Note that your CPF SMRA monies will no longer earn floor rate of 4% from 1 Jan 2016

I was surprised from recent conversations with many people that they are not aware that their CPF SMRA (Special, Medisave and Retirement Accounts) will no longer earn the floor interest rate of 4% from 1 Jan 2016! 

Actually, this floor rate of 4% would have been terminated long ago if not for the extension by Singapore Government every year since 1 Jan 2010! 

From 1 Jan 2016, SMRA will only receive a floating rate equal to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%. 

              

At the moment, 10YSGS is hovering around 2.1-2.5% only, so SMRA monies will earn 3.1-3.5% only if the 4% floor rate has been removed. 

On the other hand, Savings in the OA will continue to earn either the legislated minimum 2.5% per annum or the 3-month average of major local banks’ interest rates, whichever is higher.

Should you top up your CPF-SA (by transferring from CPF-OA)?

Should you top up your CPF-SA (CPF Special Account) by transferring from CPF-OA (CPF Ordinary Account)? 

I heard this many questions many times, and I know why: because I also read that there are quite many people advocating others to transfer their CPF-OA to CPF-SA.  So should you or should you not? 

Actually, the answer to this question really will differ from person to person.  However, I would take the contrarian view that in general: YOU SHOULD NOT TRANSFER CPF-OA to CPF-SA! 

WHY?  you may ask? 

In order to answer your question, you have to go back to review the "reasons" why would you want to transfer CPF-OA to CPF-SA? 

Reasons cited are mainly because: CPF-SA pays 4% interest while CPF-OA pays only 2.5% interest (so there is a gain of 1.5% interest)! 

So it is all about return isn't it? 

Now, looking at the return, 4% is still mediocre isn't it?  So why would you want to do so? 

Is the 4% interest rate guaranteed?  Would the 4% be changed or be lowered in future?  Would you get higher return than CPF-SA rate if you leave the money in CPF-OA and invest it in some other instruments? 

Well, my opinion is that once your money is in CPF-SA, there are so few investment options to invest the CPF-SA money that you are tied to at best CPF-SA rate of 4%! 

What if you leave your money in CPF-OA?  Well, you have many more investment options, and these investment options over the long-term would likely earn you return much more than 4% provided by CPF-SA!  Even putting these CPF-OA money to buy and invest in a property will reap you bigger profits over a long period (much better than putting these money in CPF-SA)!  Also, if you invest in S&P-500 index over the past 30 years, your annualized return is actually about 11%, much higher than 4%!   Oh, sad to say, unfortunately the hard truth is, you are barred from using your CPF-OA money to invest directly overseas-listed stocks and ETFs!  Well, you may say, doesn’t matter, you can invest via unit trusts (UT)!  Sorry, you will be dead wrong to do that!  The UT costs will eat up your returns to become mediocre!   

So, unless you have no interest and no time to learn how to invest your money, then, yes, you have no choice but to transfer your CPF-OA to CPF-SA! 

But, why you have no interest and/or no time to learn how to invest your money? 

If your answer is because you are busy with your work and your work earns you lots more money, then I would like to say "Good! Happy for you"!  In this case you don’t really have to care nor spend time to learn to invest your money, just leave it to professionals and many will die to serve you (for your management fees of course)! 

Other than that, I would suggest that you better start to free up time and cultivate interest to invest your money!  We people can only work till 65 years old and there about (some can’t even work much earlier due to poor health, illness etc), and thereafter, it is unlikely you would be of much use to a company that is profit-oriented (and they have lots more other younger people who can take over your job at a lower pay) unless you own the company or your job really is "do almost nothing to take salary type" and appointed due to connections!  This is regardless of government’s mandatory later retirement age or even enforced reemployment after 65 years old (if a company wants to get rid of you, no law can protect you!  If you work in private companies, you will know very well what I mean…)

Read NEWS with EYES wide open, brain functioning-3

Today, I read an interesting article (quoting a research paper), titled "CPF returns attractive versus risk: Institute of Policy Studies", which you can read at this URL...

The part which is believe is "interesting" BUT doesn't quite make sense in the paper cited by the news article is pertaining the claimed return of CPF, where it says:

"The CPF has similar returns, over 20 years, when compared to a typical balanced portfolio of 60 per cent equities and 40 per cent bonds, the paper said. But these returns of 5.7 per cent a year come with a standard deviation of just 1.4 per cent due to various guarantees in the system. By contrast, the standard deviation for the 60:40 portfolio is 12.3 per cent, with expected returns a tad higher at 5.9 per cent."

