate, which is adjusted quarterly.

The student has to start repaying the loan one year after graduation or termination of studies, whichever is earlier. Repayment must be made in cash either in one lump sum or via monthly instalment over a maximum of 12 years. The minimum monthly instalment is $100 and the rate will be computed for the student based on the loan amount and repayment period.

2. CPF Investment Scheme
As we graduate and take on our first job, it is imperative to consider investing for retirement. If you are thinking of that, then this is the scheme that you do not want to miss out. This scheme allows you to invest your Ordinary Account (OA) and Special Account (SA) savings in a wide range of investments.

Conditions to be met before you can adopt this scheme:
  1. are at least 18 years old;
  2. are not an undischarged bankrupt;
  3. have more than $20,000 in your OA; and/or
  4. have more than $40,000 in your SA.
You can find the range of products which you can invest in here. One of the products is Exchange Traded Funds (ETFs) which our blog had been advocating!
3. CPF Nomination Scheme
We might be thinking we are so young, filled with hope and energy. Death might be the least of concern. This is especially so after the recent hoo-hah, where CPF stated that CPF funds are not covered under a will.

For more info: https://www.straitstimes.com/forum/letters-in-print/cpf-monies-not-covered-by-a-will

The nomination procedure is very simple.
All you have to do is fill in a form found on the CPF Nomination Website.
Download the form, fill it up and submit it to CPF Board.

Here are some other information that are useful to you!

What does a CPF Nomination cover?

Covered under CPF NominationNot covered under CPF Nomination
  1. CPF savings in your Ordinary, Special, Medisave and Retirement Accounts
  2. Unused CPF LIFE premiums, if any
  3. Discounted SingTel shares
  1. Properties bought using your CPF savings
  2. Payouts from Dependants’ Protection Scheme (DPS)
  3. Cash and investments held in the CPF Investment Account under the CPF Investment Scheme-Ordinary Account (CPFIS-OA)
  4. Investments held under the CPF Investment Scheme-Special Account (CPFIS-SA)

More information can be found here: https://www.cpf.gov.sg/Members/schemes/schemes/other-matters/cpf-nomination-scheme


Conclusion
CPF is definitely not an organisation for the elderly. In fact, youngsters should harness such national scheme, especially since it affects us for the long term!


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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Wednesday, 23 October 2019

Why I am NOT Paying Back my Student Loan ASAP


Most people after they graduate from University and start working, their goal would be to pay down their student debt, and save up for housing, car, marriage, etc.
That’s not a wrong idea to have, paying your debts down and all, especially if you took a bank loan that charges about 5% per year in interest.
I took the CPF loan out from my mother’s account, and the interest is 2.5%, and honestly, I am not that much in favour of paying back them soon. Here’s why:

  1. It’s a low-interest loan
    Okay, it’s not exactly that low but it’s not that bad. It is comparable to say a housing loan. So it’s better that I extend this low-interest loan and use the excess cash to invest in assets that give higher long-term returns (like stocks). 
  2. It is a form of interest arbitrage
    Refer to one of our latest articles to understand why - How the Rich Play the Money Game
This is not applicable for all though. You have to really invest the excess money for the long-term to make the loan worthwhile.

  1. It can’t be used for expenses, even wedding, proposal, home renovation, etc. 
  2. It can’t be used for anything that won't give you an investment return. 
  3. It can’t be invested in assets that give you low returns like bonds
  4. Your parents have to be ok with you dragging the repayment (ie; they not in a rush to have money in their CPF). Sometimes they might need the money inside for housing, some times for your siblings’ future study. 
  5. Your parents have more than $60k in CPF. This is a bit more complex. So because the first $60k in CPF gets +1% interest, and those age above 55 gets another +1% on their first $30k. Essentially that is like a nice 4.5% interest per year, which is a pretty good return that can be quite hard for other asset classes or investments to beat. In which case, it’s better to return the money early to earn the 4.5% guaranteed by CPF than to try your luck in the assets market


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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Monday, 21 October 2019

Should I Transfer my OA Money to SA?



