Investment Moats https://investmentmoats.com Wealth Mentor for Financial Independence Sun, 25 Aug 2019 03:48:51 +0000 en-US hourly 1 https://wordpress.org/?v=5.2.2 https://investmentmoats.com/wp-content/uploads/2017/09/cropped-sand-castle-3-32x32.png Investment Moats https://investmentmoats.com 32 32 28389540 REPS Holding’s Resale Endowments: What You Need to Know https://investmentmoats.com/money/reps-holdings-resale-endowments-what-you-need-to-know/ https://investmentmoats.com/money/reps-holdings-resale-endowments-what-you-need-to-know/#respond Sat, 24 Aug 2019 23:00:16 +0000 http://investmentmoats.com/?p=10486 Resale endowment policy is not something new. However, in the realm of wealth building, it may be less talked about. And therefore, a lot of investors may not be aware about it. The concept from what I remember originate from UK. UK Tradeable Endowment was a pretty hot concept in the unit trust and investment […]

The post REPS Holding’s Resale Endowments: What You Need to Know appeared first on Investment Moats.

]]>
Resale endowment policy is not something new.

However, in the realm of wealth building, it may be less talked about. And therefore, a lot of investors may not be aware about it.

The concept from what I remember originate from UK. UK Tradeable Endowment was a pretty hot concept in the unit trust and investment forums that I frequent when I started investing in 2004 to 2006.

Since then, the talk about UK Tradeable Endowments have died down. In their place, there are some brokers who started dealing with Endowments that can be traded in Singapore.

One of them is REPS Holdings.

In this article, I will do a deep dive on the resale insurance endowment business. The value proposition to you as a potential investor. The risks involved as well.

How are Insurance Endowments “Traded” or “Resold”?

Absolute assignment is a process where a current owner of a policy (we call this the assignor) can legally transfer the rights and benefits of a policy to a new policy owner (we call this the assignee).

For each insurance company, they have their own assignment form that the assignor can fill up with the assignee to transfer the policy.

You can review the assignment forms for the various insurance company here.

The first part of the process is when the original seller assigns the policy to REPs Holdings. REPs Holdings is the assignee in this case:

The original owner sells the policy to REPs Holdings

Once the form is filled, signed and accepted, the policy is assigned to REPS Holdings.

REPs Holdings sell to a prospective policy owner

An interested investor would then browse the policies that REPs Holdings have taken over. When the investor found a policy that matches what he or she is interested in, the policy is then assigned to the investor. The investor became the new policy owner.

In these assignment forms, we can pick up more things regarding what the assignor is signing over, and what the assignee is taking over.

NTUC assignment form

We learn here that any policy under trust nomination or HPS cannot be re-assigned. So this weeds out some of these policies that are more complex in nature.

Prudential’s Notice of Assignment form

We learn all future correspondence and dealings on the policy will only require the new policy owner’s consent.

HSBC Assignment form

In HSBC’s assignment form, it provides the clearest take on specifically sell, assigning and transfer of the cash surrender and loan value, the bonus declared.

AIA Assignment form

In AIA’s assignment form, it explains that any nomination of beneficiaries that the assignor made, once the policy is assigned to the assignee, will be revoked.

This means that once the policy is assigned to the new owner, the beneficiary will be the new owner.

How does a policy sold through REPs Holdings look like? A Case Study of a $24,900 Investment

It would be something like an 8-year endowment policy listed by REPS Holdings shown below:

An 8-Year REPS Holdings Resale Endowment
An 8-Year REPS Holdings Resale Endowment

This was originally a 10-year endowment plan (29-Nov-17 to 29-Nov-27). The original owner of this policy sold to REPs Holdings after less than 2 years of owning it.

The surrender value the original owner got when he or she surrendered should be at a loss. The owner surrendered to REPs Holdings instead. In return REPs Holdings is able to give the original owner a better surrender value.

REPs Holdings would typically incubate the policy from 3 year upwards. Some policies have tenure as long as 20 years.

If you are interested in this policy, you can buy from REPs Holdings. The green numbers show the cash flow that you will need to put in.

In this case, the new owner will need to fund $24,891, and 3 x $15,000.

(Do note that this is not a one-time investment. If the policy requires on-going premium payment, you need to be ready to commit. In this case, you can see there are three $15,000 a year payment)

8 years later when the policy mature, the policy will pay out $92,416.

If you would like to know your projected return, you can look at the Price Discount Rate. The 3.8% here, is the XIRR or internal rate of return.

This is typically the way we view and how the insurance company view the “interest rate” of this stream of cash flow. It allows you to compare to other financial assets such as equity, bonds, commercial offices.

A 6-Year REPS Holdings Resale Endowment
A 6-Year REPS Holdings Resale Endowment

Here is another case study.

This policy is a shorter 6-year maturity that will yield a projected 3.6% XIRR/discount rate.

The main difference is that the cash flow is different. It is a smaller amount.

For some of you, your capital might not be as large as the previous case study.

Since these policies comes in different capital commitments, you will have to choose one that you are comfortable with. (Now you know why I say this is like buying second hand laptops)

How different is this resale endowment versus the traditional endowment

A resale endowment does not have a lot of difference from the traditional endowment:

  1. There is an assured person (life insured)
  2. The participating fund, which helps the policy owner invest their money is also the same
  3. The rate of return is thus the same had the policy not been sold
  4. In a traditional endowment plan, your actual return may vary from the projected return. This does not change as well
  5. The recurring premium contributions are also the same

What is different will be your return and margin of safety versus the first owner.

Why are the returns higher?

The returns if you choose to buy this resale endowment is higher because the initial amount you put in is lower.

Going back to this example, the original owner of the policy, for the first 2 years would have paid in total $30,000 in premiums during the first 2 years.

When the original owner surrenders the policy to REPS Holdings or the insurance company normally, the original owner would only get back say $22,000 in surrender value if the original owner chooses to surrender to REPS Holdings.

REPS Holdings resell this policy to you at $24,891. So the premiums you paid, versus the original owner ($30,000) is lower.

When your capital is lower, your discount rate/XIRR is higher than the original owner.

What if the original assured passes away? Who gets the sum assured?

When the policy is sold to REPS Holdings, the original owner will sign a change in assignment form to transfer the ownership to REPs Holdings.

After the sale, REPs Holdings (the new owner) is the only one who is able to claim any death proceed should something happen to REPs Holdings.

Usually the original owner is also the insured person. The original owner can name a few beneficiaries. These are the people who can receive the money should the insured (usually himself or herself) passes away.

Once the policy is assigned to a new owner, all past beneficiaries will be revoked. The new owner is the only one able to claim any death proceeds should something happen to the insured.

In some situations, a mother would buy a policy for her son. The mother is the first policy owner and the son is the insured.

For policies like this, the policy cannot nominate a beneficiary. This is because if anything were to happen to the son, the owner, which is his mother, will automatically be the beneficiary. Thus, nomination is not allowed.

When this policy is resold to you, as the new owner, you are not allowed to name any beneficiaries to the policy as well.

Who Gains, Who Loses?

My readers tend to be more sceptical than most. You are thinking about how this adds up. There should be some party who loses. It cannot be that all parties gain.

So here is the summary:

  1. The biggest person who loses is the one who surrender the policy. The original owner surrenders the policy at a big negative difference to the premiums he or she paid (the lesson learn is know what you are putting your money into, know how it works, how it fits into your financial net wealth!)

You can liken a resale endowment like a distress debt. REPS Holdings takes over from the original owner at a big discount to the original par value.

There is margin of safety there for them.

Here are the folks that benefit

  1. The person who purchased the endowment gets a product that he or she understands, matches his or her risk profile, matches his or her time horizon and a decent return
  2. The insurance agent (that sold to the original owner) and the insurance company still get their commissions as the policy is still in-force
  3. REPS Holdings earns a profit margin for taking over and reselling the policy
  4. The original owner who surrendered the policy get a higher surrender value compared to if the owner surrendered with the insurance company

Are the Returns on the RESALE Endowment Guaranteed?

The mechanics of the resale endowment is the same as how the original owner of the policy experiences it.

  1. The original owner’s returns are partly guaranteed and non-guaranteed
  2. The returns are dictated by the performance of the insurance company (not REPS Holdings) participating fund
  3. The original owner will get the reversionary bonus and may get the terminal bonus
  4. The policy may fall short of expectations when the insurance company cut the bonus. The owner’s returns will be cut lower

When you take over the policy, you will have experienced the same uncertainty as the first owner.

What are the Returns Expectations?

When REPS Holdings take over the policy, they will get the most up to date returns projection from the insurance company to work out the XIRR/Discount Rate that you would get, if you choose to purchase this policy. Remember that if the insurance company cuts the bonus, the returns projection changes.

So REPS Holdings do their best to give the closest projection and not based it on the original projection that the original owner gets when the original owner first bought the policy.

I have written a crowd sourced article in the past, where I tabulated the matured value of readers, friends and family’s insurance endowment plans. You can read it here.

from Investment Moats

Longer term policies should have a higher return, compared to shorter term policies. However, your experience will very much be determined by the performance of the insurance company’s participating fund.

In the summary table above, taken from my previous article, you can see the returns can vary.

Going forward, the returns of the policy is fundamentally based on the underlying returns of the financial assets in the participating funds. In the table above from Business Times, you can observe the asset mix for different insurer.

If you purchase these resale endowments, your cost is lower than the original owner, so your returns are also higher.

Are REPs Holdings Licensed by MAS?

There are currently no MAS administered regulations which govern the sale, purchase and distribution of Resale Endowment Policies.

This means that if a person purchased a resale endowment policy, the person cannot rely on laws administered by MAS to take action against either REPS Holdings should they encounter any problems with the investment process.

You can however seek recourse under the Consumer Protection (Fair Trading) Act (CPFTA). The CPFTA allows consumers aggrieved by unfair practices to pursue civil remedies before the courts.

Who buys these Resale Endowments?

This is an interesting question.

I asked my representative about this and the folks that likes these policy (and they tend to keep coming back to purchase) are those very conservative wealth builders.

Firstly, they understand how these things work.

Why is this better than the traditional endowment?

