Investment Moats https://investmentmoats.com Wealth Mentor for Financial Independence Mon, 17 Feb 2020 23:17:25 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.5 https://investmentmoats.com/wp-content/uploads/2017/09/cropped-sand-castle-3-32x32.png Investment Moats https://investmentmoats.com 32 32 28389540 The Side Effect of Coronavirus – No-Pay Leaves and the Need for Life Red Teaming Exercises https://investmentmoats.com/money/coronavirus-no-pay-leaves-life-red-teaming-exercises/ https://investmentmoats.com/money/coronavirus-no-pay-leaves-life-red-teaming-exercises/#respond Mon, 17 Feb 2020 23:17:24 +0000 http://investmentmoats.com/?p=11632 I noticed fewer clients coming in during this period. An adviser told me a few clients have canceled their appointments coming in. This Coronavirus feels like a seriously big hit to the businesses depending on local and overseas consumption, as well as certain services. Singapore’s economy is likely to report some really shitty numbers. Singapore […]

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I noticed fewer clients coming in during this period. An adviser told me a few clients have canceled their appointments coming in.

This Coronavirus feels like a seriously big hit to the businesses depending on local and overseas consumption, as well as certain services.

Singapore’s economy is likely to report some really shitty numbers. Singapore is a very open economy. We depend on the export and other countries buying what we created.

The way to alleviate this problem is to have adequate human isolation for a period. This killed not just exports but also local commerce.

I was commenting to Caveman that market prices seem to have discounted this period as a short term event and not of material consequence. There is no way the supply chain of the world are not affected in any way. Caveman shared with me that those small-medium enterprises will be cham because even in good times, their liquidity is going to be very tight. Now, without orders, and with limited cash-like assets, they will really feel it.

Workers will Face Even More Uncertainty if this Drags On

But the ones that I worried about the most are those workers who work for the SME. In Singapore, the biggest costs of doing business are rental and manpower.

While companies cannot do a lot about rental (associations have been asking for rent reduction), without business the best way to control the cost is to ask staff to take no-pay leave.

Cathay Airlines have asked 27,000 of their staff to take no-pay leave. Hong Kong Airlines cut 400 jobs. Asiana Airlines is also doing something similar.

If there is no business, then it makes a lot of sense to reduce variable labor costs. Workers in SME will be the most hit.

And I wonder whether you will be shocked to be put on no-pay leave.

The shock factor for each of us in these situations depends on the perception in our brain how safe the situation is versus how swift, how sudden, how improbable the incidents are. Those working in government sectors, or big MNC will be the least susceptible to this.

It will feel like an annoyance that they have to live with some annoying business continuity plan (BCP) inconvenience.

But for some, they are living from paycheck to paycheck.

They cannot have a period where there is no cash flow coming in. This is a nightmare for them.

I felt in 2019 and 2020, these incidents will make some people question whether it is a good idea not to have any safety buffer, or whether the safety buffer they have is an illusion.

The Misconception of the Role of Your Emergency Fund

Most people will search for authority to tell them how much they should have in their emergency fund, without thinking critically about how an emergency fund aids them in their life.

Experts tell us we should have 3-6 months of expenses saved up, compartmentalized in liquid amounts for “emergency”.

Some of you who wishes to optimize will ask the questions:

  1. Can I invest my emergency fund?
  2. Can I just have 1 month or 12 months?

The answer to that question is that: It depends.

You need to frame an emergency well.

When it comes to problems you faced in this world, they can be classified in the following 3 categories:

  1. Known knowns. Shit you know will happen
  2. Unknown knowns. Shit you don’t know will happen but more experienced or knowledgeable people would
  3. Unknown unknowns. Shit everyone likely do not know will happen. Think 4 improbable events all happening at once. Or a meteor hitting Thailand.

Civil unrest is #2. Coronavirus is #2. These two add up is probably #2.

We have seen developing countries having unrest before and some of the risk-conscious folks would have explored that when events like these happen in Singapore, what would be your rough course of action. You could also determine if your plan sound.

Some of us went through SARs before. It hasn’t happened for some years but it is probable.

An emergency fund is to address #2 or #3. #2 and #3 are events that you have not encountered, that shocked you and money is needed.

How much is enough in our emergency fund for us to prepare for events such as this?

It is hard to say. The best is to have as much as you can!

The investment or financial dilemma is that if you put all your money in liquid assets, the returns are low and there is an opportunity cost to holding 100% of your net wealth in liquid assets.

The answer is therefore 3-6 months of expenses. If an emergency needs more, liquidate some longer-term, volatile assets.

Liquidating your emergency fund sounds very irresponsible and what we should not be advocating, but if you think about it, an emergency is an emergency because your life is impacted!

For example, when you are put on no-pay leave and there is no income coming in, there is a real urgency to ensure you can tied through this period.

The concept of an emergency fund is to have a sinking fund for the improbable. But your sinking fund might not always be enough and it’s ok.

It is better to have some sinking fund than nothing. This sinking fund allows you to minimize life disruption.

If you understand the above well, you would know that in some situations, you have to break the cardinal rule of selling your investments.

For some emergencies, you might need to break the cardinal rule of having to borrow money!

What Most Misunderstood About Their Emergency Fund

Some people use their emergency fund to plan for #1. That is not an emergency. That is a saving goal of events that is less probable.

For example, ff you know your boyfriend always gives a last-minute ultimatum that both of you need to go for a quick holiday that is not an emergency.

Save up beforehand for vacations. It will happen soon enough but you just do not know when.

Or that your job is volatile. Some months you will bring in less money. It’s the nature of your job. You should have worked out a system to smoothed out the money aspect. (You can read my article on how freelancers should manager their money)

At the end of the day, even a 2 year worth of expenses saved up may not be enough for some medical cases that your loved ones suffered (you cannot use critical illness insurance to cover because it is not on you but another person)

We can only try to do our best.

Wargame What Your Family Would Do If Shitty Situations Occurs

Having sound financial planning is important but being resilient is further than just managing the tangible money that you have.

The way to build resilience is to first confront the situation we most feared rather than lie to ourselves that this would not happen to us. That we have moved on passed that.

In army exercises, the higher-ups put commanders through a training exercise to see the commanders and their men’s reaction to certain scenarios that are both probable but rare.

The commanders work in an environment that would allow them to be vulnerable to any inadequacies of their current capability, be aware of certain nuances that they would have glossed over normally.

Another name for this is called red-teaming.

Red-teaming can be applied to businesses as well as our lives, not to mention our finances.

Some of the scenarios that you could work through are:

  1. One spouse losing their job for 6-months, 1-year, 3-years
  2. Both spouse losing the job
  3. One spouse being disabled
  4. The family won $1 million dollars

The result of going through these exercises is that some of my more thoughtful friends ensure that their mortgage could be paid with one of their income, have 3 years of mortgage in their CPF OA, one spouse works in a bond-like company one spouse in an equity-like company.

The best output I feel you should have is a different set of expense budgets.

You would have:

  1. one budget for how you are spending now
  2. one budget for how you would spend in these scenarios, and the actions necessary to get there

For example, if something were to happen, the grade of food, products that you will buy will change. Some expenses will be cut down. Some expenses cannot be cut down.

By going through red-teaming, you would know in the event of these situation, whether you could live on a smaller budget. For some who cannot, then you would really need to build-up large buffers.

Here are some resources on this topic:

  1. Art of Manliness Podcast #564: Assault Your Assumptions Through Red Teaming
  2. Radical Personal Finance 194-You Just Got Laid Off. Here’s What To Do Next!
  3. Investment Moats: War-game the Scenario of your Salary getting cut from $9500 to $7000 BEFORE it gets cut

Summary

I feel that as a country the biggest opportunity from this crisis is to have a profound change in how we look at cleanliness, preparedness, sufficiency.

As an individual, the biggest opportunity may be to realize how vulnerable our situation could be, even though we earn a good income and everything looks optimistic.

You would not value your emergency fund if you have not gone through one (and I hope you can learn that value through my blog or some other way instead of finding out through a situation you have to experience).

There will be many that look at how I would think about wargaming in life as a very paranoid behavior.

I will let you tell me if this is really paranoid or there is real value here.

Those of my friends who been retrench, and could not find a job for 1 year would agree that in our plan, there is always a virtue of being able to live smaller than we usually would.

I think many areas of commerce on the ground is crawling right now and we should expect some crazy support in the Singapore Budget this afternoon.

Whatever it is, everyone should be vigilant about their health and hygiene during this period. Let us hope we can emerge from this Coronavirus in one piece.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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The Case for Investing Your CPF OA Monies & Endowus https://investmentmoats.com/money/invest-your-cpf-oa-monies-endowus/ https://investmentmoats.com/money/invest-your-cpf-oa-monies-endowus/#comments Sat, 15 Feb 2020 23:30:19 +0000 http://investmentmoats.com/?p=11615 My friends at Endowus Gregory and Sheng Shi asked me to make a comment about investing with CPF so this is my honest take. I wrote a post five months ago going through a Morningstar research why fees of funds in Singapore could not be as competitive as some other countries. I explained that Endowus […]

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My friends at Endowus Gregory and Sheng Shi asked me to make a comment about investing with CPF so this is my honest take.

