Archives for posts with tag: CPF
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TodayOnline published a piece in their “The Big Read” section which is interesting but not surprising.

The dreaded ‘R’ word — why Singaporeans need to start thinking seriously about retirement highlighted a few statistics which I thought deserves some attention:

  • Retiree households living in public flats here receive an average of S$1,522 each month for their retirement needs, with the bulk of it coming from their children or relatives.
  • Breakdown of the above: S$280 (~18%) from Central Provident Fund (CPF) payouts; S$485 (~32%) from familial transfers; S$180 (~12%) from personal investments; S$178 (~12%) from rental income including proceeds from subletting or Lease Buyback Scheme for example; and S$399 (~26%) from other sources, including pensions and government aid.
  • According to OCBC’s inaugural financial wellness survey: Around 65 per cent of Singaporeans are behind in accumulating funds to maintain their lifestyles after retirement, and 73 per cent are “not on track” with their retirement plans
  • The same OCBC survey found that 34 per cent of Singaporeans do not invest at all, and nearly half of Singaporeans also have zero passive income.
  • Market research consultancy Blackbox sampled 1,000 residents and found that 62 per cent of Singaporeans feel they are not saving enough for old age. This figure rises to 74 per cent among households earning less than S$2,500 a month.
  • The Blackbox poll also found that 43 per cent of respondents said they were relying mainly on CPF, while 38 per cent said personal savings and 17 per cent said investments.
  • Associate professor Ng Kok Hoe and Prof. Teo You Yenn did a study and found that by today’s minimum income standards, a benchmark of S$1,379 a month per senior is needed to meet basic standards of living in retirement.
  • Only 55 per cent of CPF members who turned 55 in 2013 had reached the Basic Retirement Sum (BRS). Those who set aside the BRS will receive S$730 to S$790 a month as of 2019.
  • CPF members without a property or who wish to receive the full monthly payout can choose to set aside a Full Retirement Sum which is two times the BRS. They will receive S$1,350 to S$1,450 a month as of 2019.

Thought #1: Average Retiree Households living in HDB are in trouble

If the average retiree household only receives $1,522 a month but the Ng and Teo study says that each senior requires $1,379 a month then it means that the average retiree household only meets about 55% of the Ng and Teo figure.

I wonder if anyone has come out to rubbish the Ng and Teo number but at the same time it makes you wonder about the pronouncement made by a certain senior politician about Singaporeans attaining “Swiss standards of living” or have we dropped that as a benchmark?

Thought #2: CPF is almost useless for a retirement scheme

If the CPF payout only contributes about 20% of an average Singaporean retiree household’s income, then what good is it as a retirement scheme? Note that this is for current retirees. I’m not sure whether the proportions will change for Singaporeans who are currently in their 30s-50s.

I’m pretty sure the problem is that too many Singaporeans use their CPF for housing and are/were banking on monetizing their house later on. This could come in the form of renting out spare rooms, downsizing to a smaller place or the lease buyback scheme.*

I think CPF should come out with a study on whether it’s smarter to leave your monies in CPF to compound over the same time frame as a 30-year mortgage or whether it’s better to bank it all on buying the biggest house you can afford to.

By the way, it isn’t my opinion that CPF is mostly useless for retirement. This was also in the article:

Speaking to TODAY, Ms K Thanaletchimi, the president of the Healthcare Services Employees’ Union (HSEU) and a former Nominated Member of Parliament (NMP), said: “The message should be stark and clear. CPF payouts should not be the main source of income for a retiree. It must be regarded as a complementary or supplementary source of income for Singaporeans.”

I find it quite disturbing though that official chatter is about how CPF is not meant to be the main source of retirement funds and yet the forced contributions to CPF make up a huge percentage of wages.

Although the CPF might argue that if you wish to get higher returns, you possibly could through the CPF Investment Scheme (CPFIS), the fact is that the forced contributions cause an unnecessary layer between a person and his or her funds.

