In the recent budget debate, NCMP Hazel Poa proposed an alternative source of revenue to be added to Singapore's yearly budget.
Current Framework (CF):
- Keep proceeds from land sales in reserves and invest them.
- Allow up to 50% of investment returns generated from the proceeds to be spent in the budget under the NIRC.
Alternative Proposal (AP):
- Land sale proceeds are dividend equally over its lease period, with each portion added into the corresponding year's budget as revenue.
- Invest the unused portion of the proceeds in reserves, with up to 50% of the investment returns allowed to be spent under the NRIC.
Needless to say, DPM Lawrence Wong rejected the proposal, citing that over the long term, the AP does not generate returns very different from the CF.
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Introducing, ChatGPT
We figured, rather than rely on our brains, let's rely on an AI.
Hence we pit the CF against the AP in ChatGPT.
We screenshot the questions and answers we got below.
So, it doesn't seem ChatGPT is very pro the AP.
But, to make sure it is not biased, we also asked it what are the benefits of the AP.
Obviously, at this stage, ChatGPT started to contradict itself a little.
It first stated that drawing on land sales is volatile while NIRC provided stable funds.
Then it contradicts itself by saying that land sales are stable while NIRC is volatile due to investment risk.
Our conclusion is: to take the ChatGPT response with a pinch of salt.
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Rationale of the Alternative Proposal
In personal finance, there are several schools of thought on how to manage money for retirement.
One of them is the "living off the interest" approach, which emphasises on:
- Accumulate a large pool of capital (principal)
- Spending only the returns generated by the principal
- Never draw down on the principal.
Another school of thought is the "4% rule movement", which emphasises:
- Accumulate a large pool of capital (principal)
- Principal and the returns generated go back into the pool to form the portfolio
- Draw 4% of the portfolio every year to spend
This is the approach utilised by the AP, but with a much more conservative twist: drawing only 1% instead of 4%.
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Excel Spreadsheet
So we ran an Excel Spreadsheet just to see how much of a difference each framework would generate in terms of returns.
Below are some of our basic findings
- By the end of the 99-year period, CF would have 75% more funds than the AP.
- By the end of the 99-year period, CF would provide 57% more in annual NIRC contribution than the AP.
- Over the full 99-year period, CF would have contributed 23% more than the AP, in terms of total dollar contribution.
- In the beginning, AP would contribute more to the NIRC as compared to the CF. The switch will happen at the 35th-year mark, where onwards CF will start contributing more to the NIRC than the AP.
- At the 64th-year mark, CF would surpass the AP in total accumulated dollars contributed to the NIRC.
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Conclusion
There is no right or wrong answer on this matter.
It is a matter of perspectives and personal preference.
Because at the end of the day, mathematically, both approaches still grow the reserves and contribute to the budget.
It is just whether we prefer the "living off the interest" approach (our current way) or the "4% rule movement" approach (NCMP's suggestion).
Personally, we're on the "living off the interest" camp, but that's our preference.
What about you?
Let us know in the comment section which approaches you prefer.
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