I wrote a post five months ago going through a Morningstar research why fees of funds in Singapore could not be as competitive as some other countries. I explained that Endowus is probably the first ROBO to provide an offering to invest your CPF.

The majority of the competitors were more focused on cash investment because that is the low hanging fruit. And that is where most of us should have our assets (I think).

SRS account was the second-lowest hanging fruit. Now we see almost all ROBO offering it.

As far as I understand, Endowus is the only one who offers it right now. When it first launches, a lot of my blogging friends were very hyped over it. Finally! There is a possible viable option to get a greater expected return than what we are currently earning!

My CPF Philosophy

Before I go on any further, I think it is better I let you in on how I look at CPF to frame the discussion going forward.

  1. The CPF OA Rate of 2.5% and CPF SA Rate of 4.0% is very hard to beat for a lot of people
  2. The CPF SA Rate is not so permanent and subjected to change
  3. Transferring from CPF OA to CPF SA allows you to easily increase the rate of compounding by 1.5% a year. This is provided you have done your financial planning well. Don’t fall into the trap that you transferred all to CPF SA, only to realize you need to cough up mortgage and student loan payment using cash (when you do not have the intention to)
  4. I believe folks should learn the skill of investing early and learn to live with uncertainty or volatility in their wealth. In the spectrum of return and volatility, you can move your wealth in your CPF up the spectrum, taking on more volatility and uncertainty in the short run, in exchange for the chance for higher returns
  5. You need to get comfortable living with some volatility in your wealth. Sooner or later, a large part of your wealth will need greater returns so that they can meet your financial goals, and so that your retirement income will last. Human beings don’t wake up overnight comfortable in putting 80% of their net wealth into some assets they do not have experience with. This has to be built up over time.
  6. If you treat the CPF portion as your bond allocation, and that you have invested in equity-like investment options outside of your CPF, have experience with it, are trying to get comfortable with it, then it is OK. That is sensible
  7. When you get comfortable with investing and can see yourself earning 4 to 10% return a year, your opportunity cost whether to invest your CPF or not is 4 to 10% instead of 2.5% to 4%. Putting your money in something earning 2.5% is costing you a lot of money!
  8. I tend to take a balanced approach, having enough in CPF SA, enough in CPF OA, invest well with my CPF OA.
  9. CPF monies augment my financial independence, not the other way

You might agree or don’t agree with me, and that is fine because we all live different kinds of life.

Do put in the comments if you wish for me to elaborate further.

Why Invest Your CPF OA at All?

I am going to tell you something startling: Some advisers managed to make a business out of advising clients to invest their CPF SA (which yields 4% a year) into an approved unit trust.

Basically, that is as close you can get to selling ice to Eskimos.

But why this question comes in the first place is that if the interest you can earn with your CPF OA and SA is more or less guaranteed, why do you subject your money to volatility?

I guess the justification that I will give you is time.

We only have one life, so we don’t have a lot of time to tryout and compound our money. If someone gives us 2.5% or 4.0%, we take it.

However, should your financial goal requires a larger sum of money in the future, what do you do?

You can accumulate more with your cash. Put my wealthy formula to work, get competent and accumulate more.

From the financial planning perspective, your investment choice depends on your time horizon and your risk tolerance. Your CPF is locked in for your retirement. For many of you, your time horizon is long and you cannot unlock the money in the short term.

Thus, it makes sense to invest and give your funds the opportunity to earn a greater return.

Gregory wrote a piece on why you should invest your CPF monies. Like a lot of his pieces, it tends to be data-driven. If you let people know you are evidence-based, best to show it.

A large portion of the article is the degree of confidence that, if you invest, you can beat the 2.5% a year rate.

There are a lot of data charts & tables that I like but I will pick out a few that stand out.

This table shows how successful each investment option is, to beat that CPF OA rate. Gregory crunched about 29 years of rolling returns data.

Since I am somewhat of a data nut myself, there are 348 1-year instances, 300 5-year instances, 240 10-year instances, 180 15-year instances, and 130 20-year instances. Basically it is not too narrow.

Each cell shows the percentage of success the asset could beat the 2.5%. If we look at Singapore inflation, there is a 24% chance in 3 years, Singapore inflation can be more than the CPF OA, but largely over 20 years, CPF OA can beat Singapore inflation.

There is almost zero chance your Singapore savings rate can beat the CPF OA. The interesting data is the Bloomberg Barclays Aggregate Bond Index. The rolling 3 to 5 years upwards show high success in beating CPF OA.

To measure the equity portion, Gregory used the MSCI All Country World Index (ACWI), World and S&P 500 (the difference between ACWI and World is that ACWI contains a small portion of emerging markets). In the short term, there are some instances where the annualized return is below 2.5%. But in the 20-year rolling return, almost all is greater than 2.5%.

Personally I like the balanced index for its balance between return and volatility. Straight off the 1-year returns, you have a relatively high success rate.

Here is another favorite rolling returns table. It breaks down the average, best and worst return for each investment option.

You would appreciate knowing the average inflation is 1.6% a year instead of the 3.0% a year a lot of people talked about.

The BBGA is particularly impressive in that the worst rolling 5-year return is 2.18%. Instead of investing in an equity heavy portfolio, we could move up the volatility spectrum slightly and invest in a corporate investment-grade bond fund to beat the 2.5%.

You will also observe that in the short term the worst case is depressing but as you hold it longer, the worst-case gets better.

Your returns gets closer to the average.

Last chart. It shows the monthly rolling returns versus the 2.5% CPF OA rate. The red area is the monthly rolling instance that failed to beat CPF OA. Observed that as you hold on it longer, the red portion disappears.

You can see a lot of instances where the returns are 50% greater than the CPF OA rates.

Suffice to say there is a lot of opportunity to do better than 2.5%. I knew that already. It is time for you to discover that.

The Problem with Investing With Your CPF

While the theoretical returns presented look good, the problem has always been the execution.

As an investor, we could achieve higher returns with individual stocks. However, we can only invest 35% of our CPF OA in individual stocks listed on the SGX (and it is not all of them! Only a selected few).

To compound this problem, the number of quality companies that you can invest and hold for the long term in Singapore is dwindling.

Here is a summary of the different investment options available to you to invest your CPF OA and SA monies:

Do note that the first $20,000 of your CPF OA and first $40,000 of your CPF SA needs to be set aside and cannot be invested.

Ideally, Singaporeans can invest in a low-cost global balanced fund or a low-cost global equity fund. If you look at the table, there is tremendous opportunity to invest all your CPF OA in unit-trusts and ILP that are low cost.

However, that is not possible because… unit trust and ILP tends to have a high sales charge and trailer fees. In March 2018, the Ministry of Manpower (MOM) tried to bring this inline by completely removing the sales charges.

MOM also capped the total wrapper fee that firms can charge from 1.5% a year to 0.40% a year.

This helped to a certain extent but they completely missed out on abolishing or capping the trailer fees. The trailer fees are a big cost component and as long as there is one avenue, there is a way to be abused.

Which brings me to Endowus’s offering.

Invest in 6 Different Actively Managed Unit Trust Portfolios with Your CPF OA

Through Endowus, you can invest in 6 different portfolios with your CPF OA.

These 6 portfolios have different volatility and return profile:

  1. Very Aggressive
  2. Aggressive
  3. Balanced
  4. Measured
  5. Conservative
  6. Very Conservative

For those who have lower risk tolerance and shorter time horizon, you can choose the portfolio on the lower spectrum of the risk profile. For those with a longer time horizon, you can choose the portfolio on the higher spectrum of the risk profile.

The minimum starting investment is S$10,000.

These portfolios are currently made up of actively managed funds:

  1. Lion Global Infinity US 500 Stock Index Fund (US500)
    • Equity
    • Feeder fund into Vanguard US 500 Index fund
    • 0.68% expense ratio
  2. First State Dividend Advantage Fund
    • Asia Ex-Japan Equity
    • 1.71% expense ratio
  3. Natixis Harris Associates Global Equity Fund
    • Global Equity
    • 1.71% expense ratio
  4. Schroders Global Emerging Market Opps Fund
    • Emerging Market Equity
    • 1.68% expense ratio
  5. Eastspring Singapore Select Bond Fund
    • SGD denominated / Forex bonds hedge to SGD
    • 0.62% expense ratio
  6. Legg Mason Western Asset Global Bond Fund
    • G10 or SG countries bond
    • 0.87% expense ratio
  7. UOB United SGD Fund
    • Money Market Fund
    • 0.67% expense ratio

As an investor, you cannot choose which of these funds go into your portfolio. You will invest based on the portfolio. You can, however, invest in multiple portfolios.

The Cost Structure

Here is how much it will cost you to invest with Endowus’ CPF Portfolio:

  1. Endowus charges an annual management fee of 0.40% for their CPF & SRS investment, which is lower than the 0.60% fee for cash
  2. No platform fee
  3. Endowus will rebate all the trailer fees earned as part of the expense ratio (seen above). More on that later

In my previous article, I have explained that a cost leakage that is seldom mentioned is the trailer fees. Suppose Natixis Harris Associates Global Equity Fund charges you a 1.71% in expense a year. Out of this, 0.75% of this is paid back to the distributor (can be a platform like FSM, Dollardex, Poems or a bank).