  1. The maturity period tends to be shorter
  2. They have less risk of surrendering the policy with a bigger loss, versus the premiums that they paid, if they need to surrender the policy. This is because the capital they put in is smaller (than the original owner)
  3. They get higher return

So it is a no brainer to them.

Unlike the original policy owner, these folks tend to be more composed and assured about using endowments in their wealth building.

How should we view Resale Endowments in our Financial Net Wealth Allocation?

A wealth builder needs to know how the financial assets that goes into their portfolio work. You would have to know the characteristics such as returns, risk, liquidity and the amount of work involved.

And the wealth builder has to view these instruments as part of their overall financial net wealth.

Resale Endowments have the following profile:

  1. They are illiquid, unless you resell them back to Reps Holdings
  2. Since majority of the assets are bonds and property, the returns tend to stick close to bond returns, if you hold them to maturity
  3. They should yield positive expected returns if held to maturity, due to the way they are constructed
  4. Since their value is not priced so often, on a portfolio basis, they look less volatile
A portfolio allocation that younger folks would appreciate.

For those who wish to build wealth, and are younger, equities tend to have more market risk, more volatility, and expected to provide a higher return. Resale Endowment can take the role of the bond to reduce the volatility of the net wealth.

Since property is also not revalued so often (at least on a daily basis), the overall net wealth would look less volatile.

A more risk adverse asset allocation

For some of you who are more risk adverse, your financial net wealth can be like this. The volatility to your financial net wealth is going to be very low.

However, you have to take note of the illiquidity of your financial net wealth.

  1. Your property is less liquid
  2. Your endowment is also less liquid

If you need to liquidate them, it might not be as easy as liquidating equity, unit trust, bond funds. When you liquidate your property and endowment in an illiquid market, the value that they may fetch might be far less.

Conclusion

REPS Holdings have provided an interesting prospect for those who wish to surrender their policy with a higher value.

As a broker, they have also provided a way for investors with certain risk appetite to purchase policies that meets their rate of return through REPSINVEST.

If you are interested to know more, do contact REPSINVEST here.

This post is Sponsored by REPS Holdings. The views are Kyith’s.

The post REPS Holding’s Resale Endowments: What You Need to Know appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/reps-holdings-resale-endowments-what-you-need-to-know/feed/ 0 10486
Shangri-la Asia’s Presentation shows the Impact of Hong Kong Protest and China Slowdown https://investmentmoats.com/stock-market-commentary/shangri-la-asia-impact-hong-kong-protest/ https://investmentmoats.com/stock-market-commentary/shangri-la-asia-impact-hong-kong-protest/#respond Wed, 21 Aug 2019 23:00:28 +0000 http://investmentmoats.com/?p=10475 How do we know whether these political and government policies have an impact on the businesses you invest in? Perhaps a review of a slew of companies will tell you something. That is lots of work. But if you want your money to be safe, you got to do it. If this is not for […]

The post Shangri-la Asia’s Presentation shows the Impact of Hong Kong Protest and China Slowdown appeared first on Investment Moats.

]]>
How do we know whether these political and government policies have an impact on the businesses you invest in?

Perhaps a review of a slew of companies will tell you something. That is lots of work. But if you want your money to be safe, you got to do it. If this is not for you, there are always index funds.

Shangri-la Asia Limited (Stock code: 69) is a hotel operator listed in the Hong Kong Stock exchange. It is owned by Robert Kuok, His Daughter is the executive chair person.

Yesterday, Shangri-la Asia released its interim results.

It’s business involves

  1. Owning and operating the hotels it owns. This can be directly or with joint venture partners Kerry Properties Limited (KPL) which is also affiliated with Robert Kuok
  2. Owning and operating investment properties
  3. Development of hotels
  4. Management of hotels

The main bulk of its profits or EBITDA have come from owning and operating the hotels.

In total they operate around 102 hotels around the world.

Like a lot of property stocks in Hong Kong, there is a big discount to NAV. At the share price of HK$8.65 the market capitalization is about US$3.86 bil. Dividend yield is about 2.6%. Share price was as high at HK$18 at one point in the last 2 years.

If we take the annual report and value it, your RNAV could be US$6.8 bil if you use the historical cost minus depreciation for hotels or US$8 bil if I roughly estimate based on their EBITDA and Cap Rate.

You can see the upside.

Perhaps there is a need to look at the results more. These firms in HK all trade at a large discount but the unique thing about Shangri-la is that 10% of their EBITDA is in Hong Kong. Not too much but also not too little.

This period of protest brings out a learning lesson about the benefits of adequate diversification. You will notice that some of these service residence and hotel players are pretty diversified around the world.

A single protest event in HK affects Shangri-la but it could have been worst if its very concentrated. It would take a global slow down, or a secular shift in travel and hotel dynamics to really affect them.

Sometimes looking at the results of these companies gives you an assessment of just how bad or good things are in certain regions you are interested in.

China is one. How were they impacted by trade war, or for the matter are things slowing down?

And how was the protests affecting business.

A large amount of the properties owned by Shangri-la or under the associates is in China. They have hotels in Hong Kong as well.

So it is great that they provide some color on the Hong Kong and China situation.

Shangri-la Asia operation updates

The interim results show the results for the first 6 months.

Occupancy for both HK and China in the first half of the year was pretty good. The average daily rate (ADR) for China have weakened yer on year while the average daily rate for HK was better.

When we put occupancy together with ADR, it shows that the charge rate and quality for the HK hotels were doing better. China worse off.

RevPar for both declined, with China being more significant.

Here is the data, broken down by different cities in China.

Shangri-la Asia also furnish some general Hong Kong GDP and retail sales figures. I am more interested with the retail sales figures for the past 6 months. Not very optimistic about it.

According to the general tourism and restaurant data the 1.5 month’s protests really affected the visitor arrivals.

In the slide above, we can really appreciate the difference between the RevPar, ADR and Occupancy for the first 5 months of the year in 2 different sub-market in Hong Kong and the past 3 months.

If your business operates in an environment where it is dependent on good relations, tourism, these data does show that these protests will caused an impact of a larger degree.

Shangri-la’s China data gives me some glimpse of the situation there. Together with some other companies, it seems the slowdown is pretty evident.

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.

Here are My Topical Resources on:

  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 Shangri-la Asia’s Presentation shows the Impact of Hong Kong Protest and China Slowdown appeared first on Investment Moats.

]]>
https://investmentmoats.com/stock-market-commentary/shangri-la-asia-impact-hong-kong-protest/feed/ 0 10475
Interactive Brokers setting Up Singapore Offices https://investmentmoats.com/money/interactive-brokers-singapore-offices/ https://investmentmoats.com/money/interactive-brokers-singapore-offices/#comments Mon, 19 Aug 2019 23:00:12 +0000 http://investmentmoats.com/?p=10457 There are a bunch of investors who are always searching for a cost effective broker platform. Through these platform they wish to handle the majority of their transactions. I think cost is one aspect but there are other considerations Think in terms of whether the broker will continue to be in business If you have […]

The post Interactive Brokers setting Up Singapore Offices appeared first on Investment Moats.

]]>
There are a bunch of investors who are always searching for a cost effective broker platform. Through these platform they wish to handle the majority of their transactions.

I think cost is one aspect but there are other considerations

  1. Think in terms of whether the broker will continue to be in business
  2. If you have a problem with the platform, or your trade, are they responsive
  3. The variety of products they allow you to trade
  4. How easy will it be for you to transfer your money in to start and transfer the money out
  5. How intuitive is the interface

One of my friend told me that Interactive Brokers (IBKR) are in the midst of setting up their Singapore office. They are probably in the process of getting the necessary license through MAS to operate in Singapore.

My friend did a check in ACRA (that is diligent of him) and it seems they really did setup this year.

Subsequently, a reader from Telegram group informed me that Interactive Brokers have posted an ad on LinkedIn looking for a role in Singapore:

Interactive Brokers was in Singapore but this time round, maybe they are looking for something more.

The Benefits of Interactive Brokers

The biggest deal about having an overseas broker having a local office is perhaps that it gives both sides an opportunity to build trust with each other.

The older investors would feel uneasy having their net worth in anything other than CDP, or the traditional brokers such as Vickers, Kay Hian and GK Goh.

The younger investors do not know what the big deal about this. They probably assume some of worries of the older investors would not happen to them. They are more accepting about this.

The more savvy local investors are familiar or at least have heard of IBKR. In my Dimensional Fund Advisers article, I pitted the cost for the Roboadvisers, the banks and my current company against do it yourself investing with a IBKR broker.

Comparing the cost stack for various ways to invest in low cost funds

Their commission for the fixed tier, which is 0.05% subject to the minimum of US$5 is pretty hard to beat.

In recent years, the local brokers such as iFAST, POEMS, Kim Eng, and like, have started to offer pre-paid accounts. These are accounts where you keep your shares with the broker. They become your custodian. You are able to get 0.08% to 0.12% per transaction commissions.

We should not be comparing against transaction cost of 0.25%, which is what offer by traditional brokers (full disclosure: I am still paying at such obscenely not cheap charges)

The appeal of IBKR is the whole package:

  1. It is a listed US Company. Actually, it may be a company you wish to invest in
  2. The way I think about it, people outside of US are looking for a platform that is cost effective enough to invest through. Turns out the savvy folks out of US, whether is Europe, Hong Kong or Singapore uses IBKR
  3. If your account size is US$100,000, there are no custodian charges. If you have less it is $10 per month unless you make certain trades. As you make some trades, it gets deducted from this $10. To me this is not a problem even if your amount is small. Eventually, if you follow my wealthy formula, it is likely you will have US$100,000. Your $120/yr is just going to spread over the future years
  4. The commission is low as previously stated
  5. They allow you to invest in a lot of markets
  6. Thus those who wishes to buy UCITS Exchange Traded Funds (ETF) that is relatively low cost, listed in London Stock Exchange are able to do so at very low cost
  7. With different broker platforms, you tend to incur some cost when you convert between SGD to USD, GBP or HKD. This is typically in the 0.50% range more or less. What I understand is the slippage in this is very very low
  8. Many have complained that their platform is not intuitive. To me this is perhaps just trying to get used to. I heard they are able to compute your portfolio overall return and let you review these numbers. I think that is a benefit of housing all your net wealth in one platform
  9. Currently, Singaporeans can FAST transfer their money in. You can Google around to see the process

A lot of advantages, very little disadvantages. The main one from what I understand, as Singaporeans, you cannot trade Singapore stocks through IBKR. Overseas investors can (very ironic)

My friend have list out some of the advantages he sees as a private investor:

  1. It is easier to manage your account through a local office in Raffles Place area
  2. It gives greater confidence in Singapore based users
  3. May be easier for Independent Financial Advisers to set up and manage B2B enterprise accounts with IB
  4. Put pressure on local brokers. So this may result in things cheaper for everyone

I like the B2B angle. A lot of the current B2B business is undertaken by IFAST. IBKR have their institutional side of the business.