At the same time, I can see how most people would have just spent any extra money that comes their way.

Thought #3: Younger Singaporeans in trouble too

If the OCBC survey is accurate, the personal finance and investing community has a lot of work in the future. We’re not even talking about how much passive income but if half of Singaporeans have no passive income, then it’s pretty worrying because as much as the Singapore government would like you to work as long as you can, passive income is the sort of thing that provides options in life.

And if familial transfer (~32%) make up the income for retiree households, then it’s no wonder that our birth rates are well below the replacement rate of 2.1.

That lack of future familial support also means that if younger Singaporeans are thinking for their future selves, then they better count on having governmental support.

I don’t know about you but I prefer sure things.

The Blackbox poll also shows a worrying disconnect since 43% of the respondents said they were depending on their CPF monies for retirement. But as the data on current retirees show, CPF monies aren’t going to help much unless you believe that things are going to be different.

Final Thoughts

I believe that I’m in a better place than most others but if you are a young person living in Singapore and haven’t thought about what happens when you stop working, I think you should.

The nice thing about the article is that you can use Ng and Teo’s number as a sort of benchmark. Of course, the $1,379 per senior per month is a nominal number so you can adjust that by an appropriate historical rate of inflation** to get a ballpark figure of how much you’ll need in 20-30 years time.

Finally, if you’ve been financially ok your whole life, I suspect you won’t have to worry much even when you’re older. But you probably might have to worry about whether your society requires you to do more.

Note:
* The lease buyback scheme contributes to about 12% of the average retiree household’s income which also shows that this hardly moves the needle in terms of adequacy.
** I should point out that the inflation rate for things like education and healthcare has traditionally been higher than things like food and electronics which kind of means that inflation rates for retirees is possibly higher than the rates reported by CPI.

I have no idea why some old idea* from more than a year ago showed up on my Google news feed but it turns out that there’s this guy, Loo Cheng Chuan, who’s a big fan of CPF and has accumulated a combined $1m in both his and his wife’s CPF accounts by the age of 45.

I’m sure that accumulating $1m across two CPF accounts by the age of 45 is a big deal for most people but the reason why I’m writing this is because, I want to address a point that all the articles featuring this guy have failed to do.

The magic behind his $1m in CPF by 45

I googled his name and all the articles that feature his idea of accumulating $1m in his CPF accounts seem to emphasise Mr. Loo’s idea that transferring money to the SA to earn an extra 1.5+ % is the magic solution.

That’s nonsense.

The big reason why this guy has $1m across two CPF accounts is because he saved a lot of money in the first place.

Financial Calculator Magic

Using my trusty Financial Calculator, a starting amount of $100,000 with annual contributions of $37,740 (the annual limit on contributions to your CPF) will get your CPF account to $500,000 in 8.27 years at an interest rate of 4%.

At 2.5%, which is the lower interest rate earned in the Ordinary Account (OA)? A mere 8.99 years will get you there. That’s barely a difference in terms of how quick you get to $1m.

In other words, the reason why Mr. Loo and spouse hit a combined $1m by the age of 45 is not because he transferred cash to the SA to earn that extra 1.5 or so percentage points.

It’s because he maxed out his contributions.

When does the extra interest rate make a difference?

I have to admit that there may be two reasons why putting more money in the SA makes sense.

(1) Over a longer timeframe
(2) To commit yourself from making stupid decisions

Over a longer timeframe, the extra percentage points of interest add up thanks to compounding. Using the same interest rates of 2.5% and 4% but over a time period of 35 years, the future sum comes out to $2,310,311.07 and $3,174,24.87 respectively.**

From a behavioural economics point of view, it may make sense that you transfer money to your SA to prevent yourself from doing something stupid like buying a bigger house*** since you can’t take money out of your SA to spending on housing or your children’s education.

Notes:
*Ok, turns out it was because some website ran this 2 days ago.