Endowus wishes to weed out these trailer fees and thus they will rebate this to the investor.

Kah Kiat from Risk N Returns has a good write up on Endowus’s offering. He has a good table where he broke down the trailer fee cost for the funds and the portfolio. I cannot stand the color so I decided to format one on my own:

The trailer fees in red show the fee embedded in the expense ratio that is paid to the distributor. Endowus will rebate that to the investors. In the last column, you can see a summary of the total annual all-in expense that an investor will incur.

While some of the residual expense ratios for the funds still looked high, when you managed it in a portfolio, the expense is more rationalized. As a comparison, if you invest in Endowus’s most aggressive portfolio with cash in the Dimensional funds, the all-in expense is 1.03%, which is not so far from this 1.18%.

The Cost Advantage of Endowus Partnering with UOB Kayhian

In order to invest in any investment with your CPF, you will need to engage one of the three big banks in Singapore (OCBC, UOB, and DBS) to open a CPF Investment Account (CPF-IA).

What you may be less aware of is that there is there are transaction fees and recurring maintenance fees for making use of the banks’ services.

Click to view larger table

The table above summarized the additional transaction fees charged by the CPF IA account administrator and if you go through Endowus.

Endowus make use of UOB Kayhian as their broker platform who has achieved CPF Investment Administrator status. This allows UOB Kayhian to offer clients of Endowus lower costs.

Normally, if you invest in one Endowus portfolio (which is made up of at least 5 unit trust funds), the other administrators would levy 5 separate maintenance fees and transaction charges.

If you make use of UOB Kayhian, you deal with only one transaction and service fee. The recurring fee savings would be $36 a year. The transaction fee savings would be more substantial if you dollar cost average often.

The OnBoarding Experience

There are a few bloggers who have written about the onboarding experience and you can check them out here:

  1. Endowus Review – Best CPFIS Product?
  2. Endowus CPF/SRS Review
  3. Investing my CPF OA with Endowus

#3 probably gives you the best onboarding experience. #1 will show you some growing pains.

What I do understand is that if you have not created a CPF IA account (which you need), the process can be a bit arduous:

  1. Complete a CPF Self-awareness Questionaire
  2. Open your CPF-IA account with UOB (if you have one you should be able to skip this)
  3. Linked your CPF-IA to Endowus

You just got to be a bit patient.

The Elephant in the Room

If there is a problem with Endowus’ CPF offering is that people will ask the obvious question: What is with all the active funds?

I think some people are asking but not a lot. To be honest, the majority of the wealth-builders looking for solutions do not see the funds used as a problem. They may likely believe that since these funds are CPF approved then they are the superior funds.

But to many, Endowus have shaped their philosophy to be close to being evidence-based, making a strategic allocation, buying and holding.

Using active funds seemed… uncharacteristic.

Personally, I think this is a reflection of how broken our CPF investment scheme is, then Endowus carrying out actions that go against their original philosophy.

There is only a certain set of funds that are CPF OA and SA approved, so the selection is very limited. There are certain criteria to meet in order to be a CPFIS approved fund, chief among them is a lower expense ratio (less than 1.75% a year). Many of the funds could not fulfill what I believe is a low hurdle.

The funds that we believe are better (Lion Global wrapped 3 Vanguard funds into the Infinity series of funds) are not CPFIS approved. There are not a lot of physical, liquid global equity and bond exchange-traded funds around.

Many investors paying attention to this space would have hoped to invest in Dimensional Fund Advisors’ unit trusts with Endowus.

I didn’t ask Endowus about this but based on what I can gather, that… will take some time.

The play (my guess) from what I can guess is to provide the most viable solution for CPF investors first. Once Dimensional funds are available, it will be much easier to get existing onboarded Endowus investors to switch to the Dimensional funds.

So What is the Risk with Active Funds?

There are enough people talking about active unit trust without having invested in one.

My mom’s funds and a part of my CPF are in actively managed funds.

The biggest problem with active funds is the misdirection that you get. You observe that the global bond or equity index moved up 12% the past six months, and you expect your fund to do the same thing. However, it doesn’t. Sometimes it did better, sometimes it did worst.

Active fund managers have to make a judgment call to be in more cash, concentrate on a few stocks.

Research shows:

  1. Active funds underperform their index
  2. Funds that did well (to be in the top quartile of their category) have a hard time trying to remain in the top quartile.

What is not often mentioned is that… an underperforming fund may still beat a 2.5% CPF OA rate over time.

But in summary, when you select an active fund, a lot of times all you can do is pray that Endowus have picked the fund that managed to keep up with the index.

Summary

We start this article by asking whether you should invest your CPF OA at all.

Mathematically speaking, there are good justifications to do that.

However, financial planning wise, the decision is more complex. Many Singaporeans prefer to use their CPF monies to service their mortgage. Then, they will upgrade to a bigger place and that will require more CPF OA.

Given this kind of potential cash outflow, it makes them very resistant to commit to long term retirement investing.

CPF OA investing is suitable for those who have used enough of their OA monies to pay for their mortgage, are in their late 30s, ready to grow their CPF for retirement income.

Endowus has worked within challenging cost and available fund constraints to create strategic portfolios suitable for investors with different risk tolerances and time horizons.

Your total all-in cost is around 0.86% to 1.18%. That sounds like a lot but the next best alternative which is to invest in unit trust with DollarDex, Fundsupermart (no management fee) will average 1.50%.

A cheaper solution would be to invest in a 2-fund portfolio of ABF Bond fund and STI ETF. However, that is very Singapore-centric and if you are looking to be less home-based bias, that might not do.

If you are looking for a CPF investing solutions, do check them out.

The problem with CPF Investing is less of any providers but more of how the governing people structure it.

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Future Flat Sizes HDB BTO in Central Places May be Smaller https://investmentmoats.com/money/hdb-bto-in-central-places-may-be-smaller/ https://investmentmoats.com/money/hdb-bto-in-central-places-may-be-smaller/#respond Thu, 13 Feb 2020 00:18:38 +0000 http://investmentmoats.com/?p=11612 If we go by the recent HDB Built-to-Order trend, it might be the case that future central BTO will be smaller in sizes. I observed that the latest HDB build to order sales launch was out and it seems rather peculiar that there were no launches in matured estate that is bigger than 4-room. The […]

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If we go by the recent HDB Built-to-Order trend, it might be the case that future central BTO will be smaller in sizes.

I observed that the latest HDB build to order sales launch was out and it seems rather peculiar that there were no launches in matured estate that is bigger than 4-room.

The biggest size flats for Toa Payoh Ridge and Kim Keat Ripples is 4-room. The sizing of the flats is deliberate and HDB should be under no constraint in their sizing.

Here are some of the past year launches:

My eyes were not playing games with me. But if you were to be strict about it, HDB is still releasing 5 RM HDB flats for a matured estate like Tampines.

A possible explanation is that they are starting to rationalize the supply of the new flats in these areas that are more central, and more in demand.

This would cause some frustration for newlywed young couples. For a long while, my friends prefer to stay in 4 RM or 5 RM HDB. They even lament that 4 RM is too small.

I always think that the sweet spot between affordability, cleaning, enough space, government subsidies is the 4 RM HDB.

Yet, when I spoke to Heartland Boy recently, you realize that there are some nuances that you will struggle to accomplish with a 3-RM flat. Heartland Boy stayed in a BTO similar to the new BTO above and has one daughter.

If you wish to create a better long term sleeping practice for another child, perhaps having only 2 rooms will not be very conducive.

I do get a feeling that there might be a push to rationalize affordability in these central estates.

I was initially thinking the government is saying: “If you want a bigger, yet central flat, go for those older ones. I have already given you the grants to make it more affordable. The leases are shorter but it will fit your needs.”

In matured estates, there should be ample supply of existing 3 RM and 4 RM HDB.

If this trend continues, it may be bad news for some couples. I know of folks who cannot stand living in a place that was inhibited by someone previously. It is damn weird but if that is the case, you would either

  1. get a new BTO further
  2. get a new Condo instead

You got to pay a higher cost.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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Dividend Machines Course Online Now – Taking In the Batch of 2020 https://investmentmoats.com/money-management/dividend-investing/dividend-machines-course-online-now/ https://investmentmoats.com/money-management/dividend-investing/dividend-machines-course-online-now/#comments Mon, 10 Feb 2020 23:27:03 +0000 http://investmentmoats.com/?p=8221 At 30 years old, I had 6 years of investing under my belt. But my returns were heading nowhere. One of the main reasons was that I was trying a lot of different things. So I told myself, its time not to mess around anymore and try one method that I feel goes best with […]

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At 30 years old, I had 6 years of investing under my belt.

But my returns were heading nowhere. One of the main reasons was that I was trying a lot of different things. So I told myself, its time not to mess around anymore and try one method that I feel goes best with my character. Then I doubled down on it.