It remains to be seen whether they prefer to focus on the B2B or B2C portion of things. I think there might be very little alternative to IFAST. The rest of the B2B platform, from what I heard, were not able to deliver as good of a service than IFAST.

With some competition, we might be able to enjoy better rates. Of course, we may benefit when local brokers scramble to try and offer what IBKR is able to.

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.

Here are My Topical Resources on:

  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 Interactive Brokers setting Up Singapore Offices appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/interactive-brokers-singapore-offices/feed/ 4 10457
The National Day Rally 2019 Notes (Unfiltered Version) https://investmentmoats.com/money/national-day-rally-2019-notes/ https://investmentmoats.com/money/national-day-rally-2019-notes/#comments Sun, 18 Aug 2019 23:55:58 +0000 http://investmentmoats.com/?p=10462 This used to be a hobby. If you feel like writing then you write. If you feel strongly enough, you write. It hit me especially hard when I was about to watch Dr Stone. “Kyith, could you provide a summary of the National Day Rally for the advisers?” Guess this is life now. So since […]

The post The National Day Rally 2019 Notes (Unfiltered Version) appeared first on Investment Moats.

]]>
This used to be a hobby.

If you feel like writing then you write. If you feel strongly enough, you write.

It hit me especially hard when I was about to watch Dr Stone. “Kyith, could you provide a summary of the National Day Rally for the advisers?”

Guess this is life now.

So since I already read it, why not provide it here. The version that I wrote internally is more for a different base. This one is more….

Let me give a summary that is closer to the readers. They are ranked in terms of importance.

No Impact to CPF Withdrawal

The biggest talking point have been about raising of the retirement age and re-employment age.

This will be raised gradually.

We know it is coming. KNN, if you read enough of the papers this 2 years, you would have caught the narrative.

What the Prime Minister did was to kill a lot of the arguments the opposition will have on retirement. It is something the opposition know is close to the people’s heart.

He repeated twice. There will be no changes to the withdrawal.

He basically said “I will raise the retirement age, I will give you more official protection on working longer, yet you can still withdraw your CPF as same as the current plan. It is your choice whether you want to delay to 70 years old or not. It is up to you. Opposition, what do you wish to attack me on?”

The re-employment age will be beneficial to clients who are still working. It provides policy security that makes it compulsory that their employers must offer them re-employment from 62 years old onwards, up to the age of 70.

This allows them to work longer, and accumulate more wealth.

Continual employment is beneficial to a retiree:

  1. It adds to their retirement funds. This increases what they can spend in the future
  2. By spending their earnings, it prevents early draw down of retirement funds. What they originally should spend will be reserve to spend in the future
    For those with good savings rate, by working each year, they may lengthen their retirement by 2 years.

Changes to the CPF Contribution Rates

While there are no changes to the CPF Life withdrawal, the government will be gradually raising the CPF Contribution rate.

Refer to the following table taken from Seedly:

Employers and employees will still continue to contribute the full 37% from 55 to 60 years old, then step down to 26% and so on. The government have delay the contribution rate reduction.

The impact to you is that, for those who are still working, employers are contributing more to their CPF. As do themselves.

I would think that those that delay their CPF Life pay out beyond the typical 65 years old may be able to take out more. This helps a lot for those that needed more time to reach the full retirement sum, or even basic retirement sum.

Potential Impact to SRS

If you withdraw early from the Supplementary Retirement Scheme (SRS) account, there is an early penalty of 5% and the withdrawal amount is taxable as ordinary income tax.

The Penalty Free withdrawal age was 62 years old. This is tied to the statutory retirement age. Since this is moved, this may change.

That is why I explain how I open and fund my SRS account with $1 dollar a year ago. After you hear so much narrative, you got to do something.

I think the impact will depend on how dependent on your SRS for cash flow.

If you really and I mean really need it, then just withdraw early and take the penalty and be taxed. You need the money!

But for most, they should be able to delay for 1 to 3 years in cash flow. I find the impact of this is down to planning.

More Pre-school Subsidies

Pre-school education spending to be double over the next few years. Government will raise the income ceiling of households eligible from $7,500 a month to $12,000 a month. An additional 30,000 household stands to benefit. Government supported pre-school to be increased from 50% to 80%.

This one is a big one because it has been something the middle income have been trying to tackle. It is one of the concerns on their mind when they think about having more children.

Pre-school is necessary especially for single child to open them up faster, to interact with people. I find it helps them develop faster.

But the cost is rather substantial for parents. The example given by Channel News Asia puts the cost reduction from $560 a month to $370 a month.

It is not just about subsidies but also creating an ecosystem that supports it. And this plan helps.

It also creates job opportunities.

Reduced University, Polytechnic Fees for Lower Income Students

The Prime Minister also announced a few measures aimed at helping lower income students:

  1. Bursaries for university courses to increase from up to 50 per cent of fees, to up to 75 per cent
  2. Bursaries for polytechnic diploma programmes to increase from up to 80 per cent of fees, to up to 95 per cent
  3. Increased bursaries for students at the Institute of Technical Education (ITE), Nanyang Academy of Fine Arts and LASALLE College of the Art
  4. Reducing the cost of tuition for low income but eligible students to study medicine from $29k – $35k a year to $5k a year

This is a push of what meritocracy is about. Those who are bright, should be not limited by their economic background to be able to get up-skilled. It may allow them to earn higher wages.

What may not be addressed is that a lot of bright kids fell on the way side because the ranking system is still based on a bell shaped curve. The kid may be bright but there are many bright kids. So they end up with less than stellar grades. And that affects their qualification.

It is a bit sad there.

Protecting against Climate Change

This is a big one for me.

I been wondering about this and it is good the government has thought about this.

The sum of this, as highlighted by the Prime Minister is huge. But if you divide it up, it is big but at least more manageable.

The repercussions is real if the government have not seriously considered and implement this.

And many of you have majority of your net wealth in properties. Our properties are attractive because Singapore is land scarce and we have a sort of stability, and are well connected. Advanced enough if you want to call it.

Imagine the prospect of those properties being affected by flooding.

I could probably relocate. But if your net wealth is so concentrated and tie to a single sector, single location, good luck to you.

You can see how badly affected you can be

Development of Greater Southern Waterfront

More plans were put out how they are going to shape the Greater Southern Waterfront.

Those of you who are staying in Redhill and Telok Blangah will welcome this. It should add or stabilize your property value. The value is high but some of your flats are old.

This will also be welcome developments for investors holding Mapletree Commercial Trust. Mapletree Commercial Trust primarily owns a lot of properties that resides in the Greater Southern Waterfront. The increase importance will bring welcome footfalls from office as well as city dwellers for its main asset Vivo City.

While more office buildings may increase the competition for the REIT’s properties in the region, I do see it as complementary. Businesses tend to congregate together.

These developments will be welcomed by investors who holds existing construction, engineering and cement suppliers listed in the Singapore stock exchanges. These stocks have been in a slump with a lack of developments. I do caution that while there is a plan in place, these listed firms still have to compete against keen and intense competitors in the industry. There is also a timing of when these projects will be released and the company’s cost control.

Stocks in these industry tend to be cyclical in nature. The investor will have to be vigilant in his or her assessment of the business.

Raising of the Official Retirement Age and Re-Employment Age

I put this last because as a person who have been writing about financial independence, I do not know why people are so concerned about it:

  1. If you don’t like your job and have the wealth, even if the official age is 80, you will still retire at 57 years old
  2. If you like your job and have the wealth, you will work till you drop dead a lot of times

My dad “retired” nearly 19 years ago at 54 years old when there was no more contracting business. At that time Yong Nam’s share price was near $0.01 if I remember. I do not know if “retrenched” is the right word here.

What scares people is that all their money is tied to CPF.

There is so much talk about the government can always “shift the goal post”.

If that is the case, don’t keep topping up so much CPF lah!

The returns may look good but you got to think of your overall plan. Learn to earn as good of a return outside of the CPF!

Who knows the returns of 2.5% and 4% may be unsustainable.

I will say this:

  1. the re-employment age may be important As explained before
  2. there is very little comparable annuity out there from my point of view versus the CPF Life

If you keep asking the question of whether the goal post will shift again, or whether the rate of return is sustainable or not, it may be the proportion of your CPF in your overall net wealth is large.

According to standard risk management:

  1. Mitigate the risk. Don’t have so much so concentrated in a policy tied instrument
  2. Avoid the risk. Plan like you are not going to see this “CPF Tax” at all
  3. Transfer the risk. Not really applicable here.

Conclusion

There are lots of good in this National Day Rally.

Perhaps more goodies means the Singapore Election is around the corner. Humans have short memories and these good initiatives will stick to them.

In any case, I think the whole narrative we see for the past 2 to 3 years point to a clean sweep for the PAP. The main idea: “There is no more monster meaningful enough to slay.”

This may be a topic for another day.

More so, the big projects such as Greater Southern Waterfront and these climate change stuff will create enough projects for local companies. They have not been doing well.

When the private markets are in the dumps, the government spending have to ramp up. This is one way. IT projects is another.

How will all these be funded.

I think its not an issue for this Prime Minister. It may not be his problem for long. Just like how the VERS will be carried out.

No one knows. It is the next generations hot potato.

If you are wondering what is Dr Stone, its the show below:

I welcome any thoughts that is not too politically volatile.

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.