**Note that these numbers are nominal. In other words, being a $2m or $3m-aire 35 years later may not as wonderful as you think it may be.

***Bigger house doesn’t always mean better. In fact, you may end up accumulating more junk and there’s more cleaning to do.

Yes…technically it hasn’t but isn’t that what the intent of the default payout age is signalling?

Recently, there’s been some hoo-ha about when CPF starts paying out one’s retirement money. Apparently, it started when someone posted a picture of a letter from CPF informing an account holder that if they wished to have their payout start at 65 (the earliest possible age), they need to inform the CPF Board of this. Otherwise, the default payout age would be 70.

This naturally led to some people saying that the CPF payout age had been raised to 70 from 65 and this led to the CPF Board issuing a statement to debunk this “myth”.

Can you blame the people?

I mean, if CPF had set the default payout age to 65 instead of 70, there wouldn’t be this issue in the first place. And if the default is set at age 70, then we can assume that the intent of the CPF board is to have people draw down monies from their Retirement Account only starting from age 70.

It’s been quite well established in the behavioural economics community that defaults are a way of nudging people into certain behaviour. The best and most often cited example is how an opt-out programme results in a higher proportion of people donating their organs after death as compared to an opt-in programme. In other words, default options matter because as humans we are lazy and tend to stick with the default.

What I think the CPF Board should do

Instead of coming out and saying the technical and legally accurate thing, the CPF Board should have come out and explained why the default payout age is set to 70. Their argument will probably be a combination of extra years of compounding (5 years) which is result in an extra X number of dollars paid out each year.

People may or may not agree with the CPF Board’s argument on having a default at 70 but at it least it would be a reasonable explanation of their choice of default payout age.

Right now, it just seems like they are nitpicking on the facts but skirting around the issue of their intent.

Last Sunday, the Straits Times ran this piece titled “CPF, cash not enough for comfortable retirement” (link here but it’s behind a paywall) and it’s written by the CEO of StashAway who makes some good points.

Of course, like any good businessperson, the CEO doesn’t say that your CPF money isn’t enough for retirement but that it’s not enough for a comfortable retirement. I won’t go into the details of the article because (a) I read it some days ago so my memory of it is hazy and (b) it’s hidden behind a paywall so I don’t have access to it as I type this.

 

CPF, as originally intended, isn’t all that bad

Furthermore, I’ve shared my thoughts on CPF before (see here and here) and over the years, I’ve come to believe that CPF in its original form is a pretty good system.

Why?

If you look at this handy retirement calculator, saving 37% of your money means that you can retire in roughly 30 years assuming a rate of return of 3.5% (this is an estimate of the blended OA and SA rate) and a withdrawal rate of 3%.

In short, if you continually save 37% of your money up until 55 years of age, you could retire with the amount of in your CPF account providing you a return to match your yearly expenses ad infinitum.

But wait! There are some issues

One issue that CPF has against it (just like that crappy endowment plan your financial advisor tries to sell you) is that those numbers are nominal. In other words, if someone earns $50,000 per year and is saving 37% of it in their CPF, he/she will be spending $31,500 per year. Unfortunately, the same $31,500 per year 30 years later is going to buy him/her a lot less stuff.

Of course, having some cash to retire on is better than not having anything at all. However, if CPF could pay inflation-indexed rate of returns, we would be in a much better place.

Of course, optimists will point out that salaries don’t remain constant over time and some people might save over and beyond the amount in their CPF accounts. Also, the official retirement age is 65. That’s a full 10 years more than the scenario above. Also, the withdrawal rate of 3% may be too conservative. If that’s the case, then the loss in purchasing power won’t be (so much of) an issue.

Reality Sucks

In reality, we know that the CPF system has morphed into one where monies in the CPF is used (mostly) for housing. In that case, retirement becomes a much more dicey affair. After all, if a person has taken out a 25 or 30-year loan on his/her property, then there wouldn’t be much left to compound in the CPF account, would there? If the 25 or 30-year loan is so huge that it completely wipes out the monies going to the OA account, then there won’t be much to compound on either.