Today's post: Should I transfer my OA money to SA?
This post was proposed by one of our readers, who asked the question: is it wise to transfer my money in OA into SA?
We would like to thank all our readers who posed us questions and sent to us tips.
We would love to see more of that coming in, so do feel free to keep sending us these messages!
You can contact us via email (investmentstab@gmail.com), comment on our blog, or drop us a message via Facebook or Instagram.

There is a scheme in the CPF that allows you to transfer your money in your OA account to your Special Account (SA).

Benefit:
1) Higher Interest - SA gets 4% while OA gets 2.5%.

Considerations:
1) Money transferred from OA to SA cannot be transferred back - its a one-way traffic.
You will only be able to get the money back at age 55, IF you have met your minimum sum

2) The range of investment products that you can invest in becomes smaller.
SA is unable to invest in ETFs and other investment products, however, money in OA is allowed to invest in ETFs, and other investment products.

3) You can only transfer money from your OA to your SA until your SA hits the prevailing FRS (currently at $176,000). No more money can be transferred from your OA to your SA unless the FRS sum is raised again next year or if you managed to spend the money in your SA.
*Monthly contribution can still be contributed into your SA even if your SA has reached the minimum sum.

4) Should you have insufficient money in your OA to pay for your insurance premiums or your mortgage, you would be required to pay these in cash. You are unable to use the money in your SA to pay for almost anything.
So only transfer the excess money you will not be using if you wish to transfer from OA to SA.


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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Thursday, 17 October 2019

How the Rich Play the Money Game


Interest Arbitrage:
For those of you who have no idea what this phrase means, let me explain it to you.
Interest: interest rates.
Arbitrage: is the practice of taking advantage of a price difference between two or more markets.
Simply put, the rich get richer by taking in a higher interest rate return than the interest they pay on the loan they take.

Simplest Example:
I borrow $1 million from the bank at 2% interest.
I lend it out to someone at 6% interest.
By doing nothing, I earn 4% interest.
Of course, the real-life example is not that simple. But as an illustration to show you the point.

More Common Example:
I buy a house for $1 million.
I put a 10% down-payment ($100,000) and borrow the rest of the $900,000 from the bank.
And yes, the banks are more than willing to lend huge sums of money to rich people than to the average Joe and Jane.
Here's where it gets interesting:
Now, I can negotiate a deal with the bank to not repay them the principal of the loan (the $900,000).
Instead, I will pay only the interest portion of the loan - aka Interest-Only Loans.
The bank, hoping to have my business, will agree to this (competition is tough these days for the banks).
So I now have a property that I can rent out for income, and net me some cash if my rent is greater than my interest payment.
If I want to, I could also lower my rent to equal my interest payment, just to ensure that I got someone paying my interest for me.
Here's why it makes sense to do that - warning: a fair amount of maths below.

Recommended Post: CPF LIFE Payout Sum's Difference

Properties tend to increase in prices in the long-term (agreed?)
Properties probably can average a 6%-8% return per year in the long-term (rent + capital appreciation, agreed?)
Interest rates probably won't go beyond 5% in the next 10 years
So essentially, what I, as the rich have done, is borrowing other people's money (the bank's money) cheaply to invest for returns that exceed the cost of my loan. 
The only thing I have to ensure is that I have money to pay my interest payment and that I can last long enough for my property to appreciate significantly in value so that I can sell it for a profit.
Simplified mathematics: 7% return - 4% cost = 3% net return per year on average over 10 times

Now, the property is not just the only tool used for such action.
Those of you who trade in Forex and commodities will understand that you all leverage to earn extra money.
Stocks have leverage (brokerage firms allow you to borrow up to 2x the capital you put with them).
When you buy your HDB, you are also essentially hoping to sell it in the future to reap a good profit when you are near your retirement, that is also a form of interest arbitrage.