Here are My Topical Resources on:

  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 The National Day Rally 2019 Notes (Unfiltered Version) appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/national-day-rally-2019-notes/feed/ 3 10462
Singaporeans may achieve Financial Independence. Retire Early not So Much. What the Data Shows. https://investmentmoats.com/financial-independence/financial-independence-possible-singapore-retire-early-data/ https://investmentmoats.com/financial-independence/financial-independence-possible-singapore-retire-early-data/#comments Sat, 17 Aug 2019 23:11:52 +0000 http://investmentmoats.com/?p=10436 The department of Singapore statistics published the Household Expenditure Survey 2017/18. The department published the results every 5 years. And so we have the figures to compare against the expenditure figures published in 2012/13. That is the data 5 years ago. There is too much data, and we would probably not be able to finish […]

The post Singaporeans may achieve Financial Independence. Retire Early not So Much. What the Data Shows. appeared first on Investment Moats.

]]>
The department of Singapore statistics published the Household Expenditure Survey 2017/18.

The department published the results every 5 years. And so we have the figures to compare against the expenditure figures published in 2012/13. That is the data 5 years ago.

There is too much data, and we would probably not be able to finish in one seating.

As a researcher of financial independence, I was curious whether the data do show that Singaporean’s will find it challenging to reach their financial independence goal.

How to Judge whether You can easily reach Financial Independence?

In most cases, if you map out your cash inflow and cash outflow, factor in the rate of growth of your wealth, and expenses, you could figure out when a person can be financially independent.

You could however, rely on some rule of thumb to determine if this household can be financially independent much faster than the average folks.

Usually, we rely on two metric:

  1. Your long term rate of return of your wealth
  2. Your average savings rate through your working career

Long Term Rate of Return

For #1, your wealth are your

  1. investment property
  2. cash, deposits
  3. unit trusts, insurance savings plans, ILP
  4. stocks and bonds
  5. exchange traded funds

This is net of your liabilities.

We say long term because in any given year, your rate of return can be very high or very low (short term the sample is smaller, you tend to get more extreme results). Over longer term, we are able to see your average consistent rate of return.

The higher your long term rate of return, the higher chances you will be financially independent earlier because your wealth accumulates faster.

Your savings rate

You make $70,000 a year. That can be the amount you take home or gross before deducting your CPF. If you spend $42,000 a year, your savings is $28,000 a year.

Your savings rate is ($70,000 – $42,000)/$70,000 = 40%.

Whatever you do not spend, you save. It has to go somewhere.

What you save, becomes your wealth. The more you save the more wealth you get.

How Long to Financial Independence?

If you pair savings rate with the long term rate of return, that is when you see your wealth built up.

The Retirement Grid: How long to FI: Your Savings Rate and Rate of Return Matters
How long to FI: Your Savings Rate and Rate of Return Matters

I shown this table in the past. Each number on this grid is how long it takes for you to be financial independent.

Going back to the previous example, if your savings rate is 40%, that means you spend the other 60%. Your rate of return of your wealth can be from 1% to 20%.

It will take you between 11.74 years to 32 years to be financially independent.

So from the table, you can see that if your savings rate is 50%, it is between 10 years to 22 years. If it is 60%, it is between 8 years to 15 years.

The higher the savings rate, the less the long term rate of return matter. You realize when the savings rate is high, whether you get 4%, 6%, 8% rate of return, it does not speed up the number of years that much. (50% savings rate the difference is just 3 years)

What if your annual expenses change?

Then you recompute how long you need. This rule of thumb is easy to recompute. Many people will tell me your expenses keeps going up. There is a lot of truth to that, but for some, they can envision that if they stop working, their expenses will be lower.

Adjust accordingly.

The assumption is that you take out a constant, inflation adjusted amount from your wealth over the next 30 years. You withdraw 4% in the initial year, and adjust with inflation over time.

There are a lot of debate whether 4% is a safe initial withdrawal rate. I think let us leave that out of the equation. If you think it is not safe, because the duration in which you need the money is longer, use 3.5%, 3%, 2.5%. Come up with your own metrics. I have already say this is a rule of thumb. It is a gauge how close you are to financially independent.

To stop working, you need more thorough planning.

Once we established this we can take a look at the Singapore Statistics

The Household Income Analysis

I won’t be able to cover all demographics in one article, thus let me focus on just a few prevalent ones.

Singaporeans work a spectrum of jobs. They live in different kind of dwellings. Different age group earns a different salary.

My way to tackle this is to pick out the prevalent household types, and take a look at the prevalent jobs categories and age group.

The majority of Singaporeans lived in 4 room and 5 room HDB flats. For work purposes, let me look at the upper echelons of Singapore as well. These will be those that stayed in the Condos and Landed Property.

The statistics show the income and expenditure on a monthly basis. The income also factored in the employer’s portion of CPF. It is likely they took the annual taxable salary and divide by 12.

We could factor in our CPF portion in our analysis but most of us would like to see how much we could achieve with our take home. My struggles are that above $6,000, the income does not contribute to CPF. It is a pain but I worked out the figures.

We presented the following Take Home Income data:

Take home income of household, according to different home types
Take home income of household, according to different home types

I found that the most common home types are the 4 room and 5 room. I found that the education level most prevalent are the university and diploma.

I would also like to see the take home income of different age group. I did not list all age group. My focus tend to be on the 30 to 54 year old that are accumulating towards financial freedom. They are the group that are not able to access their CPF currently.

I would also like to see the take home income of those above 65 years old.

Some observations:

  1. There are those who have diploma qualification but lived in landed property
  2. University take home income higher than diploma
  3. Those who stayed in landed has higher take home income than those in condo, and 5 room and 4 room
  4. Those older than 65 years old and staying in 4-5 room HDB and landed take 60% less income than when they are working before age 54
  5. Those older than 65 years old and staying in condo, saw their income cut by 50%

Let us see the income progression for different age group:

Take home income by different home type
Take home income by different home type

You would notice those living in 4 room and 5 room showed stagnating or declining income. They peak at 30 to 34 years old, before stagnating and declining.

In contrast, there is a reason why those staying in condo and landed was able to stay there. Those staying in condo and landed saw their income go up.

The condo ones peaked earnings at 45-49 years old. They either get retrench here, or manage to retire here.

If a lot of us are staying in 5 room, then many household have an annual take home income of $120,000 to work with. Those living in condo have $200,000 a year to work with.

The Monthly Expenses Analysis

The Singapore statistics provides many angles to household expenses. I have picked out some which are more relevant.

Expenditure based on different income level, household size, profession
Expenditure based on different income level, household size, profession

I think that for expenses, we have to look at various angles.

So I looked at:

  1. The expenses of the 61-80 decile and 81-100 decile. These tend to be those above average income
  2. The expenses based on household size
  3. The expenses of the PMETs and managers

Here are some observations:

  1. Overall, there is a big monthly expense gap between condo and 5 room HDB
  2. The expense differences between 61 to 100 decile for 4 rm, 5 rm, Condo is small. The difference is bigger for landed properties
  3. The expenses for a single is almost the same, despite living in 4 room or 5 room
  4. The expenses for a single is almost the same, despite living in condo or landed
  5. In fact, the expenses difference between 2 ,3, 4 person household for condo and landed are almost the same
  6. There are synergies when the household moves up from 1 person to 2, 3, 4 person. Expenses do not double, triple or quadruple just because the household has more people
  7. Managers earn more than PMET
  8. The average expenses seem to match those with a 4 person household

We can then take the average expense for the following expenses:

  1. 61-80 income decile
  2. 81-100 income decile
  3. 3 person household
  4. 4 person household
  5. PMET
  6. Senior officials and managers

We get an average expense of

  • 4 rm HDB: $4,711
  • 5 rm HDB: $6,176
  • Condo: $8,418
  • Landed: $10,973

Let us look at the expenses based on age group:

Expenditure based on different age group
Expenditure based on different age group

Here are some observations:

  1. Expenses for 4 room, 5 room, landed dwellers stayed largely consistent
  2. Expenses for condo dwellers rose over time
  3. Expenses for those older than 65 dropped by 50% for 4 room, 5 room and landed property. Condo dwellers went down by 30%

The previous average monthly expenses coincide with those in the age group 45 to 49 years old.

Analyzing Singaporean’s Savings Rate

With these figures, we can work out the spectrum of savings rate. This would enable us to see whether Singaporeans have any chance to be financially independent.

Savings Rate of Singaporeans broken down by Household Size, Income and Profession
Savings Rate of Singaporeans broken down by Household Size, Income and Profession

We can compute the savings rate based on the different monthly expenses. We compute based on the average take home pay for the various housing categories.

A clear observation is how high the savings rate we get!

The single household should be looking to be financially independent in 5 to 8 years due to the 75-80% savings rate!

A 70% savings rate means their years to financial independence takes between 6 years to 10 years. If the rate of return of your wealth is at least 6%, it will take 8.5 years for you to reach it. If your rate of return is less it will take you a long time.

Those with the larger household have a lower savings rate. But even the 4 person household have a 40% savings rate. PMET have at least a 40% savings rate.

This is based on take home pay.

A 40% savings rate means their years to financial independence takes between 11 years to 32 years. If the rate of return of your wealth is at least 6%, it will take 20 years for you to reach it. If your rate of return is less it will take you a long time.

Now let us look at the savings rate, for different age group:

Savings Rate of Singaporeans broken down by Age Group
Savings Rate of Singaporeans broken down by Age Group

The Savings Rate are as high. But we observe for those living in 4 and 5 room HDB flats, and from age 45 to 54, the savings rate are going down.

For those that are above 65 years old, the savings rate is low but this may be understandable.

With such a high savings rate, financial independence seem to be within reach for Singaporeans.

So why do we have so many articles explaining that retirement is not possible in Singapore?

I think the savings rate is high enough for most Singaporeans to have a chance to be financially independent. Based on the data. Being financially independent early or later demands a high enough savings rate. The singles will have an easier time. The DINKs will also have an easier time. It is a choice. Those with a good job can achieve it.

The formula is to have an income in a higher decile and spending in a lower decile.

How I Think Expenses was Collated

The first thing is to study how the expenses is formed. What was omitted. There were two areas that I noticed not included:

  1. Their insurance figures only factor in term insurance not cash value insurance
  2. They did not factor in mortgage

This savings rate will look incredulous to you but you got to think if have cash value life insurance policy. If you have then those are considered as savings.

The rate of return in the past are usually around 2.5% to 3.5%. You can read my article here on some historical return rate.