I lean towards investing for dividends. And what a friend said about respecting value makes sense.

So I doubled down on value investing with a focus on finding dividend-paying companies.

I have been doing that since then, and regular readers would know where to check how I am doing.

Why Should We Invest with a Tilt Towards Dividends?

Dividend investing has a lot of appeal, and I think the reason is that people like to be validated that they are slowly getting a cash flow payout from their investment.

This has a lot of similarities to the Asian concept of owning land and leasing out to farmers to grow crops and living off it. It is a very passive form of income.

At this stage of investing, I wouldn’t compartmentalize the way that I invest to be called dividend investing. I prefer to call it active stock investing simply because I invest in stocks and I take an active approach.

However, the role of dividends plays a big role in my consideration:

  1. It is the cash flow return that I get for waiting for an undervalued stock value to be realized. One good example is the cash flooded company Cosco Shipping International in HKSE. They have been in that position for quite some time and you don’t know if value is going to be unlocked and when will that happen. Having a good payout and a supportive business allows you to stay in the stock
  2. It helps you to inspect if the business is more of a fraud or less of it. This is simply a measure of how much the management takes from the minority shareholders versus what they paid out
  3. It enables you to determine the valuation. When compared against the peers, it allows you to determine the stock’s relative valuation versus its peers
  4. It allows you to determine its posture between growth and maturity

Perhaps the main difference is that I use the dividend payout as an indicator, as well as a cash flow remuneration while you are attracted due to its cash flow payout.

There are Dangers if you are Less Sophisticated in Dividend Investing

There can be a particular danger if you are enamored with the dividend component.

If I need $20,000/yr, I could just put it in Asian Pay Television Trust (APTT) and I would only need $200,000 to achieve that.

There are some deeper knowledge that, if you didn’t know that you need this knowledge, it could be dangerous. And that danger can very well be an impairment of 20-30% of your capital. This will be difficult to gain back when the cash flow does not support the dividend payout. It will take many many (and I say many) years to recover.

If you had invested $200,000, that is a $60,000 impairment.

The price fall of APTT over the years
Buying Asian Pay TV at Different Points (click to view larger chart)

The price chart above shows the 3-year price change of APTT. Observe that at IPO, in 2015, or as recently, if you have invested at these periods, your initial dividend yield will be damn appealing. They would fulfill the income you need.

However, over time, the share price goes on a tailspin.

The prevailing dividend yield has always been attractive (and even after this plunge it is attractive as well!) hovering above 9%. Yet you would have lost a lot of capital in your attempt to gain those delicious dividends.

Is this how dividend investing suppose to be? I would say dividend investing can be volatile, but if you are more sophisticated, you can avoid some of these companies. If not, a more sophisticated dividend investor would bite the bullet and escape this.

Look through my past transaction logs and you would see I was invested (not just APTT but in its original form MIIF). I am also human. But increasing our competency can help correct some of these mistakes.

These are not scary case studies that only occur to a small subset of people. As I have written about this in a previous post, APTT and Rickmers case study is common, attractive and can turn out to be rather unfortunate.

You Can However Spot Cash Flowing Companies as Well

It is not all doom and gloom.

If you developed sophistication in prospecting dividend stocks, you can spot companies that pay out a decent dividend yield, yet has the ability to grow their dividends.

Chip Eng Seng
Chip Eng Seng Growing its dividends

What you see above is the historical price chart of Chip Eng Seng, a construction company, which eventually went into property development. It might not be the ideal dividend stock but you can see yourself prospecting a stock like this and get invested in 2005 based on a 6.5% dividend yield per year. Over time, its earnings expand and they pay out more dividends. The annual dividend yield on your original cost became 12%, then 15% then 34% then 52%!

Who says if you go into dividend investing, you forgo growth?

Some dividend stocks can grow their dividends over time.

Cheung Kong Infrastructure (1038 HK) have been growing their dividend for nearly 18 years.

Cheung Kong Infrastructure or CKI (1038 HK) for short is a diversified infrastructure company, partly owned by Li Kar Shing, listed in Hong Kong Stock Exchange.

CKI has been growing its dividend per share for the past 18 to 19 years. If we compared to its earnings per share, its dividend payout is much less than its earnings per share on the left. The nature of the utility business is that the cash flow is recurring, the dividend payout ratio is conservative. This allows CKI to slowly raise its dividend payout over time. Conservative payout also buffers the stock from having to cut dividends.

In Feb 2020, it currently pays a potential dividend yield of 4.4% a year.

If I were to summarize, here is the high-level solution to successful dividend investing:

Focus on having a good dividend investing system.

By that I mean you:

  1. have good processes to prospect stocks, be able to tell whether a stock is a good dividend stock, a mediocre low growth but sustainable payout one and plain bad, unsuitable ones
  2. continue to learn and polish your dividend investing craft
  3. have a good system when you should buy, how much to buy, when you should hold or sell, when you should add on (basically portfolio management and execution)

And this brings us to Dividend Machines.

Dividend Machines Reopens

If you wish to learn from me, you can take a look at my resources section.

It contains curated resources on:

  1. Building a good wealth foundation
  2. Learning about REITs
  3. Active Stock Investing
  4. Financial Independence and Retirement

These are usually not very comprehensive since I don’t kill myself to create a bunch of modules for you guys.

If you wish to learn about dividend investing, there are a few training centers that offer affordable classes.

One of them is Dividend Machines offered by Fifth Person.

My friends Rusmin and Victor started this course some time ago, focusing on providing the necessary resources for investors who want to invest in dividend stocks to be well equipped to deal with that.

The course is conducted in an online manner.

There are 5 modules that bring you from a raw investor to one who knows how to systematically prospect stocks for dividends:

  1. The first module gives you an idea the appeal of dividends and why you should invest this way
  2. The second module is important. It lays the framework that this way of investing is not unlike any other investment in that it requires you to have a good wealth foundation in order for you to succeed (and many just jump straight into investing oblivious that these aspects are important)
  3. The third module goes into the nuances of investing in dividend stocks, according to Rusmin and Victor. Here they lay out their idea how to select the stocks, what to watch out for, why do they prefer some metrics over the others
  4. The fourth module goes into the Mumbo Jumbo of REITs, which happens to be a popular subject.
  5. The final module ties everything together and shares with you how to manage the stocks from a portfolio perspective. You will learn about how much dividend stocks you should have. You will learn about how heavy you should concentrate or whether you should do that at all. And whether you should do margin financing on your dividend stocks.

The curriculum is online, which means you do not have to rush to classes when your boss wants you to work longer. Or when your children suddenly fall sick.

It is more flexible for the modern employee.

Questions & Answers and Discussions

The best way to learn is to clear your doubts.

As you critically think about what is right and what is wrong, you have more doubts.

As you get each of these doubts addressed, you will gain confidence in how you can go about executing a plan to create a dividend portfolio.

In the platform, you can access to Rusmin and team who will answer your query. Here are some examples:

Rusmin answers some nuance questions on computing Price to Book
dividend machines Q&A 2
dividend machines 3

You can also grow by paying attention to what your fellow trainees’ queries and the answers to them. Sometimes you do not know what you need to know. So when your fellow trainees raise a question and you come across it, you become conscious about it.

Have Unlimited All Access Workshop

I realize from my friends that people still prefer the human interaction.

While technology can provide such an advantage to make learning interactive and flexible, people still prefer to interact in a face to face manner.

Dividend Machines will organize all-access workshops. In these workshops, you can hear the trainers present their recap on course materials, what you should focus on, and some common mistakes.

You can also get the chance to talk with the trainers and revisit the curriculum.

It is a full day event where you can interact with trainers, who will revisit the action plan. The trainers will highlight certain more important nuances of the action plan that you might missed out (if someone keeps repeating something, it might sounds lame, but its probably important enough to keep repeating!). You can also ask them what you are unclear about.

In 2019, Rusmin and Victor hosted 8 such sessions last year and if you are a Paid Member, you have access to these workshops.

Here is their list of upcoming LIVE Workshops available to members who signed up or existing members who wish to refresh their concepts

However, these workshops are on a first come first serve basis so when they are available do register them early.

Who Should Sign Up for Dividend Machines?

If you have heard of dividend investing, investing for income, but have no idea what that entails, Dividend Machines will give you an idea of what investing for income is like.

I look at Dividend Machines as a gateway for folks who need someone to tell them on a high level, the various disciplines required to be a good dividend investor.

However, if you are looking at something very technical, that goes into the weeds of financial statements analysis and such this is likely not the right course for you.

As a test, if you fully comprehend what explained in the Chip Eng Seng and CK Infrastructure example, Dividend Machines may not always be suitable.

Here maybe some more indicators that you might be more intermediate than what Dividend Machines can provide:

  1. Understand what is & how to compute Total Return, Dividend Yield, Earnings Yield, Dividend Payout Ratio, Debt to Asset
  2. Comfortable in reading financial statements such as balance sheets, cash flow statements, income statements, and balance sheet
  3. Knows very well what separates good dividend-paying companies from those which pretend to be one

If you roughly know these, the biggest value is to pay the fee and you get access to the trainer (Rusmin & Victor) and be able to tap his expertise in reading the nuances of investing.

