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

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.
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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.
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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

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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.

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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

Saturday, 12 October 2019

CPF LIFE or Private Annuity Plan?


Disadvantages of using Private Annuity Plan instead of CPF LIFE.
Although this post title is "Disadvantage", but we included some "Advantage" of Private Annuity against CPF LIFE too below.

From what we have found, Private Annuity Plans available in the market tend to supplement CPF LIFE instead of replacing the CPF LIFE.

Instead, Private Annuity Plans can be used together with CPF LIFE to
1) Boost your monthly retirement income.
2) Help you withdraw out a portion or the whole of your Retirement Sum.

Advantage
1) Potentially higher returns (Annuity plans invest your money into a unit trust which can bring high potential returns. However, this depends a lot on the trusts that the insurance company invests in).
2) May comes with rider benefits (Eg; cheaper insurance premiums if you buy other INSURANCE from the same insurance company you bought your annuity plan).

Disadvantage
It is fairly difficult to plan for your  Private Annuity Plan to replace your CPF LIFE.
We made some comparison on our previous post HERE
1) Returns not as great as what CPF can provide.
2) Returns are not guaranteed - 4.25% is not definitely a 4.25% every year. Returns are determined by underlying investments (usually unit trust, which has a history of not performing well)
3) Might not have bequest left over for your children
4) Unable to plan accurately your future annuity monthly payouts*

*Your CPF LIFE cost (Retirement Sum) and its future monthly payout to you is determined when you reach age 55. The 2 figures will keep changing every year. Thus it is very hard to accurately plan your annuity plan to match its monthly payout against the CPF LIFE's future monthly payout.
This difficulty to match payouts might make you under-sized your future annuity payout and hence unable to withdraw your Retirement Sum out from the CPF fully.

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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 - 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, 9 October 2019

Retirement Might Not Be For Everyone


Reaching your retirement tough, especially with inflation, low-interest rates and longevity.
The amount that we are saving might not be sufficient for us to retire at the age we feel we should be retiring.

Assuming you make the income as per below.
Assuming you save 20% of your monthly income, and there is no inflation.
Age Monthly Income Annual Savings
20 - 24 $2,000 $4,800
25 - 39 $2,500 $6,000
30 - 34 $3,000 $7,200
35 - 39 $3,500 $8,400
40 - 44 $4,000 $9,600
45 - 49 $4,500 $10,800
50 - 54 $5,000 $12,000
55 - 59 $5,500 $13,200
60 - 64 $6,000 $14,400

When you reached age 65, you would have saved $216,000 in total.
Below is the retirement income you can get depending on how long you think you can live.
Live Till Retirement Years Monthly Income
95 30 $1,200
90 25 $1,440
85 20 $1,800
80 15 $2,400
75 10 $3,600
70 5 $7,200

Base on the above 2 tables, we can tell that the longer you live in your retirement, the less you get monthly from your retirement fund.
Retirement is going to get tougher as we live longer unless we push it back to after age 65.
Currently, if we start working at age 20, retire at 65 and live till 90, we are using 45 years of work to support 25 years of retirement; that's nearly equivalent to using half your monthly salary to support 1 month of your retirement, which technically, is fairly insufficient.

Recommended Post: 3 Reasons Stocks are Better than 99 Year HDB

Several facts below:
1) On average, 1 year is added to your estimated lifespan every 10 years.
2) People used to live till 60+ 70, so retiring at 55 would still get you a fairly good monthly retirement income (35 years of work to support 15 years of retirement).
3) Retirement is going to get tougher as you live longer unless you work longer.

Sadly, most people will never have a scenario where there is no inflation. Most people will see inflation being higher than the interest they can receive, which erodes away their money's value.

*Above assumes a saving rate of 20%, which is the amount Singaporeans technically "save" via a compulsory retirement scheme call Central Provident Fund (CPF).
Just a little heads up, if you are unable to grow your retirement savings at a rate faster than inflation, chances are, you are going to have to work past your retirement age to ensure you do not face any retirement income shortfall.

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Tuesday, 8 October 2019

Here's How You Can Opt Out of CPF Life


Everyone has a goal of retiring comfortably after working more than half their lives out for money.
We all hope to get a lump sum retirement fund when we reach our retirement age.
But, in Singapore, our money is instead secured away and we are given a monthly income from that pool of money.
Although we still think the CPF is a pretty solid retirement scheme, not everyone agrees to this.
So if you think you are better off with the full sum of CPF money in your pocket, we will be sharing how you can get that pool of money out of your CPF!

There are 2 ways to do this:

1) Buy a Life Annuity Plan
We talked about what an annuity plan is and how it can help you withdraw your retirement sum from the CPF.
You can find the post here: How to Escape Retirement Sum? 

2) Own a Pension
By owning we do not mean you go out and buy a pension.
A pension is usually a retirement payout paid by the company you worked for.
It is usually a fixed amount of money paid from the day you retire to the day you pass away.
It is rarely (if not no longer) seen in Singapore (except if you are from the really old days of Singapore).
If you are paid or going to be paid by a pension, you can apply to be exempted the setting aside the full retirement sum!

Recommended Post: Can I use my CPF to pay for my housing after age 55?

You will be exempted (fully or partially) based on the monthly income you draw from either/both sources.

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