CPF is many things to Singaporeans, and we should be concern about how we can make sense of the CPF, and manage the CPF more efficiently.
We conducted our BIGS LIVE on 16 Mar 2017, centering on making sense of your CPF and we have a very healthy turned out. My friends Chris from Tree of Prosperity, Budget Babe and Uncle Createwealth888 provide us with a glimpse of how they live with CPF and we all learn many nuances of the decision making they made that took them to where they are, or where they are heading towards.
This turned out to be one of the more engaging sessions and frankly I am happy that more Singaporeans are interested on how to manage their CPF better.
If there is one takeaway is that many want to ensure that they are taking the right steps at an early age, or before they make any big decisions to ensure it is correct. The best way to do this in my opinion is to listen to a few perspectives, to see if you have missed out any scenario considerations.
There are some questions asked, and I wish to briefly address them, but I would also briefly highlight some of my takeaways.
Singaporeans are not as Generic as We Think, and we implement our CPF choices very differently
There is a stark contrast between what the crowd is looking for and what was put out during the session. The attendees were looking for roughly the model answers.
Yet what the 3 speakers presented could be wildly different.
I believe this will always be the case because our characters are very different. For Chris, we thought his management of CPF is wildly unconventional, but turned out to be the most conventional. Uncle CreateWealth stance on the CPF looks to be in direct contrast to Budget Babe.
And I guess this is the challenge of a government pension system. How do you set up a system that is robust, flexible and achieving the aims that you set out?
This session is not unique to Singaporeans as citizens in other developing countries have their gripe about their government pension system, but area also seeking solutions to make sense about it and do the right thing.
Chris concluded his part by summarizing the government system takes autonomy away from the citizens, and protect the responsible citizens from the poor habits of the not so responsible citizens.
The Importance in your Ability to Eventually Cash Flow your Assets
Uncle Createwealth reminds us that there is a stark difference between collecting assets.
From someone who have seen how numerous friends deal with managing assets over 30-40 years, this is his conclusion.
There are many he has seen who keep pace with net worth but end up in circumstances that their net worth is locked up. They are doing OK by math standards, but when you cannot cash flow your assets, at the time you need, it becomes a big problem.
This problem gets highlighted recently, as the government did a tweak on the total debt service ratio (TDSR) requirements, so that some segments of the citizens can unlock some of their lock in assets.
Many his generation have lock in assets that they have difficulty monetizing, especially when put against a very prudent rule such as the TDSR.
Should you transfer from CPF OA to SA to gain an extra 1.5%
This is a very popular query.
Your CPF SA currently earns you 4% interest versus CPF OA which earns 2.5% (the first $60,000 earns you 1% extra).
It becomes very popular for people to max out the transfer from CPF OA to CPF SA. The rationale of doing this is to let the money compound at a higher rate. Budget Babe favors this. Chris have maxed out before 30 years old (when the CPF SA limit was lower)
Uncle CreateWealth reminds us that it is not that your money in CPF OA will not compound. It will.
However, you have to take an active approach to earn that 1.5% extra, and he thinks it is achievable. Chris believes there are financial instruments out there that is doable as well.
My opinion is that we should understand the difference between whether you are a passive saver or a competent active investor. Many belong to the former, and thus the transfer make sense.
Taking the passive saver route is mathematically safe, however you exchange that higher compounding with a greater lock up that you will not see and use again.
There is no free lunch. We live in a dynamic world but if you can plan everything linearly, yet build your wealth that is bigger than the CPF to take care of any change in your family’s life, transfer and treating the SA as a long term bond/annuity is ok.
I always think it lures citizens to take the easy way out and not be proactive about building wealth competency.
Does it make sense to use CPF to be a long term endowment for your kids?
One participant asked 2 questions a long the lines of:
- could we contribute more to our CPF SA, above the minimum sum limit and take advantage of the 4% interest
- is it a good idea to contribute to your child’s CPF early and treat it as a savings endowment?
I think this question is relevant to people who did well and was able to grow their capital or savings to be larger than the standard CPF that the government have outlined.
You could help your child create a CPF account when they are born. You can contribute the Full Retirement Sum (currently $166,000) into their CPF SA under the retirement top up scheme. The money can compound at the CPF SA rate (currently 4%) for a long time.
By the time the child turns 20, the sum would be big and self funding. I doubt the child could transfer much into his SA as it will constantly hit the minimum sum.
He can only take out the excess amount, above the minimum sum in god knows when, when he reaches 55 years. Likely the child will have much more money in his CPF OA.
This is a rich consideration, and I believe should be evaluated after you sought out your own wealth building, retirement planning, and saving for the family’s other goals.
Building up for your child wealth, can be an important goal and he has a reason to seek out the highest return instrument with the lowest amount of risk. the CPF OA or SA fits that criteria.
Most people prefer to put in insurance savings plans. Previously, I did a crowd sourcing of the returns readers, friends and family get on their past insurance savings endowments. You can view the general rate of return in this post.
It is difficult to beat this rate of return, and Chris suggested preference shares earning more than 4%.
I disagree with Chris. I believe the yields on preference shares nowadays are not that high.
However, the money will be lock up, not just away from the child, but the family for a long time, so that is a major consideration. You have to really set aside contingency and ensure this amount of money is not needed by anyone, for a long time!
This is a wealthy problem to have.
There are certain tenets of CPF that the policy makers based around
What I realize is that despite how difficult it is, to slay this many headed hydra, in Chris words, there are some rule of thumbs that can be used to help us understand which direction they will take.
This could help a little in our planning.