I have noticed that aside from the monthly expense, there is an imputed rental for owner-occupied accommodation. This seem to be simulating the additional expenses should they be renting a similar properties. I thought some of the figures look low.

But if you factored in this “rent”, the expenses will be higher.

Some observations:

  1. The Singles still have high savings rate
  2. So does the Dual Income No Kids (DINKs)
  3. You start seeing the savings rate for the 4 to 5 room, 3 and 4 person household come down
  4. For some reason the managers living in 4 to 5 room look to be really struggling
  5. The 45 to 54 year old living in 4 room and 5 room flat drop off over time while those in Condo and Landed Properties stayed well

Despite this, for a large part, we still have a savings rate of 30% at least for those living in 4 to 5 room flats.

A 30% savings rate means their years to financial independence takes between 14 years to 46 years. If the rate of return of your wealth is at least 6%, it will take 26 years for you to reach it. If your rate of return is less it will take you a long time.

I do not think we should factor in the Imputed Rental from Owner Occupied Accommodation. This is because most of household own a property. The way our mortgage finance rules are set up is such that we are deterred from using our CPF after retirement age. So majority will have owned their property after retirement age.

Furthermore, the mortgage were usually funded with CPF. So this cost is not part of your take home pay.

The above expenditure data shows the monthly expenses spent on other transport services. These data were broken down by full fledged air fares to different parts of the world. The way the data is group together do not feel natural to me.

I felt the only way this data could exist, is that the expenses were take from some Airline database, NTUC Fair Price database. These data are than correlate back to the different demographics.

Household Expenses by Housing Type

In the table above, we are able to see the top categories of expenses. I have sorted based on 5 room and executive flats.

The first thing to note is that this is average cost. And this is likely to make things…. weird.

We have those living in 1 or 2 bedroom flats owning cars. Generally, we should not expect a lot of them to. So why are there vehicle owning costs? This is because if you have a retiree downgrading to a 2 bedroom but still able to afford a vehicle, this cost is spread among all the 1 or 2 bedroom household.

It may be right that the costs for this group is low. For other expense categories, the expenses might be pulled up due to the average spending amount.

The top 5 category for 5 room flat accounts for 65% of the costs:

  1. Transport entails purchase of vehicles and what comes with it. It also includes your public transport costs. For the 4 to 5 room HDB, this is the highest
  2. Food serving typically takes the data collated from restaurants, pubs, fast food restaurants, hawker centers, food delivery
  3. Miscellaneous goods and services includes personal care (hair dressing, grooming, electrical appliances for personal care), insurance (no whole life type insurance, those expense only)
  4. Food and Alcoholic beverages should be the data taken from the supermarkets. It is your groceries
  5. Recreational and culture includes your holidays, reading, pets and photography

The way to use this is your mileage may vary. This might be less applicable to you. If you are the frugal sort, your expenses could be 10 to 20% less than this average amount.

Analyzing the Expenses of those 65 years old and Older

It is likely the 65 years and older cohort makes up of those that are semi-retired, retired and working. Their expenses should reflect that of a retirement lifestyle.

The average expenses are:

  • 4 rm HDB: $1,989
  • 5 rm HDB: $2,992
  • Condo: $6,334
  • Landed: $6,730

In June 2019, a team of researchers from Lee Kuan Yew School of Public Policy released their research on working with a few focus group to determine the household budgets necessary for older people to meet their living needs.

I have written about the interesting takeaway from this report here.

This public policy school study is based upon a focus group and what the people think constitute a budget that is meaningful enough.

So how far are these figures from the stats in general?

Older Singaporeans Basic Expenses
The budget broken down by single, couple and those before retirement.
  • Single monthly without housing: $1,223
  • Couple monthly without housing: $2,162

The LKYSPP survey’s budget look lower than the 4 to 5 room actual spend. Probably at the lower bound of the Singapore statistics.

I can see that $2000/mth for a 4 room HDB flat be a good spending rate for retirement.

If a couple has CPF Full Retirement Sum (FRS), they should be able to provide that amount. But not everyone has the FRS. They have used their CPF to purchase their HDB.

That would mean they need a retirement fund. Since their retirement is not in an annuity (unless they top up their CPF to be ready for CPF Life), they might be looking for at least $600,000 in wealth based on the 4% withdrawal rate.

Of course, if they meet the CPF Basic Retirement Sum (BRS) which is half of the FRS) they may be able to offset this.

If a couple have $75,000 each in their CPF Life, and they chose the CPF Basic option, each of them would have $450 a month. This would offset 45% of the $2,000 per month expenses. This would approximately reduce the wealth they need to $330,000 at least. Alternatively, they can top up their CPF so that it is fully funded. Instead of needing $330,000 at 65, at age 55 they would just need $150,000.

Some Conclusions

The way the data is pieced together makes me question whether I could conclude our take home savings rate is at least 30% of our take home pay.

Yet the way it works is that those frugal folks will buffer those spendthrifts. So perhaps the data is about right.

Let me summarize some big observations for myself.

The savings rate of 30% to 40% looks better than a lot of other countries. But because we do not have a government supported system in Singapore, we have to come up with lot of the costs (above the bare minimum) ourselves.

This means Singaporeans take between 11 to 46 years roughly to be financially independent. A lot will depend on your rate of return:

  1. Rate of return of 2%: 28 to 39 years
  2. Rate of return of 4%: 23 to 30 years
  3. Rate of return of 6%: 20 to 25 years

Most will need to start building wealth at least at age 35 to 40 years for it. This is so they can retire at age 65. If the rate of return of your wealth is low (1% versus 5%), you probably need to work 10 to 15 years more.

There seem to be a wealth divide. This wealth divide is based on income. Those that seem to do better in their career, their careers continue to flourish.

In contrast, those whose career seem to stagnate, their income does not allow them to upgrade their comes. It seems to be meritocracy at work. Those who do well get rewarded with a higher social economic standing.

Those living in 4 to 5 room HDB, their income peaked around 30 to 34 years old. Those living in Condo peak much later at 45 to 49 years old. Those in Landed seemed to drop off after 55 years old.

There is a big expense gap between the 5 room HDB dwellers and the Condo dwellers.

The expenses for single household largely stayed the same despite some upward mobility.

We can make use of some average expenses in our planning:

  • 4 rm HDB: $4,711
  • 5 rm HDB: $6,176
  • Condo: $8,418
  • Landed: $10,973

Your mileage may vary.

Other than condo dwellers, expenses do stay the same over certain age groups from 30 years to 54 years.

When you are 65 and below, your expenses go down by 30-50% (leaning closer to 50% instead of 30%).

The average expenses are:

  • 4 rm HDB: $1,989
  • 5 rm HDB: $2,992
  • Condo: $6,334
  • Landed: $6,730

For those with CPF Life, you might be able to offset a large part of your retirement expenses.

I think that based on the figures, it seems financial independence for most would coincide with the defacto retirement age. The problem it seems, is the rate of return for wealth for most.

I write more about financial independence and retirement in the retirement section below:

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.

Here are My Topical Resources on:

  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 Singaporeans may achieve Financial Independence. Retire Early not So Much. What the Data Shows. appeared first on Investment Moats.

]]>
https://investmentmoats.com/financial-independence/financial-independence-possible-singapore-retire-early-data/feed/ 14 10436
Journal-ling the reaction when Dow Fell 800 Points https://investmentmoats.com/money/dow-fell-800-points/ https://investmentmoats.com/money/dow-fell-800-points/#respond Wed, 14 Aug 2019 23:32:46 +0000 http://investmentmoats.com/?p=10418 This is a follow up to the last post I did when the volatility of the markets picked up. Not to cause panic but I want to see how different ETF for different asset classes do. 800 points do look like a lot and for a market like this you realize there are not a […]

The post Journal-ling the reaction when Dow Fell 800 Points appeared first on Investment Moats.

]]>
This is a follow up to the last post I did when the volatility of the markets picked up. Not to cause panic but I want to see how different ETF for different asset classes do.

800 points do look like a lot and for a market like this you realize there are not a lot of 3% moves.

The 20 year US Treasury Bond ETF always look good in times like this. Very uncorrelated and moving up 2%.

Gold Holdings ETF
The Gold Miner Stocks

Gold miner stocks is quite insulated. Since they are equities, you do not know how they are going to react when equity markets move down. The correlation relationship might not always be similar.

US Dollar ETF

Finally the USD ETF is performing better.

Japanese Yen ETF

The Japan yen is rather muted compared to the Aug 8 period.

Volatility ETF does it’s thing when the volatility picks up.

3 times leverage S&P 500 ETF
3 Times Leverage 20 year Treasury ETF

The UPRO and TMF are suppose to be in a constantly re-balancing portfolio.

Emerging markets, is still rather correlated. It has been very depressing.

REIT ETF

Lastly the REITs .

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.

Here are My Topical Resources on:

  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 Journal-ling the reaction when Dow Fell 800 Points appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/dow-fell-800-points/feed/ 0 10418
Do We Hoard Too Much Money? https://investmentmoats.com/money/hoard-too-much-money/ https://investmentmoats.com/money/hoard-too-much-money/#respond Mon, 12 Aug 2019 23:00:41 +0000 http://investmentmoats.com/?p=10405 What are we saving for? Are we saving for food and expenses? Or are we saving for lifestyle. I was reading this very thought provoking post by Early Retirement SG. Well, he is currently not in Singapore, following his wife to work. So now he is living in Paris. If you follow his posts, you […]

The post Do We Hoard Too Much Money? appeared first on Investment Moats.

]]>
What are we saving for? Are we saving for food and expenses? Or are we saving for lifestyle.

I was reading this very thought provoking post by Early Retirement SG. Well, he is currently not in Singapore, following his wife to work. So now he is living in Paris.

If you follow his posts, you will realize that whatever skill set you picked up on Freegan living, can be applied in Paris as well.

So now he has taken food that will probably last for 3 to 4 days.

Early Retirement SG reflected on how our insecurity with food may be similar to our insecurity with money in a certain way. But at the same time, it can be rather different.

How Knowledge of Capacity and Perish-ability Changes Things

The main difference between his insecurity with food and our insecurity with money is that there is a certain capacity that we can hoard.

I explained it as his insecurity because this is unique to him. For most of us, the supermarket is always open. The supermarket for most is pretty close to us. So there are no insecurity there.