Rusmin and Victor have been deep into this for some time and they would be able to explain some tactical nuances that you might not be able to learn from books.

Dividend Machines is Now Open for a Limited Time!

You can sign up for Dividend Machines here through this link >>

As with past Dividend Machines, you can only sign up within a limited duration. On the last count, you should have 20 days more, as it will close on 29th Feb, 11:59 PM.

During this time frame, you can enjoy the course fee of US$356 (S$488). This is S$100 off the usual price of S$588.

Given that you pay this one time fee and have access to content that will be updated annually, and that have access to trainers virtually and live, this is a very good deal.

And if after 30 days you are not satisfied with how the course turned out, there is an iron-clad Money Back Guarantee. This gives you peace of mind to sign up.

Guys some of the links above are affiliated links. When you click on the links, I earn a commission at no additional cost to you. I believe you will gain value out of Dividend Machines if that is what you are leaning towards in terms of wealth building at a good price range. In any case, I am part of the Q&A group in Dividend Machines as well. Let me know the feedback for the course so that I can improve the recommendations.

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Focus on What You would Gain Instead of What You Would Lose https://investmentmoats.com/wealth-psychology/focus-on-what-you-would-gain/ https://investmentmoats.com/wealth-psychology/focus-on-what-you-would-gain/#comments Sat, 08 Feb 2020 23:30:49 +0000 http://investmentmoats.com/?p=11592 It has been some time since I shared some personal finance thoughts but I was triggered by two events so I would like to share something and see if they manage to help you or your loved ones. How do you really convince yourself or get someone to try getting your financial situation in order? […]

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It has been some time since I shared some personal finance thoughts but I was triggered by two events so I would like to share something and see if they manage to help you or your loved ones.

How do you really convince yourself or get someone to try getting your financial situation in order?

This is a problem that plagued many people but more so, it plagues those that are in a relatively good financial situation, but their loved ones are not.

Convincing people is hard.

Whether you are convincing yourself or someone else, I believe that 9 times out of 10, deep down, they know what are some of the things that they need to do to maybe get to a better position.

The problem is that when we look at the solution, we will immediately recognize what we will lose if we try to fix the situation.

The solution to not having any savings is to go and earn more, reduce your expenses (You can read my wealthy formula here). The probable solution to getting out of the debt cycle is to not accumulate more debt, reduce the expenses and prioritize debt clearance.

Not rocket science solutions. And if you ask some of your friends who are more sensible, less judging and willing to help, they would tell you the same thing.

The issue is not being oblivious to the solution but that we know, but we fear what we will lose if we do it.

If we cut our expenses and prioritize debt clearance, our debt will get less and when they cross over to zero, they will eventually go up.

But we will lose our quality of life. How would life be if we cannot Grab to work and back? You cannot go out with your friends anymore. We have to replace our food with Maggie Mee.

What compounds this fear is that automatically, we think that we have to do this FOREVER for the rest of our lives.

So the easy way is to not do go ahead and change.

What would You gain if you Re-order your Finances?

The solution is not to look at what you would lose but also explore what you would gain.

A lot of times, no one told you what you would gain. You have to figure that out yourself. The conclusion that you would come across is that you will “get into a better financial situation.”

That is very vague, not useful, not a good representation of where you wish to get to.

Here are some examples of what you would gain if you try and implement the changes:

  1. You will not have the anxiety at the back of your mind about who to avoid or dreading to see those bills
  2. You wish to be known as someone who got their shit together. By going down this route, at least you would be known as someone like that
  3. If some of your peers can have $XXX,XXX by this age, you should be able to do that as well. At least you show that you have the ability to do that and able to do it. This is an ego boost
  4. The more you accumulate, you move further away from the times when your family does not know whether you will have money for food the next month
  5. People don’t believe you can do it. You are someone with some fight in you and you want to show them (and yourself) that you can do hard things. You wanna be known that you can do hard things.

In a lot of the examples list above, you may realize it is a transition to a certain better state, or that it is an identity that you wish to be at.

To convince yourself to get started, the upside must be more than the downside.

Most of the time, the upside is more than the downside.

If you cannot articulate the upside, you may not stick to it long enough. Hopefully, you will start seeing some results, and be able to understand what you gain from improving your finances.

But the strong motivator is the ability to identify upsides. If you cannot articulate what you are gaining, then why make the change at all?

The Last Honors Year

17 years ago, I was torn whether I should do the last Honors year during my university days. I really got tired of my career in academics after studying since I was 6 years old.

I was afraid that I am making the stupidest decision of my life by not having Honors credentials. But what I will gain is work income, not having to write an Honors thesis paper.

So I went around to ask some of the teaching assistants and lecturers whom I respected more to see if I am going to do something dumb. Their answers did not make things very clear.

But in the end, I felt that what I gain outweigh what I would lose. Hindsight, things turned out alright. The credentials might matter more if I was in civil service but in my last company, that was less important then my experience.

Try and assure yourself that fixing your financial shit is worth it by also looking at what you would gain.

This article is part of my Lifestyle Re-design Series where I provide some philosophical and helpful tidbits to get through life.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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What We Can Learn from 147 Years of UK Home Affordability Data https://investmentmoats.com/money/147-years-of-uk-home-affordability-data/ https://investmentmoats.com/money/147-years-of-uk-home-affordability-data/#comments Sat, 08 Feb 2020 00:50:45 +0000 http://investmentmoats.com/?p=11561 What would drive residential price growth? If you were to ask me, that would be the wage growth in a country or a particular area. The second thing is the demand and supply dynamics. If you wish to assess residential property is a good long, long term investment, it will be your mastery of this […]

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What would drive residential price growth?

If you were to ask me, that would be the wage growth in a country or a particular area. The second thing is the demand and supply dynamics.

If you wish to assess residential property is a good long, long term investment, it will be your mastery of this topic.

We often say that Singapore is a young country and our housing market going back to 1960, is probably 60 years old.

We have been through a period where the supply and demand dynamics have been in one direction and only until recently, some questions were asked about it.

As a person looking at data to shape my view about things, I am rather cognizant about how good is your conclusion depends on the data. If you have too little data, the conclusion based on the data, might not be as strong.

But how much is a lot or too little data?

Duncan Lamont from Schroders dug through 147 years of UK housing information and gives us a glimpse of UK Housing Affordability over the years.

I found his report interesting because if we conclude that it is dangerous to conclude the future residential growth from a historical period where the markets just went one direction (up), why not take a look at the evolution of housing affordability in a developed country that went through more than us?

It might give us a different perspective on the housing market.

UK Home Affordability Looks Expensive Now, But…

One of the ways we gauge residential home affordability is to use Price-to-Income ratio to determine.

In Duncan’s report that is what he used as well: House prices as a percentage of average earnings.

It gives us a reflection of how long it takes for us to pay off the home if we do not eat, drink and spend any of our income and there is no leverage interest on our debt.

As a lot of people know, London residential homes is not so cheap. But on average the house price as a percentage of average earnings ratio for the UK now is 8 times.

In Singapore, the 4-room HDB flat’s price to income ratio ranges between 3 to 8 times but averages around 3.8 times (read my detail 4-room HDB data article).

You can see the gulf in disparity in affordability.

This price affordability high has only been breached twice previously in the past 120 years:

  1. Prior to the start of the Great Financial Crisis (GFC)
  2. Once at the start of the 20th Century

120 years is a long time! And based on this, a simple conclusion could be that this kind of price to income unaffordability cannot be sustained.

However, if we extend back to 1845, then we will see some surprising data:

From the 1840s to 1900, the house price as a multiple of average earnings is very high!

It will take you a while to pay off your mortgage if you do not eat or spend. If you do, it will be even longer.

Schroder’s data also show that the disparity in regional home affordability is more of a recent phenomenon. London and the South tend to be more unaffordable but itis only the last 15 years that the gap grew wider and wider.

What Caused the Improvement in Housing Affordability from 1845 to 1915?

Something drove the improving trend of housing affordability from 1845 till the first world war.

Average house prices fell by 23% between 1845 and 1911 (-0.4% a year)

It can boil down to these factors:

  1. More houses were available. The stock of houses increased.
  2. Houses became smaller. House plot size went down from 913 sqm to 268 sqm on average.
  3. Income is higher. Earnings rose by 90% over the same period (+1.1% a year)

Actually, one thing to note is that while 90% growth in earnings looked big, on an annual basis, it does not look very impressive. Presenting numbers in different ways is interesting.

It feels very much like the Singapore situation where

  1. Housing prices per square foot is not cheap
  2. Developers justify that smaller family needs smaller homes and so the residential home size is dramatically reduced
  3. Smaller home’s PSF prices stayed higher but on a unit basis, they are more affordable and thus we can purchase them (A $1.2 mil 2BR now goes for $0.9 mil because the size is smaller)

The only difference is our home prices remain resilient, while in UK’s case, the prices went down.

More and smaller houses should increase supply and control prices while higher-income should increase prices. The fact that home affordability improved over this period feels to me that the greater supply outweigh the rising income well such that prices are still relatively controlled.