I haven’t looked at the numbers but based my observation of colleagues and relatives, I suspect most people have overspent on housing but they haven’t felt the effects of it because they are so far away from retirement.

 

Less house, less stress

Personally, my house is dirt-cheap because it’s a BTO in a less appreciated part of the island. This allowed my wife and I to take on a loan that’s ridiculously cheap (it gets paid off in eight years and the deductions are less than my OA contributions). The flat itself is nice because we got a good facing (pure luck here!) and we have good neighbours.

Of course, the downsides are that my commute to work is far and we’re not really near a train station. Of course, this means that we spend more dollars and time our transport and commute.

The good thing is that this allows us to sleep better at night and I definitely won’t be worrying about life at 60.

pexels-photo-323705.jpeg

Is your housing expenditure detriment to your retirement?

 

Alternatively, this could have been titled, “An Ode to my CPF”.

I know I’ve given lots of shit to CPF (for example, “CPF monies: to depend on it for retirement is a pipe-dream“, the footnote in “Early retirement: some math“, or more recently, “What’s the economic logic behind CPF’s accrued interest policy?“) but think about it:

What if you had regular contributions to your CPF and you let it compound?

There is a group of people in Singapore that has spent so much on housing that they have barely any contributions to their CPF each month. Those that even have to fork cash out of their pockets to pay the mortgage are in truly dire straits. If you happen to find yourself in this situation, read on below.

A Very Personal Example

I happen to belong to the camp that has regular CPF contributions because my housing loan is so low that my monthly CPF contributions more than covers the monthly mortgage. Also, I will finish paying off my loan in another 4 years or so (background here).

So I decided to run the numbers on the following scenarios to see how much I would have when I turn 55 (the age that we can finally take some of the money out of our CPF accounts):

A: If I work for another 20 years
B: If I work for another 10 years
C: If I work for another 5 years

The assumptions I’ve made are as follows:

#1: Current contributions increase by $10,000 per year after our housing loan is paid off.

#2: Contributions remain constant over time. i.e. No increases in salary.

This is for easy math and anyway, I don’t expect my salary to increase drastically beyond the inflation rate so the contributions can be viewed in ‘real’ terms.

#3: CPF returns 3% across all accounts.

I’m assuming this despite having more monies in my Special Account (SA) at this point in time. I know the SA earns a higher rate of interest and combined sums (subject to a cap of $60,000) in your accounts earn an extra 1% but once again, this is for easy math and to set a floor.

#4: I’m starting with roughly $130,000 in both my OA and SA.

Numbers

Thanks to the magic of Excel:

Scenario        Final Amt at 55 ($)

    A                  $1,180,000

B                  $772,000

C                  $495,000

Final Thoughts

Obviously, the numbers above are not going to be representative of what another Singaporean might end up with. I’m making above the median salary although NOT much more than the Median Household Income. Of course, a major factor is that my wife also works and our household size is smaller than the average*.

I still believe that the CPF system needs a revamp. Way too many people are spending what should be their retirement savings on a property, either as an investment (which is still somewhat excusable) or on housing (gasp!). That’s probably one of the main reasons why only about half of CPF members can meet the retirement sum despite pledging their property.**

Also, one big sore point for many people is the Retirement Sum*** going up. There’s a good article on what the retirement sum may be like for younger people today when they reach 55 later on. Just eyeballing the table, it seems that based on my calculations above, meeting the retirement sum shouldn’t be a problem.

Very often, people forget that compounding needs time to work its magic but for compounding to work, there’s needs to be something to compound in the first place. If you spending all your money on housing, there won’t be anything left to compound. And if you want to turbo-charge compounding then you need both time and regular contributions.

 

Notes:

*I believe the average household size is 2.1 in Singapore. No, us having a cat doesn’t count.