However, when you are able to gather food that people do not want, the dynamics changes.

You start thinking about

  1. How much exactly I need?
  2. How long these food will last?
  3. How much can I store in my home?

When I went on an experiment to see how many I can last with food I can gather from all over the place, these are the considerations. Most of the time, we can get too much food. Both cooked and uncooked.

However, you also start seeing your psychic change.

I developed the hoarding mentality. However, for food, I cannot hoard much because I have to think about where I can put them. I am also limited to how long I can store them.

But you will start going through that mentality of “this is free!” to whether you can systematized this collection, storage, cooking, determining the optimum amount to take.

To me, back then it was a project. It was not really a need. It will be difficult to make peace with my father on different food philosophies. So it ended after I went through this Freegan experiential period.

The biggest learning experience for me was to learn about

  1. the supply chain of Singapore fresh produce
  2. where to find these unwanted food
  3. how much you can get
  4. how could you roughly systematized these things if you wish
  5. seeing my reaction to stuff that does not cost money from a third party perspective

Daniel Tay said that when he had more money, being equipped and earning as a financial planner, he never felt a sense of security. Freegan living did. I gotta say I agree with him on many levels there.

I digressed a little too much.

The idea is that…. I cannot bring home all. These things are perishable.

Perhaps another reason is that…. we know there is a limit to our capacity. How much does Kyith eat? How much does my dad eat? Since my dad disagreed on this philosophy, he would not eat as well. There is a few stuff I do not take for health reasons as well, so that limits things.

Food is something that we know the capacity limits (the refrigerator and the number of stomach capacity x number of meals per day x number of people that wishes to eat).

We often saw on variety shows, or in the news some old folks that keeps… quite a fair bit of things.

They probably also have a capacity. How big are their room and flat. The difference is that these stuff are not perishable. You can put them there for a long time.

Do We Hoard Money as Well?

Hoarding is often described as an excessive acquisition of and an inability or unwillingness to discard large quantities of objects that cover the living areas of the home and cause significant distress or impairment.

Hoarding for me feels quite psychological.

It often stems from some trauma at certain pivotal periods of your life. It is pivotal enough that psychologically you wish to prevent yourself from going to that situation again.

This can be not having any money when you were young, not having things you want. Then you suffer at the hands of your school mates, friends, society for them having it “easily” while no one can give it to you.

Or it could be when your family lost everything due to failed business. The quality of life suffered that behaviorally it shook you .

When older adults hoard stuff, they may have this fear that “some day that they will need it”. When they need it, they are afraid “they could not afford or it is senseless to spend extra money on it”.

It is a form of insecurity.

And to a certain extend I felt we can say the same about our relationship with money.

Some businessmen have a poor childhood.

It haunts them. It gives them motivation to do better. They eventually did. They made a lot of money.

However, while their economic status, and lifestyle changes, psychologically they didn’t grew out of that insecurity. They just keep accumulating. They didn’t know when to step down their efforts. They explained it by that is their work ethic, there is a strategic direction. That may be true to a large extent.

However, I felt that this money insecurity can be the greatest motivator.

We do not Know What We Want and an Uncertain Future

Those who tend to excessively hoard do that because there is a certain limit to what you can use an item for.

With money, we do not run into that problem. This is because one of the advantage of money is that it is used as a medium of exchange.

If you have a lot of that, you can buy different goods and services. It can do a lot of different things.

We hoard money because we do not really know what we want. Whatever the excess, we will save it. However, if you ask the folks what are they saving for, they do not have the clearest picture or how much they need.

Having money is better than not having any.

How could financial planning solved this problem?

I felt that majority of this problem is not going to be solved instantaneously by just providing some financial plan.

What we can do is to established a good framework to show you different levels of security and independence. And then we show you where you are.

If our framework is very robust, you should feel more safe. If the framework is not very robust, then you will feel more safe, but it is a false sense of security. We have failed in our job.

The framework established the various capacity. For example, how much do you need for you not to fully work. We can establish a investment portfolio that can provide a cash flow for you for 50 yo 60 years.

Another example is how much you need for your 2 children’s education?

How Secure would You feel about your Financial Situation?

In my comprehensive article on establishing financial security, I showed the graphic above. We are all haunted by our past to different degrees.

What we can do is to established different level of capacities. Those that are more risk adverse, would need more. But still, there is a limit to that.

For example, a very conservative measure is that

  1. You map out how you want to live your life in the future. This is your annual expense.
  2. We buffer #1 by 100%
  3. Then you withdraw 1% of your wealth in the initial year. For subsequent years, you adjust that spending amount by whatever inflation that year

You need a lot of money for this plan. But even then, there is still a numerical limit! A strong framework will give you what is this very upper limit where we can soundly conclude you are rather secure.

And then you can think of what you want to do with your money.

For those excessively financially insecure ones, yet have less resources, they probably need to make peace with themselves.

They have to be able to move up the spectrum to more risk seeking. But up to a certain point where they could accept (and also fundamentally sound. Some risk seeking can be really crazy).

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.

Here are My Topical Resources on:

  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 Do We Hoard Too Much Money? appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/hoard-too-much-money/feed/ 0 10405
Definitive Guide to Dividend Withholding Tax in Stock & Passive Investing https://investmentmoats.com/money-management/guide-dividend-withholding-tax-interest/ https://investmentmoats.com/money-management/guide-dividend-withholding-tax-interest/#comments Sat, 10 Aug 2019 23:08:47 +0000 http://investmentmoats.com/?p=10382 As an investor, you will invest in a stock, a business, a partnership that is based overseas. These stocks, business or partnership are incorporated or domiciled in another country. These stocks, business or partnership may declare dividends, interests or capital payments to you as a shareholder in Singapore. Once the dividends, interest or capital payments […]

The post Definitive Guide to Dividend Withholding Tax in Stock & Passive Investing appeared first on Investment Moats.

]]>
As an investor, you will invest in a stock, a business, a partnership that is based overseas.

These stocks, business or partnership are incorporated or domiciled in another country. These stocks, business or partnership may declare dividends, interests or capital payments to you as a shareholder in Singapore.

Once the dividends, interest or capital payments exit a specific country there is a withholding tax on these income, dividends, interest and capital payments.

There is no running away from withholding tax. I sort of validate this when I have the privilege to meet the subject matter experts that are recommending offshore investment bonds.

These bonds fulfills a specific tax planning role for expatriates, but also Singaporeans with assets in other countries. I shall not go too much into it.

Understanding withholding tax is something you cannot run away, whether you are a

  1. individual stock investor
  2. unit trust investor
  3. DIY passive index portfolio investor
  4. Robo- investor

This is particularly confusing if you are investing in a fund that is incorporated overseas. These fund manages a portfolio of stocks or bonds, which declare dividends as well.

So how does the withholding tax picture add up? In my Dimensional Fund Advisers article, I explained in depth. However, I think not a lot of people manage to read to that portion. So in this article I will try to talk specific about this.

Tax When Money Flows out of the Country

I think the best way I find to remember this is that every country, who choses to have a greater than 0 withholding tax, wishes to tax money when it flows out of the country.

So if you think about it this way

  1. When a China incorporated subsidiary declares a dividend and pays a Singapore parent, there is withholding tax (10% for China)
  2. A German unit trust owns a Spanish company. When the Spanish company declares a dividend to the German unit trust, there is a withholding tax when the money leaves Spain (20% for Spain)
  3. A Singapore investor owns a company incorporated in United States. The company pays a dividend to the Singaporean. There is a withholding tax on the dividend

As you can see whether you are an individual stock investor in Singapore, or Hong Kong, or other countries, you are affected. This is because your stock have overseas subsidiary.

As a unit trust or exchange traded fund investor you are affected as well.

What is the Implication?

A lot of times, the implication means is that you get a smaller dividend.

For example, you have a stock that is domiciled in Spain that is at $50 and it gives a $3 dividend. Your dividend yield would be 6%.

When the money leaves Spain and reaches you in Singapore, your dividend yield will be (1-20%) x 6% = 4.8%.

The Withholding Tax around the World

Each country do change their tax rates from time to time. So as an investor, you can check with the company you are interested to invest in, or you can download the latest withholding tax table.

I find that it is better to check with the company you are interested in.

To help with today’s discussion, here are the latest withholding tax as current as 2019 from Deloitte:

You realize countries have different withholding tax for different kind of payments. There are also different rates if you belong to different country unions or two countries have a dual taxation agreement.

Bermuda is like one of the tax haven. You will realize a lot of listed company are incorporated in Bermuda. Their withholding tax is so friendly (0% for all). Barbados is also one.

Recall the USA REITs Manulife US REIT and Keppel KBS all switched to a Barbados based structure when the 2017 Tax and Jobs act was announced. (Explained more in detail here)

Singapore is pretty friendly as well.

Switzerland’s withholding tax is obscene.

It is not Where it is Listed but Where the Company is Domiciled!

One thing that bamboozled a lot of investor is that they think that all the stocks listed in the United States are automatically subjected to a 30% withholding tax (which is the withholding tax for United States)

The way to remember is where the company is domiciled or incorporated.

It means where this company calls its home.

A good example is Royal Dutch Shell ADR. The American Depository Receipts (ADR for short) is a scheme that can easily allow an American to own a foreign stock like Royal Dutch Shell.

The US investor can buy this Royal Dutch Shell ADR listed in a United States stock exchange.

As a Singaporean, you can also invest in Royal Dutch Shell ADR listed on the United States stock exchange. So how much withholding tax do you have to pay?

Royal Dutch Shell is incorporated in UK but is a tax resident of Netherlands. You can check out the company website to find out more.

Based on this the withholding tax you pay is 15%, and not the United States withholding tax.

How do we tell where a Stock or Fund is Domiciled or Incorporated?

In the section before, Royal Dutch Shell ADR is incorporated in UK but calls Netherlands a tax resident.

The best way is to check with the company you are interested in, browse the website.

If not most of the time finding out where the company is incorporated or domiciled. Usually, the annual report or financial statements will show it.

Ping An Insurance is a Chinese stock listed in Hong Kong Stock Exchange. The withholding tax in Hong Kong is 0%. In China it is 10%.

A look at Ping An’s financials will show us that this company is incorporated in China. There is likely a 10% withholding tax on Ping an’s dividend.