The chart above shows the UK housing completions over time. In terms of current levels, the home constructions were on the low side if you compare the period after the second world war.

However, in the period of 1850 to 1910, home completions were lower. We cannot discount that with better technology, home building may be much easier compared to in the past.

We can see the great pick up in home building from 1856 to 1900. The two periods where housing completions took a break was during the war.

The composition of who built the UK houses also shows the role of government in providing the need when the people needed homes the most and how eventually the private sector took over.

A Predominantly Renting Culture Probably Controlled the Price

I felt that given the same situation as Singapore, there would be periods where the supply could not keep up with the demand.

This would have caused some price appreciation.

I think that did not happen because even at the end in 1918, the UK has a higher percentage of people renting than owning a home, despite the improvement in residential affordability.

This gradually changed in the 2000s but the private renters started growing again due to the lower relative income to home prices today.

UK Property Performance Versus Equities Over 25 Years

Since Schroders is an asset management firm, they will always have an equity angle to their research.

Duncan’s research questions whether it is wise for Britons to put their faith in property over their equity pension.

The research shows that UK properties on average, 100,000 pounds in:

  1. UK Properties would be worth 416,000 pounds today
  2. London: 648,000 pounds
  3. Yorkshire: 356,000 pounds

This excludes maintenance, repairs, insurance or taxes, rental income (since this is your primary residence) and the impact of leverage/mortgage financing.

Global Equities would have grown to 787,000 pounds.

What was not factored in was the substantial tax savings that can be saved and the closing costs of buying and selling properties.

I think it is a strange comparison.

If we are talking about living in the property then we should not be compared to equities at all because the purpose is to have a roof over our heads more than the growth of our wealth.

I think property in the UK, like in Singapore, holds a big mindshare and people treat it as their retirement fund as well. If that is the case, then the closing costs of selling the property and the tax benefits of the pension will have to be factor into the equation.

The Global Equities have been impressive but I feel Schroders may be cherry-picking the numbers.

If you are UK person, there should be a home country bias. Your alternative should be to invest in UK equities. That should be a fairer comparison.

My data shows me that from 1994 to 2019, MSCI UK (net of dividends) grow 100,000 pounds to 463,000 pounds.

That is probably not as impressive as the home appreciation.

Conclusion

Duncan asked the question of whether UK homes could be more affordable.

If we draw from history, homes got more affordable when supply increases and wages increases.

This is very unlikely because:

  1. Homes today are already very small in UK
  2. The majority of homeowners are on mortgage, and if the prices slide, it would be a political suicide
  3. Wage growth has not been good

Affordability can be achieved if prices fall due to change in interest rate policies.

A Bank of England study shows that the rise in housing prices can be attributed to the fall in interest rates. An unexpected and persistent 1% rise in interest rate could ultimately generate a fall in real house prices (over a period of many years) of just under 20%.

You can read the paper here.

In Singapore, our HDB homes, relative to the median household income is about $9200 a month or $110,400. If we backed out the CPF SA and Medisave, that will be about $100,400 a year. The median resale price of our 4-room HDB flats is $400,000.

Thus the house price to average income ratio is about 4 times. This is pretty OK. I think the government has increased the supply such that there is no glut that would cause a price increase due to shortage of supply.

The demand for HDB is now more controlled as Singaporeans realize that as a leasehold, the eventual value is zero, and they have moderate their crazy expectations to bid up the prices.

The private sector:

  1. The homes are getting smaller
  2. There are a lot of supply still
  3. Wages of Singaporeans are rising

So in terms of affordability, things will get better. The prices would say in control and as wages go up affordability increases.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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Reviewing Manulife US REIT’s 2019 Full Year Result https://investmentmoats.com/money-management/reit/reviewing-manulife-us-reits-2019-full-year-result/ https://investmentmoats.com/money-management/reit/reviewing-manulife-us-reits-2019-full-year-result/#comments Thu, 06 Feb 2020 23:20:18 +0000 http://investmentmoats.com/?p=11584 Yesterday, Manulife US REIT announced its full-year results. This was the first result since their acquisition of Capitol Mall in Sacramento. The results was not a good one. Dividend per unit fell 5.9% from 1.53 cents in Q4 2018 to 1.44 in Q4 2019. Before Jagjit (the previous CFO) left, he told us to focus […]

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Yesterday, Manulife US REIT announced its full-year results. This was the first result since their acquisition of Capitol Mall in Sacramento.

The results was not a good one.

Dividend per unit fell 5.9% from 1.53 cents in Q4 2018 to 1.44 in Q4 2019.

Before Jagjit (the previous CFO) left, he told us to focus on the adjusted DPU. Due to the numerous acquisitions, it would be difficult to track what is the dividends based on the enlarged outstanding unit base.

So let me focus on it.

The Adjusted DPU dropped 4.6% from 1.53 cents to 1.46 cents.

Since this was a six-figure position for me, let me provide some updates. This will be a short update since I have written enough about Manulife US REIT.

Michelson’s Lower Occupancy

Management updated in their financial statements that much of the fall in DPU was due to Michelson, their Trophy asset in Orange County.

I ask if the fall in DPU it was due to other attributable reason but management reveal it was mainly due to Michelson.

Last quarter, Michelson’s occupancy was 96% but this quarter it was reported as 90%.

From what we understand there was a vacancy in mid-October. So the vacancy period was about 75 days.

Not just that, the newest acquisition Capitol Mall only contribute for 60 days while the outstanding unit base increased due to the placement and preferential offering.

These factors caused the majority of the fall in DPU.

Management had a tenant ready to sign up. They are one of the biggest co-sharing company in the world. But at that time, the co-sharing company was embroiled in enough controversies.

Management deliberated and decided to cut from this tenant. Too high of an amount of co-sharing tenant would affect an office building’s valuation. In this case, management would rather lease to some longer-term tenants with lesser problems.

They are still leasing it out and are optimistic given the level of enquiries they have gotten.

Strong Leasing Momentum

In the reporting year of 2019, Manulife US REIT renewed 9% of their portfolio leases. The overall rental reversion was 0.5%.

This looks pathetic until you exclude Michelson’s rent reversion. Then it would be a very good 12%.

Michelson’s rental escalation ran past the market rent. As such on average, the lease was renewed on average 12% below the previous passing rent.

Management also reported that year to date in 2020, they managed to renew a further 70,000 sq ft of space in Plaza, Peachtree, and Figueroa.

From what I understood the rent reversion is good for these leases signed up on January 2020. From what I understood, the rent reversion is in a low double-digit.

We Should see Michelson’s Cash Flow Being Restored Next Time.

While Michelson’s rental reversion looks disastrous, in truth, if you have own Michelson 10 years ago, you would not be unhappy your passing rent outrun the market rent. But since we own it for a shorter duration, we have to bear the painful drop in rental revenue.

The cash flow should come back due to the rental escalation.

I tried to ask how long do they expect the cash flow to get back to where it was but no clear guidance was given.

Because within an office building there are many leases, and the leases expire at different time, it is difficult to forecast clearly how long.

Major Mortgage Maturing in 2020

Management updated that in 2020, there is one major mortgage loan that will mature and needs to refinance.

The current interest rate is about 2.45% and likely the interest cost will go up unless interest rate change quite drastically.

Management will be patient to see whether they can get a better interest rate, but if they refinance during this period, their interest rate will be slightly below 3.0%. Not too bad.

FTSE EPRA Nareit Developed Asia Index Incursion the Tailwind They Need

Manulife US REIT share price crossed above $1, rising to a high of $1.05 upon their incursion into the FTSE EPRA Nareit Developed Asia Index.

The incursion into the index would mean that funds who wish to beat or at least keep pace with the index would need to consider the REIT.

From what I understand, they have received attention from regional funds in Thailand, Korea and even in the USA.

The shareholding mix has evolved from more retail and private banking to more institutional.

Future Acquisitions Funding Will Likely Not be too Deeply Discount

Since the shareholding mix is shifting towards more fund and institution centric, it is likely future capital raising will either be placement or preferential offering.

This is because large funds prefer capital raising that is not too dilutive.

This will be better for the minority shareholders as they do not have to be forced to inject more capital in the REIT. As long as the acquisitions improve the DPU, existing shareholders will benefit from an enlarged portfolio.

A Preference for More Resilient Tenants then Technology Tenants

One of the main differences between Keppel Pacific Oak and Manulife US REIT is the former is very much focus on buildings with greater exposure to companies in the technology space.

Manulife US REIT took a different route in preferring tenants who they believe are more resilient. The buildings were carefully chosen such that their key tenants lease their office spaces to be the headquarters.

In more challenging times, tenants tend to consolidate around the headquarters and based on their observations, companies tend to not move away from their headquarters.

Lower Cost of Capital, Greater Interest Points to More Acquisitions in 2020

Manulife US REIT’s current dividend yield is below 6%. In the past at 7%, there are fewer office prospects that would be a value add acquisitions.

At a dividend yield of 5.6%, more office portfolios of greater quality, in more vibrant cities becomes available to be acquired.

Sometimes, you need to know to a certain degree that your capital raising is largely successful for you to confidently purchase a property.