**There are also other factors at play. I suspect that the labour force participation rate should explain quite a bit. Some (especially mothers) may have only worked very few years of their lives and hence have little in their CPF accounts. For example, my own mother practically stopped working full-time after she had me and my brother. By the time my youngest brother came along, she had already stopped working for some years.

***The Retirement Sum is the minimum you need to have in your CPF accounts so that the CPF can slow-drip the money back to you in old age so that you have enough money to meet your basic spending needs.

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

Singapore Household Balance Sheet

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?

CPF_accruedinterest.png

CPF put this out on their FB page. I think their point was to clarify some “myths”.Source: CPF Facebook page

 

Point #1 in the infographic above is the point about CPF that I never understood. That point says that when you sell your property, you need to pay both the amounts from your CPF account used to service the mortgage as well as the interest that would have accrued to your CPF account if you had NOT taken money out of your CPF account.

Economically, the monies in your CPF account belong to you. According to CPF’s original intention, that money will remain in your CPF account in order to fund your retirement needs. As a reward for being forced to save your money, CPF pays you a return on the sums in your CPF account. Fairly straightforward stuff.

Later, CPF changed the rules so that anyone with a CPF account could use their CPF monies to pay their mortgage. Obviously, the tradeoff, if such a choice was made, is that no interest accrues to the sums that are not present in the CPF account.

Logically speaking, this is the same as a bank account. If you take $10,000 out from your bank account, the bank is not obliged to pay any interest on that $10,000. The bank saves on paying you interest but of course loses out on any profits earned from making fewer loans to their customers.

So, it’s preposterous that CPF requires you to pay any interest that would have accrued if you had not taken your money out from your account. Imagine that if you want to deposit $10,000 back into your bank account but the bank says, “I’m sorry, you have to deposit $12,500 because that is the interest you could have earned if you didn’t take the money out from my bank.”

Of course, I can understand why CPF makes property sellers do this. The primary reason for CPF accounts is to fund retirements. If someone makes an additional profit above the amounts borrowed from their CPF accounts from selling his or her property, then it is in the interest of the property seller’s future self to make sure that not all the profits get consumed immediately.

The problem for me is that this makes the job easy for the people at CPF because it shifts the burden of retirement on the property market and the financial institutions that provide avenues for unlocking home equity.

If I’m missing any other arguments on accrued interest, I’d love to know. Drop me a line in the comments.

I’ve recently come across this book called “Early retirement extreme” by Jacob Lund Fisker and in it, he has some very interesting insights with regards to retiring early. His book is a basically a more organised collection of posts from his blog, so you can head over to his site for a relatively unsorted version of his ideas. (link here)

Most of the book sets up a paradigm shift that one would require in order to retire early. One may or may not completely agree (for the record, I think he makes a lot of sense but I’m pretty sure I won’t be following completely in his footsteps) with his philosophy but one cannot argue with the mathematics of having enough money to retire.

Two of the mathematical ideas that I find particularly interesting are (1) the equation used to find the number of years that one’s money will last them and (2) the equation that finds the number of working years needed to attain a fund big enough to last you forever.

I’m not reproducing the equations here (go get Fisker’s book) but anyway both equations depend mainly on two factors- (a) the savings rate and (b) the rate of return on the initial sum. The first equation basically comes to the conclusion that a 30 year fund (fund with starting sum equal to 30 years of expenditure) will likely last 70 years (or most of one’s expected lifetime after we start working).

As for equation (2), stripping inflation of say 3.5% per year, one can use a rate of return of 4-5% (depending on how optimistic you are) as a reasonable guess to do the calculations and the conclusion one will come to is that the higher the savings rate (i.e. the less one spends), the faster it is to reach retirement.

In fact, Fisker did it in 5 years with a savings rate of 75%. I’m skipping the details but Fisker did it by keeping his annual spending to around US$7,500 per year (That’s right, no typo here. A YEAR and NOT a month).