Risks:
Now, that is not to say that such arbitrage doesn't come without risks.
If you cannot pay your interest-only mortgage, the bank seizes your property (think 2008 Financial Crisis).
If you cannot provide enough funds to support your trading positions, the brokerage firms will sell out your positions in stocks, Forex, commodities, bonds, or other trading assets to recover their money.
You need to have enough planning and financial resources to cover the risks involve (you must have money to pay your loans when you got no tenants paying for you).
It takes a huge understanding of how asset classes (stocks, bonds, properties, etc.) work to be good at this.
For example, the probability of the stock market being positive over any 10-year period is almost 90+%. If you could borrow at 2% interest, invest over the long-term in the stock market that gives you a 7% average return per year, you earn 5% without putting any of your own capital. But the problem arises when the market is down (and the stock market can be down 30% or 50% in less than a month), under such circumstances, do you still have the resources to pay the 2% interest you incur every month?

Recommended Read: Why stocks are better than HDBs

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Wednesday, 16 October 2019

CPF LIFE Payout Sum's Difference


Source: CPF

In today's post, we will be discussing why is the Full Retirement Sum monthly payout not double the Basic Retirement Sum's payout.

As you can see above, it is an image of the monthly payout you will get based on the different Retirement Sum savings you at have age 55.

Retirement Account Savings at 55:
The FRS is 2x of BRS.
However, the monthly payout from FRS is not 2x of BRS (2x of $730 = $1460).
The same is for ERS, where the payout is not 3x of BRS (3x of $730 = $2190)

This is because the Effective Interest Rates (EIR) on each Retirement Sum is different.
EIR is the real interest rate return you get from your money.

In 2019,
a) OA earns 2.5%
b) SA, MA & RA earns 4%
c) First $60,000 of your CPF balance gets extra +1%
d) First $30,000 of your CPF balance gets extra +1% if you are age 55 & above

FRS is 2x of BRS, however, the income derived from FRS is not 2x of BRS because the effective interest rate is not the same.
BRS enjoy a higher effective interest rate than FRS and ERS even though it will earn higher than the base 4%.

For a clearer picture on the EIR issue, please refer to our other post: EIR of CPF.
It will explain why is the effective interest on your CPF money decreasing as more and more money is accumulated in your CPF accounts


MORE LINKS
Accrued Interest More than Housing Profits?
CPF +1% Interest for those age 55 & Above
5 Financial Things to do in your 20s
Singapore Finance Minister on Personal Finance Part 2
Reducing CPF Housing Accrued Interest
CPF +1% Interest for those age Below 55

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF

Monday, 14 October 2019

Private or Public Housing Loan?


Buying a HDB flat for the first time can be an intimidating experience. It is probably the first big-ticket purchase in your life that will take the next couple of decades to pay off, so you would definitely want to rake in as much savings as you can.

Perhaps you have not really thought about what kind of loan to take up. If you do not already know, you have a choice between taking up a HDB loan or a bank loan, provided you are eligible for them.

You might want to hold on to your cash and pay off your home loans using your CPF, but did you know that taking up a bank loan allows you to pay less interest? This is because bank interest rates are lower as compared to the CPF Ordinary Account (OA) interest rate which home loans are pegged to.

Recommended Read: Climate change: You can save money and the planet

And while the down payment required to take up a bank loan may be higher (at 20%, with at least 5% paid in cash) as compared to a HDB loan (10%, fully payable with your CPF), you get to enjoy greater flexibility in retaining your savings in your CPF OA. Conversely, upon the collection of keys to your new home, HDB will wipe out your CPF OA balance to reduce the loan quantum required for you to service.

In the following infographic, we run through the main factors to consider while taking up a home loan for your HDB flat, and the main differences between taking up a HDB loan and a bank loan.


Click HERE to see the full infographic.

Recommended Read: Here's how you can opt out of CPF LIFE

Infographics provider:
The team at Redbrick Mortgage Advisory has more than 60 years of banking experience and is proficient in structuring and sourcing for the best financing terms for both residential and commercial real estate in Singapore, Malaysia, USA, UK, Japan, Thailand and Australia.

Remember to offer your opinions. If you don't put your two cents in, how can you expect to get change?

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Unhappy with your job? There's something you can do about it.
A. Save up enough money from your job so that you can fire your boss - the problem is it might take some time and some effort
B: Find a new job, search for new opportunities. A career coach might be able to help you with that. And if you are looking for a free career coach, visit Workforce Singapore via the link below.
They can link you up with the career coach and you might be able to find new opportunities on their jobs portal.
http://ow.ly/GY8150wlfrF