I don't know how the authors obtain 5.7% a year return for our CPF money locked in CPF, because as we know, CPF money has been paid 2.5% per annum (p.a.) for very long time, and the first $60,000 will get 4% p.a.  The CPF has a minimum sum of $161,000 for retirement fund and another about $50,000 for Medisave account, making a total of $211,000 locked inside CPF for every Singaporean.  If only $60k receives interest of 4% p.a. and the other $151k receives interest of 2.5% only, how the hell the authors of the paper arrive at 5.7% p.a. return?  May be the 5.7% p.a. is the AVERAGE return (total return over 20 years divided by 20 years) and NOT ANNUALIZED return?  But hey, ANNUALIZED return is usually used in the financial sector and presenting the return as 5.7% AVERAGE return and then comparing to say about 5.7% ANNUALIZED return from stocks and bonds are like comparing APPLE to ORANGE!


For people who are not sure about the difference between AVERAGE return and ANNUALIZED return, let me explain it in a simple way:
1) Say you have AVERAGE return of 5.7% over 20 years, then your total return over 20 years = (5.7%)x20 = 114%.

2) Say you have ANNUALIZED return of 5.7% over 20 years, then your total return over 20 years = (1.057) to the power of 20 = 303.04%.

Hey, the difference between (2) and (1) above over 20 years = 189% !!!

I leave it to all of you to figure out the details or call for more clarifications from the authors of that paper. 

PM's National Day Rally speech - Lease Buyback Scheme & New Silver Support Scheme & CPF changes

The Prime Minister's National Day Rally speech looks like a welcome to those silver hairs generation who have little cash on hand but with a HDB flats as an asset.  I extracted some relevant portions from the news:

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Lease Buyback Scheme extended to 4-room flats: 

"CPF members can count their homes in the Minimum Sum, meaning they need to set aside just half of it in cash, which works out to S$77,500. Mr Lee conducted a poll of the audience at the Rally using an example of a fictitious couple Mr and Mrs Tan.

"I ask Mr Tan - how much do you think you will need in retirement every month?" Mr Lee said. "What do you think? S$3,000 per month? That's about two-thirds what he is getting now. S$2,000 per month - less than half what he is getting now? Or S$1,000 per month?" 

The majority picked S$2,000 a month. Mr Lee said this means the Tans will need S$250,000 for their retirement needs - which is more than the Minimum Sum. And if Mr and Mrs Tan pledged their home, the amount of S$77,500 kept in their CPF account would only give them S$600 a month. They would then need to find other sources of income to plug the shortfall.

Mr Lee said there are options to achieve this, including continuing to work, getting support from their children, tapping on savings or getting money of out their house.

For example, he could rent out a room for S$700 a month, or move in with his children and rent out the entire flat for S$2,500 a month.

"The third thing you could do is to 'right-size': sell this flat and buy a smaller flat. Let's say you buy a studio apartment, you move into the studio apartment and then in the process, you can enjoy a silver housing bonus from the Government which is S$20,000. We can do the sums, you get quite a lot of money - S$210,000, plus S$800 per month," explained Mr Lee.

Another option is the Lease Buyback Scheme, which will be extended to 4-room flats. In Mr Tan's case - if he sells the remaining lease of 35 years to HDB - he will receive a lump sum of S$27,500 in cash, plus S$900 per month.

The Lease Buyback Scheme currently covers 3-room flats and below. Mr Lee says that extending it to 4-room flats will cover more than half of all flat owners in Singapore.  "

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PM Lee's National Day Rally Speech - Overview: 

" Singapore Prime Minister Lee Hsien Loong has highlighted the need for economic growth and a cultural change to help all Singaporeans achieve their potential. Speaking at the National Day Rally on Sunday (Aug 17) evening, Mr Lee outlined how Singaporeans can attain success through different routes, regardless of their academic qualifications. To help the older generation of Singaporeans, Mr Lee also announced policy enhancements to the national savings scheme.

Mr Lee also gave more assurance that older Singaporeans would be provided for after they are retired. He said the national savings scheme - the Central Provident Fund (CPF) - has served Singaporeans well. "It works well for most Singaporeans, but not quite for all, especially the lower income. Also it is not quite flexible enough, and I think we can and should improve the scheme further," Mr Lee said.

A new scheme for low-income elderly Singaporeans called Silver Support will be introduced. Low-income seniors will receive an annual bonus from the Government, starting from age 65, to help with living expenses.