I tried to recreate a schedule of the time needed to obtain a 30 year fund for various rates of return and you can see the results below.

Number of years required to work vs. Savings rate

Number of years required to work vs. Savings rate

The main point is that if we use a very conservative real rate of return of 4% and what some might consider a good savings rate of 25%, it’ll take about 39 years of work in order to obtain a 30 year fund. Coincidentally, this translates to a retirement age in the early 60s regardless of gender.

Of course, as one’s career progresses, one’s income will increase. What the above exercise illustrates is that we need to increase our savings as our income increases, otherwise, the savings rate drops and the number of working years required increases. This is logical because if one spends all of the increase, then the required 30 year fund must also increase in size as compared to before. 30 years of an increased amount of expenditure is of course, a bigger number. The best case is if one can channel even more of the increase into savings and therefore, lower the required number of years of work.

Now, in Singapore we have the CPF system which basically forces us to save 37% of our income (including both employers and employee’s contribution). This sounds like a good thing because a savings rate of 37% , going by the equation, means that at a rate of return of 4%, you would need only 28 years before the 30 year fund is obtained. The problem with our CPF is that most of us spend it on housing so please don’t count your CPF towards this 30 year fund. The other problem is that even if we counted our CPF monies towards this sum, the rate of interest earned on the sums is far less than our assumed real interest rate of 4%.*

So, what’s a good Singaporean got to do? Well, the only solutions I see is to one, drastically simplify one’s life in order to bump up the savings rate (which in effect reduces the size of the 30 year fund) or two, maintain one’s lifestyle even as one’s income increases.

I’ll probably fall into the latter camp. Right now, my savings rate is around 23% and I need to bump this up. For those who think that saving even 10% is a stretch, good luck!

*So in fact, the well-meaning system fails because 37% of your income^ goes into accounts that you can’t really touch until the specified age. That means that one has to cut back on expenses even more or retire a lot later. This is terrible for middle-income and above earners who would otherwise have a decent shot at retiring early. On the other hand, it works spectacularly for people who would otherwise blow all their money on current consumption.

^I’m aware that the CPF contribution rates have some sort of wage ceiling which means that the 37% contribution rates apply only to those that earn $5,000 per month or less. However, last I checked, the median monthly income of a Singaporean resident was only $3,770 so I believe I speak for the majority.

2014 has been an eventful year to say the least.

Globally, it was the year of terrible air disasters (for this region, at least) where one Malaysian Airlines flight went missing (MH370) and another was allegedly shot down (MH17). As I write this, an AirAsia flight from Indonesia to Singapore has gone missing (QZ8501). These are terrible events and only hopes that the family and friends of those on board find comfort and peace soon.

As terrible as these events may seem, one cannot forget that there were many more affected by typhoons (Philippines), floods (Malaysia) and famine (in parts of Africa). Some others are adversely affected by the tyranny of a few- think North Korea, wars in the Middle East, shootings in the USA, the  people in the Sydney cafe that was held hostage by a lone madman or the crazy guy that went on a shooting spree in Ottawa.

Bad things happen every year and news channels have a duty to report it. That’s their raison d’être. But just in case anyone thinks that their year has been shitty, maybe a look at my year will make you think twice and take stock of the good things in your life.

Wealth

It’s been another great year as far as wealth building goes.

The STI did ok this year. It started at 3167.43 and closed at 3365.15 for a gain of 6.24%. Coupled with a dividend yield of 2.5% (I’m making a rough guess here but if the distribution yield on the STI ETF is anything to go by, this is a reasonable long term approximation.), you have a 8.74% gain. Not mind-blowing but nothing to scoff at either. In fact, it’s pretty much at or in fact, just above the long term compounded annual growth rates that one would expect from constantly being in the market.*

My own portfolio saw a 13% return if I count pure investing returns (capital gains + dividends reinvested). I’ll take it. But I won’t expect the same kind of returns year after year on a consistent basis. Including savings added to the portfolio, the portfolio actually grew by 26%.