Greater interest from more institutions should ensure that capital raising via placement is less discounted.

Summary

The USD has been quite strong recently and Manulife US REIT can be seen as a proxy to get exposure to the USD.

Manulife US REIT’s 2019 total return was good but for 2 quarters the DPU has dropped.

I tried to explain to the management what investors who do not have access to them see.

There isn’t a lot of metrics that reflect decent, competent management more than DPU growth. I was hoping that last quarter’s 1.48 cents in DPU was just a blip, due mainly to the acquisitions, but this was followed on with an even lower DPU.

Manulife US REIT’s DPU has languished around this range for some time.

As shareholders, I wonder if it is too much to ask if there are some ways to reflect the virtues of an average annual rental escalation of 2.1% a year.

Due to the acquisitions and unit dilutions that comes along with it, investors practically do not see the result of these escalations.

My last DPU projection after the acquisition now looks like a very stupid estimate (annualized 6.28 cents DPU). If they make another acquisition, I am basically going to not do any DPU estimation but just observe if the DPU ever picks up.

I do think that in this low yield environment, there is a high probability Manulife’s dividend yield has more room to be compressed. I suspect Manulife US REIT may have this sweet spot of operating in an environment where there are quite a fair bit of accretive targets.

This might allow the REIT to grow bigger.

Management has also indicated that they are also open to selling their offices if they get an outstanding offers. With a larger portfolio, this may allow them more flexibility to sell one or two properties.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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Singapore Savings Bonds SSB March 2020 Issue Yields 1.71% for 10 Year and 1.43% for 1 Year https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-march-2020/ https://investmentmoats.com/saving-and-investing-my-money/singapore-savings-bonds-ssb-march-2020/#respond Mon, 03 Feb 2020 23:24:31 +0000 http://investmentmoats.com/?p=11580 Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund. The March 2020’s SSB bonds yield an interest rate of 1.71%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks […]

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Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The March 2020’s SSB bonds yield an interest rate of 1.71%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 1.43%/yr.

$10,000 will grow to $11,720 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10-year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 1.75%/yr for 10 years and 1.54%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

The Application and Redemption Schedule

You will apply for the bonds through the month. At the end of the month, you will know how much of the bond you applied was successful.

Here is the schedule for application and redemption if you wish to sell:

Click to see larger schedule

You have 02 to about 25th of the month (technically the 4th day from the last working day of the month) to apply or decide to redeem the SSB that you wish to redeem.

Your bond will be in your CDP on the 1st of the next month. You will see your cash in your bank account linked to your CDP account on the 1st of next month.

How does the Singapore Savings Bonds Compare versus SGS Bonds versus Singapore Treasury Bills?

Singapore savings bonds, is like a “unit trust” or a “fund” of SGS Bonds.

But what is the difference between you buying SGS Bonds and its sister the T-Bills directly?

Both the SGS Bonds and T-Bills are also issued by the Government and are AAA rated.

Here is an MAS detailed comparison of the three:

SGS Bonds versus Singapore T-bills versus Singapore Savings Bonds
Click to see bigger comparison table

What is this Singapore Savings Bonds? Read my past write-ups:

  1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
  2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
  3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
  4. Singapore Savings Bonds’ Inflation Protection Abilities
  5. Some instructions on how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

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8.88% FD Interest! – This is how your parents came home from a bank with an unexpected investment. https://investmentmoats.com/money/parents-came-home-with-an-unexpected-investment/ https://investmentmoats.com/money/parents-came-home-with-an-unexpected-investment/#comments Sat, 01 Feb 2020 23:50:04 +0000 http://investmentmoats.com/?p=11571 My more financially savvy friends told me that among the stuff that really messed them off the most, it is when their parents go to their local bank branches. My friends have a lot more control over their finances. But they cannot just upload their better understanding of financial products and the financial world into […]

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My more financially savvy friends told me that among the stuff that really messed them off the most, it is when their parents go to their local bank branches.

My friends have a lot more control over their finances.

But they cannot just upload their better understanding of financial products and the financial world into their parent’s (siblings & relatives as well!) brains.

When their parents go into a bank to carry out some simple banking needs, they would come home with an endowment plan, structured product or a few unit-trust funds.

I have been proposition products in this way in the past, most recently 2 months ago at a UOB bank branch.

The danger about this to parents is that:

  1. These are not simple no-risk financial assets. They carry a certain level of risk. Parent’s risk expectation may be wildly different from what is communicated
  2. Not much needs analysis was usually carried out. The selling of products is based on how much spare savings the prospect has. There is no comprehensive evaluation of the prospect’s financial situation and what are his or her immediate and longer-term financial needs.
  3. Some of their parents needed retirement income instead of something that will force them to save.

Once their parents committed to the policy or fund or structured product, early surrender of these policies would have caused capital loss (unless your parents decide to cancel the policy during the free-look 14-day period).

A friend of mine was at Bedok Central yesterday morning and saw something that left him pretty disgusted.

He was outside the POSB Bank and observed that the bank have engaged someone to set up a booth where free coconut water was given out.

You can watch a snippet of the scene he observed here:

Do you want a fixed deposit that yields up to 8.88% interest?

A female emcee was on the mic repeatedly informing passersby of a great deal that is only available at the POSB Bank.

You can clearly hear in English “Over here at POSB Bank, we have fixed deposits with interest rates of up to 8.88%“.

A fixed deposit that gives you an interest of 8.88% is VERY appealing to anyone (including me). This is especially in the low-yield environment we are in.

Let’s just say that one of the reasons you may have come to read this post may be that you do not wish to miss out on some extremely high interest fixed deposit as well!

But in our current investment climate, it is very hard to get such a high 8.88% interest without taking some form of risks.

Considered this:

  1. If you look at the dividend yield of blue-chip dividend stocks and REITs in Singapore, only a minority of these risky stocks have yields in excess of 8.88%
  2. My list of safe, short term savings options may be a little outdated, but their interest rates have been less than 3%.
  3. The US or Global High Yield Bond Yields around 5%

If investments with risks do not yield 8.88%, how do you find safe fixed deposits that yield 8.88%?

The lady emcee clearly said in both English and Chinese the “interest rate” is 8.88% and not dividend yield or returns.

I did a search, and I could not find anywhere on DBS or POSB website that has a fixed deposit that yields 8.88%.

It is likely this is not a simple product such as a super low risk to no risk fixed deposit. If it is, they should let me know. I will help them market it as well.

Update: Some of my readers have let me know that they encountered the same thing in POSB branches at Yew Tee, AMK.

On further probing, the product is described as a regular premium savings plans. So this is a form of insurance endowment plan. Still, not much is known how to get 8.88%.

It is likely a combination of DBS Multiplier and doing a few different things. Will update more if I know more.

And this is what disgusts my friend.

How Ethical is This Way of Lead Generation?

Bedok is a matured estate.

Majority of those who bank at physical branches are the folks who are more comfortable banking in brick and mortar and likely less trusting or savvy with online banking.

They tend to be the older folks.

They put out coconut water outside the bank branch to attract folks to queue and the relationship managers would station close by to ask them questions. The relationship became transactional, as you would reciprocate to listen to them since you are going to consume their coconut water.

Then after this, they decide to sit down with this RM to hear more about what he or she has to say. The RM can be rather persuasive.

Aside from reciprocating the goodwill shown to them for providing the water, the biggest problem for many people is that they are really bad at saying no and walking away.

The RM will just go on and on and you will eventually fall into the mode where you will think, “Aiya just buy la, this product don’t sound too bad.”

It is quite disappointing to me that they stoop so low as to keep drumming that “fixed deposit interest rate of up to 8.88%” on the loudspeaker over and over again.

Policy-wise, they would not have done anything wrong because as long as they explain the risk of the product before the consumer signs and purchase the product, they are compliant.

You can understand why some of my friends would rather accompany their parents to the bank branches.

To be honest, I expected this kind of practice from insurance companies. We have seen some insurance agents use high returns (without telling them what are the products) to attract leads to them, and that reflects their overall character.

But this is POSB we are talking about.

The older folks trust them based on the brand name that they have built up.


To end this, let me just say that… not all financial products sold are not fundamentally sound. In this blog, I have frequently profiled endowment plans, the range of returns you could possibly get from endowments. At Providend, unit trusts are the recommended investment instruments.

There is a lack of more comprehensive planning.

Endowments lock up your money for a certain durations. There can be short term volatility in the equity unit trust such that when a person needs the money, the value then was inadequate for their needs.

A lot of this can be better planned if holistic planning is carried out.

But if these fixed deposits are truly no-risk deposits, then you do not need so much planning.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The post 8.88% FD Interest! – This is how your parents came home from a bank with an unexpected investment. appeared first on Investment Moats.