The above is extracted from Dimensional’s annual report for their funds. Dimensional funds invest in stocks and bonds from all over the world but they are incorporated in Ireland.

A review of their annual reports will show you where they are incorporated in and whether there are any withholding taxes.

What about Dual Taxation Treaties?

You will observe that for some countries, there exist a dual taxation treaty. This enable you to enjoy a relief from getting tax in both countries.

The common ones that I encounter that affects some of the investors here are:

  1. For those investors with ETF or unit trust domiciled in Ireland. These ETF and unit trust would own a basket of stocks, with some stocks in the United States. There is a dual taxation agreement between United States and Ireland. Thus, the dividends withheld is 15% instead of 30% when the dividend exit United States to Ireland
  2. For those who purchase unfranked stocks in Australia, they are taxed at 15% instead of 30% due to a dual taxation agreement between Australia and Singapore

Unpacking the Withholding Tax on Exchange Traded Funds and Unit Trust

One of the reason I wrote the original post is to illustrate the advantage of Dimensional funds that are domiciled in Ireland. They are more tax efficient, when it comes to dividend withholding tax and estate duty/inheritance tax.

This fund dividend tax thing can be rather confusing and in this section I will try to explain it.

The investors who are affected are:

  1. If you purchase an exchange traded fund (ETF) that is listed and domiciled in the United States. This ETF pays out a dividend. We know that United States have a withholding tax of 30%
  2. If you purchase an ETF that is listed in UK and domiciled in Ireland. This ETF pays out a dividend or accumulates the dividend within the fund. Ireland has a 0% withholding tax
  3. If you purchase an unit trust like Dimensional funds that is listed in UK and domiciled in Ireland. This ETF pays out a dividend or accumulates the dividend within the fund. Ireland has a 0% withholding tax

How much withholding tax in total do you pay?

There are many layers of withholding tax. I think it is better to explain in a diagram.

The most prevalent investing method for funds are:

  1. DIY Investing: Buy 1 to 4 Low Expense Ratio ETF listed in United States
    1. ETF is domiciled or incorporated in United States (30% withholding tax)
    2. Both Equity and Bonds
    3. Covers the whole world
  2. DIY Investing: Buy 1 to 4 Low Expense Ratio ETF listed in London
    1. ETF is domiciled or incorporated in Ireland (0% withholding tax)
    2. Both Equity and Bonds
    3. Covers the whole world

Based on the withholding tax, you would think that #2 is a better choice than #1. I think it is. But it is important that you understand the mechanics involved.

Let us use 2 prevalent ETF to illustrate:

  1. Vanguard Total World Stock ETF (VT) listed in United States
  2. iShares Core MSCI World UCITS ETF (IWDA) listed in London

#1 matches #1 in the DIY Investing I mentioned in the previous list. #2 matches #2 in the previous list. These two funds are equity funds that seeks to cover the large cap stocks in the world. So you will get a very diversified portfolio.

Suppose we take it that for these 2 funds they are made up of 3 stocks domiciled in 3 different countries. These 3 stocks all give a dividend of 3% before withholding taxes:

  1. US Domiciled Stock – 3% dividend – 33% of fund
  2. China Domiciled Stock – 3% dividend – 33% of fund
  3. Germany Domiciled Stock – 3% dividend – 33% of fund

How to think about the different layers of withholding taxes considerations

There are many layers of withholding taxes considerations.

In the eyes of the professionals they look at it in 3 different layers:

  1. Tier 1: Portfolio Level
  2. Tier 2: Fund Level
  3. Tier 3: Investor Level

You will hear them say they are taxed at Tier 1 and not taxed at Tier 2. To me that sounds all that confusing.

The idea is to think in terms of gateways. Every time when money leaves a country, there is a withholding tax consideration. Also when money enters a country, there is a certain tax consideration (this is probably not withholding tax but how your country chooses to tax foreign sourced income)

It would look something like this:

A model to frame your mind to tackle withholding taxes

As an investor you may live or domiciled in Country D. suppose you own a stock listed in Country C with a subsidiary in Country B, which owns another subsidiary in Country A.

At every point there is an exit withholding tax consideration. At every point when cash flow is coming in, there may be a foreign sourced income consideration.

Typically, foreign sourced income entering a country is less of an issue. The focus tends to be on money leaving. Government are more concern about ensuring money just don’t flow out like that without some form of “control”

Let us go through the two examples with VT and IWDA.

Vanguard Total World Stock ETF (VT) Case Study

VT Dividend Withholding Tax
VT, domiciled in United States

The illustration above shows the taxation at different levels.

Since VT is domiciled in US, when the dividends from the US stock is paid to the fund, there is 0% withholding tax. There are however 10% and 25% withholding taxes for the China and Germany stock. 

At the fund level to the investor’s tax office in Singapore, there is a 30% withholding tax. 

Since Singapore currently do not tax on investor’s foreign sourced income, there is 0% tax when the investor receives the dividend finally.

So this works out to:

  1. US dividend: 3% x (1- 0.0) x (1-0.30) x (1 – 0.0) = 2.1%
  2. China dividend: 3% x (1- 0.10) x (1-0.30) x (1 – 0.0) = 1.89%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.30) x (1 – 0.0) = 1.575%
  4. Overall dividend: 1.836%
  5. Dividend withholding tax cost: 3%-1.836% = 1.163%

The mileage would vary depending on the size of the average dividend, and the composition. 

New let us look at IWDA’s situation

iShares Core MSCI World UCITS ETF (IWDA) Case Study

IWDA dividend withholding tax
IWDA, domiciled in Ireland

IWDA is domiciled in Ireland, when the dividends from the US stock is paid to the fund, there is 15% withholding tax. Withholding tax on dividends in China is 10% and withholding tax on dividends in Germany is 25%.

Typical dividend withholding tax for United States domiciled companies is 30%, so why is the withholding tax only 15%?

This is because there is a dual taxation treaty between United States and Ireland.

Thus on US, they only withheld 15% of the dividends for taxes.

So this works out to:

  1. US dividend: 3% x (1- 0.15) x (1-0.0) x (1 – 0.0) = 2.55%
  2. China dividend: 3% x (1- 0.10) x (1-0.0) x (1 – 0.0) = 2.7%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.0) x (1 – 0.0) = 2.25%
  4. Overall dividend: 2.475%
  5. Dividend withholding tax cost: 3%-2.475% = 0.525%

IWDA in this regard, and for the Irish domiciled ETFs, should be the most tax efficient. 

Dividend Withholding Tax is just One Evaluation

It is important to realize that optimizing the withholding tax you will need to pay is important. However, you have to weigh other considerations as well:

  1. The expense ratio (while US may be withholding tax inefficient, their ETF, due to their size may have lower expense ratio)
  2. Tracking error to the index (Some more liquid ETF and exchanges may have lower tracking errors
  3. The difference in the funds you are going for. You may lean towards certain investing philosophy
  4. Dividends, might be a small proportion of the overall total return for the fund!
  5. You have to consider the estate duty/inheritance/ death tax should you passed away

#5 tends to be a major component to think about and not easily bypass (But there are ways. Shall not discuss too much here)

Dimensional World Equity Fund Case Study

This is not in the realm of discussion but since I already done the work, I might as well put it here.

The local Dimensional funds you can purchase through MoneyOwl, Providend, iFast and GYC financial are domiciled in Ireland.

In a way, their withholding tax treatment is pretty similar to IWDA since both are domiciled in Ireland and their portfolio covers the world.

DFA Core Equity Fund Withholding Tax
Dimensional World Equity Fund, domiciled in Ireland

The illustration above shows the taxation at different levels. Since DFA funds available for Singaporeans is domiciled in Ireland, US withheld 30% of the dividend, China withheld 10% of the dividend, Germany withheld 25% of the dividend.

At the fund level to the investor’s tax office in Singapore, there is 0% withholding tax, since Ireland currently do not have withholding taxes. 

Since Singapore currently do not tax on investor’s foreign sourced income, there is 0% tax when the investor receives the dividend finally.

So this works out to:

  1. US dividend: 3% x (1- 0.30) x (1-0.0) x (1 – 0.0) = 2.1%
  2. China dividend: 3% x (1- 0.10) x (1-0.0) x (1 – 0.0) = 2.7%
  3. Germany dividend: 3% x (1- 0.25) x (1-0.0) x (1 – 0.0) = 2.25%
  4. Overall dividend: 2.326%
  5. Dividend withholding tax cost: 3%-2.326% = 0.6735%

You will notice a difference between IWDA and the Dimensional fund. The United States withholding tax is 30% instead of IWDA’s 15%.

But both are domiciled in Ireland.

Why is there such a difference? I have no idea. I guess that is how its treated because the structure of ETF and unit trust in Ireland is different. One is a fund while the other is business.

This is why these tax stuff can drive you up the wall.

DFA funds available to investors are UCITS funds and they have certain advantages to guard investors interest.

UCITS

The Handling of Withholding Tax on Interest Income – Prevalent in Bond Funds

How much interest income withholding tax the fund is subjected to depends on the withholding tax on interest income in each country.

In the early section, you can see for each country there are different treatments to dividends, interest and royalties possibly

In the USA, exchange traded funds that generate qualified interest income and short-term capital gains, may be exempted from United States withholding tax when distributed to non-US holders.

The US Tax law permits a regulated investment company (“RIC”) to designate the portion of distributions paid that represent interest related dividends (normally known as qualified interest income) and short term gain dividends as exempted.  

  1. you need to be a regulated investment company and provide proper documentation to qualify. Thus, DIY investors would not be exempted
  2. bond interest income from USA bond generally are exempted from dividend withholding tax

Here are some examples:

  1. for US Government Bond ETFs, typically 100% of the interest income qualify as Qualified Interest Income. One example is the iShares 10-20 year Treasury Bond ETF (TLH) used by Stashaway
  2. for US Corporate Bond ETFs, perhaps only 70-80% of interest income qualifies as Qualified Interest Income. One example is the iShares IBOXX Investment Grade Corporate bond ETF (LQD)
  3. for international bond ETF domiciled in USA, the Qualified Interest Income may not be applied at all. One example is the iShares International Treasury Bond ETF (IGOV) used by AutoWealth

For those funds or ETF domiciled in Ireland, the USA bonds are subjected to withholding tax and that could be 30% or 15% depending on whether it is a fund or ETF. 