Singaporeans could soon also have the option to take out part of their CPF savings in a lump sum when they need to, subject to limits. Mr Lee also said the CPF Minimum Sum will be raised to S$161,000 next year, but added that he did not see the need for further major increases in the Minimum Sum beyond that.

In closing, Mr Lee urged Singaporeans to be the pioneers of their own generation in the next 50 years and beyond.   "

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You can read the full details at this URL and this URL...

Comments:
In the example quoted by Mr Lee, he said Mr Tan says he need $2000 a month for retirement as this is less than half his salary.  However, I feel Mr Tan's figure should be referring to his household expenses with his wife and not him alone?  This is because if we take 1 person's salary, then we  also know that about 70-80% of Singaporeans don't earn more than $4000 per month individually, so taking an income of somebody who earns above the 70-80% percentile is not a good example.  We should be taking the bottom 20th percentile which should be about $1,500 per month salary.
Remember, CPF Life is meant for basic living, the bottom 20th percentile living expenses (below 20th percentile the government is helping them through subsidies), not the top 70-80th percentile living expenses.

Startling facts about Singaporean incomes

I am rather surprised to see below news about CPF today, obtained from Channel News Asia -> URL:

 "More than half of workers reaching 55 years of age are not able to achieve the Minimum Sum - the amount needed to give them a regular income upon retirement at 65 - even after they pledge their property value. Less than 30 per cent are able to meet the Minimum Sum entirely in cash."

 Now, less than 30% of Singaporeans are able to meet the CPF Minimum Sum of S$155,000 entirely in cash!  If so, why need to keep increasing CPF Minimum Sum since so few people can achieve it?

CPF Life annuity payout is low

Recently, there have been a lot of buzz regarding Singapore's CPF Life, a form similar to pension plan in other countries.  The issues started from the ever increasing CPF Life's min sum (from $80,000 in 2003 to $155,000 in 2014) that people need to lock up in their CPF when they reach 55 years old.  

Below are certain issues that came out of my discussion with my friends.  

Just for background, CPF Life is administered by a Singapore government statutory board called CPF or Central Provident Fund Board.  CPF Life is also similar to annuity scheme sold by insurance companies in Singapore, in that you pay some money every month and at a fixed age some time later (in the case of CPF Life is when you are 65 years old), you start to receive annuity payout until you die.  However, CPF scheme is much more complicated than that.  Any way, to summarize, Singaporean workers are required to contribute about 20% of their pay to CPF every month, and employers need to co-contribute another about 15%, and these are placed into 3 accounts according to some fixed percentages, namely Ordinary Account (OA), Special Account (SA), and Medisave Account (MA).  They will contribute as long as they are working.  By the time they reach 55 years old, everyone of them who has $155,000 in OA+SA will be transferred into a Retirement Account (RA).  This sum will be held in RA under CPF Life scheme (and cannot be withdrawn) until 65 years old when by then the person can start to receive annuity payout from CPF Life scheme. 

According to current projections by CPF Board, CPF Life annuity payout for a RA sum of $155,000 will be about $1100-1223 per month.  

However, some people questioned why is this CPF Life annuity payout so low?  

To see why is this so, we can do following calculations, and we take the average payout of $1161.50 (= (1100+1223)/2) per month for our calculation: 

* CPF min sum $155,000 at 55 years old locked up with interest of 5% below $60,000 and 4% for remaining above $60,000, so total at end of 10 years at 65 years old is = $240,449.67

                             Amt below $60k           Amt $60k & above
Amount:                60,000.00                    $95,000.00
Interest:                5.00%                         4.00%
No. of Years:          10                               10
At end of 10 years: $98,820.57                   $141,629.10
Total $240,449.67

** Next come annuity payout part, to pay out $1161.50 per months mean your annuity return is only 1.93%, calculated as follow: 

No bequest - Assume Dead At 86 years old
Present value at 65 Years old      = $240,449.67
Payment per month                   = $1,161.50
Expected payout period in years = 21.00
Rate (Annualized) p.a.               = 1.93%

Now, it seems that this Government administered annuity scheme's annuity payout is even lower than annuity payout of the insurance companies in Singapore!!! 

So, therein lies another problem: Annuity payout's assumed return is low, even assuming an average person dies at 86 years old. Furthermore, CPF Life payout of this amount is not guaranteed despite giving so low return of 1.93%. Seems like people expect that a nation-wide annuity scheme should do better because of economy of scale and also the need to pay better because of the enforced scheme (i.e. you don't have the choice to opt out).