For those unsure about what the two numbers mean, the pure investing returns (13%) are calculated using a NAV calculation which eliminate the effect of adding more cash to the portfolio. This is a better reflection of the contribution of skill and luck towards returns. The total growth (26%) includes savings which also reflects the added dimension of discipline because I have to forgo current consumption.

So, which number is more important?

That depends a great deal on what answer you seek. If I want an accurate assessment of my investment luck and skill, then I should look at the first number and traditionally, this is the number when evaluating any investment. This is also the number I keep records of every month.

The second number, for me, helps in two ways. First, it helps me track how close I am to my investment goal. A portfolio of a certain size will give me enough scale to go into investing full-time and this is the number I need to meet. Second, it helps illustrate the importance of savings. This is especially true when you have a small portfolio. Even for a portfolio like mine (in the six figure range), it contributed to about half of my portfolio’s growth for the year. However, this number will definitely get smaller as the portfolio grows bigger as salaries don’t tend to go up by much so unless I save larger and larger proportions of my income, the contribution due to savings must become a smaller and smaller part of returns. But for the young investor and those who have just begun working, I hope it illustrates that savings are important! It will be the “ballast” you need to keep your investing ship going and gets you to your target much much quicker.**

I hope I don’t send the wrong message by posting my returns here because in case anyone thinks I’m the next Warren Buffett (I’m far from where he is), just remember that although I did better than the STI, the S&P500 went up 12.55% on capital gains alone. Throw in a dividend yield of somewhere between 1.5-2.0% and the appreciation of the USD against the SGD, my 13% returns has not beaten a passive strategy of just buying the S&P500 ETF. Even if I was on par, the passive strategy would have required a lot less effort.

The past five years have been very kind to my portfolio (well, accept 2011 where the only gain to my portfolio came from savings). I hope the next five will be kind too.

I’m a big believer in the CAPE ratio (it has its critics) and if you used the CAPE ratio as I did, the best 3 months to have bought Singapore stocks in 2014 were (in order from best to third best): February, March and October.

While I don’t buy the STI directly, this gives a good indicator of the current sentiment in the market. When sentiment is as bad as it was, it’s time to look for bargains. Of course, if you don’t know how to value a stock, then please just buy the STI ETF. As it is now, I won’t be looking to buy stocks unless the markets come down a little or there are bargains too good to ignore.

How much of a drop would get me out of hibernation? The STI has to come down by at least 60 points before I’ll even think about it. For me to start nibbling, it has to come down by at least 160 points.

Personal

While I experienced the loss of my paternal grandmother, there was also some relief as she had been suffering for some time. She was pretty much immobile after a bad fall a year or two ago- while she could walk with the aid of a walker, that also meant that most times, she had to be pushed around on a wheelchair or walking was only confined to short distances. With the reduction in mobility, she also stopped cooking which I think was one of the few things that she enjoyed doing.

She was also on a long list of medication which had some side effects such as a lack of appetite and it was the fact that she needed to be on some medication that eventually led to the complications when her kidneys started to weaken.

My grandmother was a practical person. She never hankered after a life of luxury and she hardly bought anything for herself. Her passing was peaceful and being the practical person she was, she wouldn’t have wanted her passing to be any trouble to us. I really think she’s in a better place and just as she would have wanted, we’re not grieving over our loss.

On a happier note, the wife and I have finally moved into our own place. Doing housework took some getting used to but thanks to my wife who had the best of upbringings, we’ve settled into a routine that is manageable.

Our interior designer/contractor really did a fantastic job. The design exceeded our (or more of my wife’s  because mine are low) expectations and while their work didn’t come cheap, they weren’t exorbitant either. They kept to the budget and the quality of work is good. What more could we ask for?