Whatever benefits you drawn from the CPF OA or SA you have to repay it, including the opportunity costs. Many people could not understand why we pay an interest of 2.6% on a mortgage loan (or another interest for bank loan) and we still have to pay back the 2.5% when we sell our properties. The opportunity rule of thumb is always at work. The policy makers would always want you to ensure what was originally kept in CPF OA, flows back to CPF OA, and the returns you could have generated also flow back to CPF. It is like CPF tracks the alternate universe that you do not purchase a property, and how much this sum of CPF OA grows to in 15-25 years time. You have to have that.
Extra interest is going towards satisfying the Minimum Sum. Over the years, we are seeing a lot of extra 1% interest on this account, that amount, for people of certain age. Folks start thinking of how to put in more money so as to earn that extra 1% for more money as possible. This, I believe is futile because CPF compartmentalize your money and the extra 1% is to ensure you could meet the minimum sum. What this means is that were you able to put in more money and able to accelerate past the minimum sum amount, CPF have a way of not letting you earn extra 1% for those amount. How they do it is a mystery to me.
CPF Compartmentalize and Tracks the Cash Flows between Accounts. While we are discussing on compartmentalizing, I realize that any leeway or pursuit that will be carried out is often limited to where the money originates from. For example, on April 2016, there was an answer to whether we could use our money in CPF SA or Retirement account to pay for housing. This was brought up by one of the attendees who seem to have an actual case to validate this. The official answer provided is that CPF SA they will not allow you to touch BUT the amount you used to contribute to CPF RA, if the amount is in RA, can be used to repay the HDB housing loan, even if their RA do not satisfy the minimum sum. This is on an appeal basis and probably not standard. Cases like these, lets us know that the flexibility or inflexibility of the 3 accounts is always kept in line. OA is flexible, SA and Medisave is not.
Pay Off Bank Loans Early or Not?
This is an intriguing question that is often asked and was raised.
The 3 panelist gave the qualitative answer that, it depends (which probably pissed you off). The truth is that, it really depends!
If your life is really linear and you would not deviate much, and you are really adverse to debts, paying off early make sense.
However, if there is a small part of you that believe life is not so straight forward, and would like to build resilience then stretching the loan out might be a better idea. This path can be taken because the interest cost on this loan is relatively low, provided you are a wealth builder who can beat or match this interest rate.
Stretching out is a cash flow management, where in case of a hit in income for 3 months, 6 months, 1 or 2 years, you have a smaller monthly mortgage to service compared to if you have a large repayment.
There is also the consideration whether your family would be acquiring a second property. In order to satisfy the requirement that your total cash flow that goes towards servicing all debts, or the Total Debt Service Ratio (TDSR) is not more than 60% of your computed cash flow, you might want to consider paring down your mortgage faster.
Math wise, I did an article in the past where I studied whether it is better for us to put in extra cash flows to pay off the mortgage faster (Read Should we repay more of our 2.6% HDB loan to save 0.1%?)
The conclusion I drawn then is that it is better not to commit more to repaying the home loan. The math here is a bit hard to get around. However, I believe is that you have a bigger lump sum in your CPF OA early on to compound over a longer period of time. This is in contrast to the interest savings on your large loan amount, which is smaller. After much thought, I realize that it is hard to make it an apple to apple comparison because of the numerous parameters. If we factor in that paying off loan early, we will get some returns on our home equity more, due to the early repayment, perhaps it will be better than dragging the repaying out.
We can’t have the right answers for everything. Over the sessions, everyone realize how diverse each of our situation is, and thus what we find the most helpful is provide rule of thumb how to go about implementing but also alternative scenarios.
Everyone grows by the questions we asked. We were glad that the attendees treat it as a session to learn from each other as well. Some attendees do help us validate some of the techniques we talked about. Some of the questions are rather nuance that we have not encountered, even if we have extensively taught about it. The 3 speakers learn as much as the attendees from the attendees.
In life, we cannot escape the topic of money, and money touched many facets of our lives. We want to discuss the nuances of it. Without so much the economic bias if its tied to the brands.
We have some topics that are upcoming, and if you would like to get notified, do subscribe to my list. If you have burning topics in life that relates to money, yet hard to be address do let us know.
In addition, we also started BIGS World on Facebook.
The idea for BIGS World, is to create a place for folks who would like to improve themselves and make better life decisions to interact with. Unlike Investment Moats, we won’t be sharing technical charts, the fundamentals of certain stocks.
We will remain high level to discuss upon:
- The nuances of building wealth in various ways, on a high level
- Working towards security, independence and robustness in life
- Updates on various authority sites in these areas
I believe we got a group of folks who are living this path of building wealth and being very constructive with their lives, and we have some good interactions. The discussions are nuance, and you get people like me starting on topics that explores the good and evil in things. In this case it is a discussion on using loans as an emergency fund (until someone went ahead and added building 6 months of cash as rainy day fund, which totally defeats the purpose)
We all learn about some affluent ways of getting low interest and which is a common rainy day fund loan yet some of us might have doubts about it.
The best way to grow is to ask questions, and be proactive in answering them. I am happy with the level of interaction. We all grow when each of us presents our own dilemma and our perspective to tackle the situation. The idea is to identify scenarios that we did not consider previously.
The other reason for this group is that I realize people that leads this kind of life, are very niche, and find it difficult to discuss the topics of financial independence, security, building wealth, tackling higher pay with people in their own social circles.
There are also folks who are reaching out for support as their immediate family and own social circles could not understand why they do this. We hope that they could find solace here.
If you are interested, request to join the group here.