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Topping Up Your CPF Life to Enhanced Retirement Sum (ERS) Might not make Much Difference https://investmentmoats.com/financial-independence/topping-up-your-cpf-life-to-enhanced-retirement-sum/ https://investmentmoats.com/financial-independence/topping-up-your-cpf-life-to-enhanced-retirement-sum/#comments Sat, 25 Jan 2020 23:34:52 +0000 http://investmentmoats.com/?p=11237 In last week’s article, I showed readers 2 different approaches to plan for how much do you need if you wish to retire at 55 years old so that you will have an income stream till 90 years old. We acknowledge that at some point, our CPF Life annuity income will be available for us […]

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In last week’s article, I showed readers 2 different approaches to plan for how much do you need if you wish to retire at 55 years old so that you will have an income stream till 90 years old.

We acknowledge that at some point, our CPF Life annuity income will be available for us to spend and thus will have to be factored into our planning.

The 2 approaches were:

  1. Plan to have an income stream that provides $5,000 a month, that is inflation-adjusted outright for the 35-year duration
  2. Break up into 2 portions. The first portion is to provide predictable income for the first 10 years and the second portion to do the first approach but over a 25-year duration

We deduce that approach 1 is definitely safer but you will need to set aside more money, which may mean you working longer for that security. The second approach is more optimized because we can compute conservatively which portion of your expenses is funded by which portion of your wealth.

The second approach utilizes less money.

The difference between the two approaches narrows if your income needs are higher. This is because if you require such a high income, the proportion of the income from CPF Life is lesser and therefore matters less.

What If We Topped Up CPF Retirement Account to Enhanced Retirement Sum (ERS)?

Those with CPF have the opportunity to top-up their CPF to not just their Full Retirement Sum (FRS) at age 55, but to the Enhanced Retirement Sum (ERS). We can top-up 50% of the FRS to the ERS limit.

For example, suppose you were born in 1960 and your FRS is $161,000 at age 55 in 2015. If you wish to you can top up $161,000/2 = $80,500 more so that you will have a total of $241,500 in your CPF Retirement Account.

A greater amount in our CPF Retirement Account would allow us to have a greater CPF Life Income Stream.

Slight Digress: While we are on the topic of CPF Retirement, do note that if you were born in 1960, if you wish to you can top-up to the prevailing BRS, FRS, ERS so that your income stream is larger.

For example, the current 2020 FRS is $181,000. The couple born in 1960 would just be 60 years old. They can top-up his CPF Retirement Account to $181,000 or $271,500 if they wish to get a greater income stream. There are no CAP there. (The hard FRS sum of $161,000 at 55 years old is there to help you identify the amount in your CPF OA and SA that you can freely take out at 55 years old. I think CPF would welcome you to top-up more into your CPF Retirement Account for a stronger retirement income stream.)

Ok, let us get back to the main topic again.

If we revisit the two approaches again:

  1. Plan to have an income stream that provides $5,000 a month, that is inflation-adjusted outright for the 35-year duration
  2. Break up into 2 portions. The first portion is to provide predictable income for the first 10 years and the second portion to do the first approach but over a 25-year duration

The first approach does not benefit much from topping up the ERS. This is because your portfolio at 55 years old have to provide the cash flow to give an inflation-adjusted $5,000 a month income from the very start.

In approach 1, the CPF is a good-to-have.

The second approach may benefit from the CPF Top-up to ERS because the CPF Life income is an integral part of the plan.

I think that having higher CPF Life Annuity may mean we need to set aside less in our cash portfolio because, in Singapore, there are not a lot of financial assets that have almost a 6% initial cash flow yield, backed by a strong entity, that continues as long as you are alive.

Approach 1: Provide a Retirement income stream for 35 years

Different initial safe withdrawal rate (3% to 4%) determines how much capital you need at 55 years old

In the previous post, under approach 1, we estimate based on a 3.25% initial safe withdrawal rate, the retiree needs to set aside $1.85 million.

Their combined CPF Life Income Stream at 65 years old if they choose the CPF Life Basic Plan is $2750 a month assuming they have $181,000 each in their CPF RA at 55 years old.

The couple can choose to top-up to ERS in their CPF Retirement Account any time from 55 years old onwards (if I am right). However, the CPF Life calculator is not so flexible to give us an estimated monthly income if you top-up after 55, so I will assume the couple top-up $90,500 each at 55 years old.

The couple topped up $181,000 more at 55 years old. The CPF Life Calculator estimates that based on this additional funding, and if CPF Life Basic Plan was chosen, the income would be bumped up by $1,212 a month.

In approach 1, this bump up does not matter so much because the couple could not spend the income until they get it at 65 years old. By spending $181,000 more, it does make their overall plan safer.

In total, the couple would need $1.85 mil + $181,000 = $2.03 million based on approach 1. Honestly, I cannot bring myself to tell people to fork out an additional $181,000 just to make their plan safer.

I am just not so sure if it is worth it.

Approach 2: A Cash Portion for first 10 years Plus an Income Stream from Portfolio for 25 years

My opinion is that topping-up your CPF Retirement Account to the ERS may matter more to Approach 2.

Let us take a look at the annual expenses of the couple that they need an income to cover, after factoring this new CPF Life Income of $3,962 a month versus $2,750 a month previously:

Annual Expenses Growth over 35 years and how CPF Life annuity and your portfolio work together to provide the retirement income

Wow ok.

At 65 years old, our cash portfolio will just have to cover $25,596 a year in expenses, compared to $40,140 a year previously.

We can determine how much capital we need at 65 years old to fund this $25,596 a year, by going back to our safe initial withdrawal rate table:

Capital needed to fund $25,596 on the initial year and then inflation-adjust the income every year for 25 years at various withdrawal rates.

In the last article, for approach 2, I used a 4% initial withdrawal rate so in this article I will stick with this.

This couple will need $639,892. (To be more safe, you could choose to accumulate $731,305 at a 3.5% initial withdrawal rate as well).

For comparison, here is how much capital you need based on the last article, if the annual income requirement is $40,140:

The capital difference between having a higher CPF Life and not is about $400,000! What this emphasizes more is that if your expenses are higher, your capital needs are higher.

How much capital do we need at 55 years old so that we can have $639,892 at 65 years old?

We need to see how much in our cash portfolio we need at 55 years to grow it to $639,892 at age 65.

Assuming a rate of return of 4.5% a year, at 55 years old, the couple will need $639,892/(1.045)^10 = $412,044. (If 3.5% initial withdrawal rate, then you will need $731,305/(1.045)^10 = $470,907)

Remember, we have to factor in a capital of $600,000 to fund 10 years of $60,000 a year spending before the CPF Life annuity income comes online.

Thus, the total capital needed equals to:

  1. First 10 years capital: $600,000
  2. Cash portfolio at 55 years old: $412,044
  3. Capital to top-up CPF RA to ERS at 55 years old: $181,000

The total comes up to $1.19 million.

Compare this to $1.24 million in my previous article.

Not a lot of difference apparently!

Ok, this is a surprise. I thought the difference by channeling more to CPF life might be greater. Turns out not a lot of difference!

Comparing the Two Retirement Income Planning Approaches

Again, if we compare the two approaches it will be $1.85 million versus $1.19 million.

Approach 2 requires less capital at age 55. If you are cash-strapped this one will be more worth it.

I cannot bring myself to include the CPF top-up for approach 1 since it didn’t really help the approach concept-wise.

What if Your Retirement Income Requirement is Higher?

In my previous article, I tried to work out the scenario if the couple needs $8,000 a month in the first year at 55 years old instead of $5,000 a month.

I shall not bore you with the calculations, so here is the total capital needed for Approach 2 if its $8,000 a month:

  1. First 10 years capital: $960,000
  2. Cash portfolio at 55 years old: $1,353,977
  3. Capital to top-up CPF RA to ERS at 55 years old: $181,000

The total comes up to $2.49 million. In the previous article, if we did not top-up to ERS, we would need $2.31 million.

Topping up to ERS seem to not work so well as the retirement income requirement goes up.

I was not expecting this. I think I better compute the difference between topping-up your CPF Retirement Account to ERS versus not topping up for different income requirements:

As you go up the income, the difference is almost the same. However, the same $53,132 in lump sum capital does not make much difference when your income requirement and subsequently capital gets rather large.

That said, suppose your additional income needs are $500 to $1000 a month. If you choose to top-up to ERS, your situation is better off than investing outside in terms of percentage (for example the capital you need is 10% less which is significant).

We can judge how significant is a $53k difference. For some couples, saving $53,132 more can be really tough thus topping-up ERS makes more sense.

Summary

It feels to me that we can conclude topping up versus not topping up your CPF Retirement account to Enhanced Retirement Sum does not make so much difference.

However, I would like to point out the difference:

  1. CPF Life is an annuity. It is backed by a government entity and is designed to hedge your longevity risk (outliving your income)
  2. Your cash portfolio is a probability-based income stream. While you can control how much income as a percentage of total capital you wish to spend a year, the robustness of the income stream depends on the markets giving you a set of returns similar to the past

These 2 features mean there is a role for both in your portfolio. For some retirees, they would rather base their income stream on the safety of a government-sponsored annuity scheme.

However, if your income requirement is so large, then you best get comfortable investing in an equity and bond portfolio because you are not going to find an instrument that gives you such a good annuity income yield.

CPF is a scheme that sought to help the second quartile of Singaporeans. If your needs are greater than that, then you need greater solutions.

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