Financially, this is one of the best decisions I’ve ever made. Private housing is painfully expensive in Singapore but Public Housing is another story. My place has a total floor area of 1184 square feet. While that isn’t much in other countries, in cities like Singapore, that is a considerable amount.

The more amazing part is how much we paid for it. Just 289 Singapore dollars per square foot. You’ll never find a per square foot price like that in the private housing market here where 700-800+ dollars per square foot is considered cheap. Most apartments I know are smaller and go for anywhere near 1000 dollars per square foot.

What this means for us is that it is extremely unlikely for us to experience a loss on this place if we ever have to sell it. The other cool thing (which I wrote about before) is that because the place cost us so little, we managed to take a floating rate loan that caps the interest we pay at the interest rate that our CPF ordinary account*** pays us. The tenure is for eight years which means that the total interest on the loan is small and with current interest rates at such low levels (currently, we only pay about 1.9% per year), we are effectively getting paid to take the loan. Furthermore, there’s a cap on the interest rates we pay, so there’s only upside and no downside to this loan. (For those who still can’t see it, CPF pays us 2.5% interest while we pay the bank 1.9%. Since we’re getting more than what we pay, the loan is effectively interest free.) The icing on the cake is that we DON’T pay anything out of our pockets for the mortgage i.e. there’s no impact on our monthly cashflow since payment for the mortgage comes from our CPF accounts.

Having said that, we wouldn’t have been able to do this if (a) we didn’t already have a substantial sum already in our CPF accounts, (b) we didn’t both have jobs that pay us slightly above the median (you can check where you stand here) and (c) were willing to wait two whole years for the place to be built. Big thanks to my wife for willing to put up in just one room while we had to wait and my parents for letting stay rent-free for two whole years.

This post has gotten way too long so I’m ending it here. Here’s to hoping that 2015 will be even better than 2014!

*Please don’t expect returns like this by investing in the STI ETF. The State Street one seems to be more heavily traded but the spreads are still wide enough that you won’t get the returns as calculated by the STI. On top of that, you still have to pay State Street for managing the ETF. It’s a reasonable approximation to the STI but don’t expect the EXACT return as calculated using the STI.

**Using the rule of 72, a return of 13% per annum doubles you portfolio every 5.5 years. With a 26% return, your portfolio doubles every 2.8 years. Of course, we can’t expect to see these kind of returns every year and as the portfolio gets larger, the contributions from savings will become less important if one remains an average salaried worker.

***The CPF is Singapore’s idea of a pension scheme where it is compulsory for workers to contribute a portion of their monthly salary towards the fund. The fund has been tweaked to allow for a range of uses, one of which is towards the payment of one’s mortgage.

But you should have known this anyway.

For those that don’t, go on and read Leong Sze Hian and Roy Ngerng’s posts (part 1 and part 2). Just ignore the sensationalist headline. It’s lengthy but I think presents some information that will be enlightening to most.

Why I’m not counting on my CPF to retire in the first place?

It’s simple. The OA pays 2.5% (well below historical inflation rate) and the SA (which has less contribution going in there) pays 4% (barely enough to cover inflation). If you monies can’t apply the 8th wonder of the world (compound interest) on a real basis, then pray tell, how is (an average) one supposed to retire?

Any wonder then, that most Singaporeans use their OA to pay for their property? After all, the traditional belief is that property will generate higher returns than the miserly 2.5% and honestly, Singaporeans in general have gotten this right because property is a leveraged asset class (for most of us, at least). The average Singaporean property buyer takes at least an 80% (?) loan? That would mean a leverage of 4:1 which means property only has to return 0.625% per year in order to equal the returns on the CPF OA. Doesn’t take a genius to figure out that property is the better option.

The question that most people don’t think about is whether they can treat their property as fungible enough to sell off and count on those monies to see them through the rest of their life.*

*The strategy of course, is to sell off the place and downsize or rent. Rest of the monies are then used to fund one’s retirement lifestyle.