Do remember, while USA have been a popular discussion, the withholding tax treatment for other countries will mean that there may be withholding tax incurred there, which might be more or less than the United States withholding taxes.

The above is taken from Dimensional Global Short Term Fixed Income fund. The United States portion constitute 10% of the fund. You would have to contend with the interest income withholding for Canada, France and Germany as well for example.

What if your Fund is Accumulating and does not pay out a dividend to you?

The fund might not pay out a dividend to you. However, the underlying companies, owned by the fund, still pay a withholding.

IWDA dividend withholding tax
IWDA, Domiciled in Ireland

IWDA is an accumulating ETF, which does not distribute dividends. But the underlying companies owned by the ETF will still get their dividends reduced.

Conclusion

Lastly, do not treat what I wrote as gospel.

A lot of work went into this through

  1. What I researched myself
  2. What others who are interested in investing researched
  3. Other investors’ experiences
  4. My experiences
  5. What I can find out from my peers in the industry who I am grateful for to share

Let me just say…. even those in the investing industry… they are also trying to figure this out.

And your own personal situation may be different from mine or the general public.

This is why you would never get very clear cut answers about these stuff. The motherhood statement is Consult your Tax Adviser.

But to get started, you got to have a blue print to start going down the rabbit hole. So I hope this is enough.

If you have more to volunteer, do let me know.

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.

Here are My Topical Resources on:

  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 Definitive Guide to Dividend Withholding Tax in Stock & Passive Investing appeared first on Investment Moats.

]]>
https://investmentmoats.com/money-management/guide-dividend-withholding-tax-interest/feed/ 10 10382
Innovative Wealth Strategies to Redistribute Nation’s Wealth https://investmentmoats.com/money/innovative-wealth-strategies-to-redistribute-nations-wealth/ https://investmentmoats.com/money/innovative-wealth-strategies-to-redistribute-nations-wealth/#comments Fri, 09 Aug 2019 23:12:40 +0000 http://investmentmoats.com/?p=10379 Bloomberg has a good article a few months ago on re-thinking wealth. They highlight 3 suggestions that may be explored to re-distribute wealth in a fair manner. These articles may end up behind a paywall so I want to share this over here at Investment Moats. I will add my interpretation as well. Two of […]

The post Innovative Wealth Strategies to Redistribute Nation’s Wealth appeared first on Investment Moats.

]]>
Bloomberg has a good article a few months ago on re-thinking wealth. They highlight 3 suggestions that may be explored to re-distribute wealth in a fair manner.

These articles may end up behind a paywall so I want to share this over here at Investment Moats. I will add my interpretation as well.

Two of them are rather interesting to me. More because of the way they were suggested because one involves retirement withdrawal. The other feels like a conversation on financial independence.

So here are the suggestions.

Baby Bonds

The gap between a median white family and median black family is wide. The white family has $171,000 in wealth while the black family have $17,600. We include home equity here.

If we use average instead, the white family will have $800,000 more than the black ones.

Baby Bonds – This establish a universal birthright to capital.

This was the brainchild of Senator Cory Booker.

  1. The government will put $1,000 in a federally managed, interest bearing trust account
  2. This account will only be accessible at adulthood
  3. The government will add money to this account based on family income over time. This with lower income will wish to be benefited more
  4. According to the math, children from the poorest family can have almost $50,000 at 18 years old

Tax Big Spenders – Financial Independence Folks are Safe!

The VAT or GST in Singapore, should tax the rich. If wealth inequality is a problem than we should tax the rich. The rich tends to spend more, so a goods and services tax should be a way that we can tax them.

But the goods and services tax affects the poor as well.

Unless you implement it like other countries. In other countries those staples, which constitute a large proportion of the expenses of the lower income are not taxed.

Laurence Kotlikoff , an economics professor at Boston University suggest we scale up the tax:

  1. Tax consumption above $100,000 per year starting at 5% rate
  2. This taxes goes up
  3. If you consume $1 mil or more annually, you are taxed 30%
  4. Consumption is calculated as all income (cash flow or what a household takes in during the year minus all the money the household invests)

If you look at the formula (#4), it seems real conducive for those folks pursing financial independence.

Imagine a couple that earns $200,000 a year (according to Singapore statistics this is not far off. This couple decides to pursue this radical, niche lifestyle call saving 70% of their income.

So they spend $60,000 a year and save $140,000 a year. The consumption tax will be on $60,000. Of course this is only consumption tax, and there might be additional income tax. The high earning couple may not be able to escape that.

Now if the couple were not aware of this financial independence movement, and do the normal stuff were they just save 25% of their income, their consumption tax will be on $150,000!

This looks to be a tax not just on those earning well, but less prudent with their money.

Index Socialism – What if we all become Temasek’s shareholders and we get a Dividend?

The article uses American wealth. However, I decide to use Singaporean wealth, since this is so close to our National Day.

Credit Suisse Research Institute 2018 Global Wealth Report puts Singaporean’s total wealth at US$1.3 trillion. Our current population is 5.7 million.

  1. If we divide this amount equally, each Singaporean will have a net worth of $228,070.
  2. At a 5% rate of return, each of us will earn an investment income of $11,403 a year
  3. Pool our resources, invest the money, make every one a shareholder
  4. Under this collective ownership, everyone gets paid a universal dividend

This is not a new concept. If you look at your Blackrock, Vanguard, they manage trillions of dollars for a lot of clients. The difference is that these are the folks who can afford it.

A suggestion would be for the country to create a government operated unit trust. All Singaporeans own an equal, non-transferable share.

Use the tax to fill up the fund with return-generating assets.

Then pay out an annual dividend to Singaporeans.

This sounds very much like our sovereign wealth fund Temasek. Their shareholders are the government of Singapore.

Would it make sense for a Singapore government managed unit trust?

One thing Kyith will say is that distributing a constant 5%… or a constant percentage 5% of the value, is a very good way to deplete all our money.

There is every chance for the assets to grow a lot. There are equal chances that the money will not last as well.

Compared to the Americans, who can divide such that every Americans owned US$300,000, maybe we are just not that rich.

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.

Here are My Topical Resources on:

  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 Innovative Wealth Strategies to Redistribute Nation’s Wealth appeared first on Investment Moats.

]]>
https://investmentmoats.com/money/innovative-wealth-strategies-to-redistribute-nations-wealth/feed/ 8 10379
Wharf REIC (1997) – a Storm coming for Dividend Yielder https://investmentmoats.com/stock-market-commentary/value-investing/wharf-reic-1997-storm-coming-dividend-yielder/ https://investmentmoats.com/stock-market-commentary/value-investing/wharf-reic-1997-storm-coming-dividend-yielder/#comments Wed, 07 Aug 2019 23:10:44 +0000 http://investmentmoats.com/?p=10369 Wharf Real Estate Investment Company’s (REIC) interim results was not too bad. I first wrote about Wharf REIC here. If you are not familiar with it, you might want to get a short overview of it through that article. Operating profit showed an improvement over last year. The profit attributable to shareholders was lower due […]

The post Wharf REIC (1997) – a Storm coming for Dividend Yielder appeared first on Investment Moats.

]]>
Wharf Real Estate Investment Company’s (REIC) interim results was not too bad.

Wharf REIC Interim Income Statement

I first wrote about Wharf REIC here. If you are not familiar with it, you might want to get a short overview of it through that article.

Operating profit showed an improvement over last year. The profit attributable to shareholders was lower due to a reduction in fair value increase of the investment properties.

That portion should be OK. We should look upon the recurrent earnings or cash flow aspect of the business.

The majority of the revenue for Wharf REIC (1997) is from its retail and commercial office rental income. In the past, since the cash flow is so recurring, we would annualized the earnings or cash flow. We could then assume a no growth scenario and see the relative valuation of Wharf REIC versus its peers in the same industry.

If we take the operating profit ($6.7 bil) – Income Tax ($1 bil) – Non-Controlling Interests ($0.08) – Financing cost of ($0.460) we arrive at a recurring net income of $5.16 bil. Annualized we get $10.32 bil.

Wharf REIC currently has 3 bil outstanding shares, thus the recurring EPS is $3.44. Wharf REIC current trades at a price of HK$45.20.

This gives Wharf REIC an earnings yield of 7.6%. Wharf REIC have a dividend policy of paying out 65% of its earnings income. This brings its dividend yield closer to 4.9%.

How should we look at the valuation?

Wharf REIC is results is driven by 2 retail malls, Harbour City and Times Square. To give you an extend of the influence of these 2 malls, together, they account for 10% of Hong Kong’s retail sales including wet market, motor vehicles but exclude F&B. Harbour City is 4 times one of our biggest mall VivoCity.

Wharf REIC’s net debt to asset is 13%. This means the leverage factor is low.

Unlike a REIT, Wharf REIC pays taxes. Name me a few retail mall REITs of this quality that trades at a recurring earnings yield of 7.6%.

I doubt you can find many.

And how many gives a historical dividend yield of 4.9%, backed by high quality assets on 65% recurring payout?

Wharf REIC

Harbour City (HC) and Times Square’s (TS) occupancy cost is rather manageable. We know it is higher versus Capitaland Mall and Frasers Centerpoint Trusts.

Wharf REIC’s dividend per share have observed to be consistently growing. It’s occupancy since 2009 have been consistently high. The revenue trend have also been consistent.

When a company do not pay out all their free cash flow as dividends, and they have a good recurring business model, they can show a rising dividend per share trend.

Certain tenants of Capitaland Mall, a Retail REIT in Singapore is on a percentage of turnover rental revenue model. This means that part of the rent is determined by how well the sales is. It gives the mall operator an incentive to do their best to make sure they also deliver in bringing greater footfalls to the tenant.

Upscale malls like Harbour City and Times Square should take a certain part of their rental revenue from percentage of sales. That would explain the good revenue trend.

Here are the average passing rent per square foot per month:

  1. Harbour City: $508
  2. Times Square: $290
  3. Plaza Hollywood: $102

The disparity is huge.

Here are the respective retail sales for the past 6 months:

  1. Harbour City: $18.5 bil
  2. Times Square: $4.4 bil
  3. Plaza Hollywood: $1.2 bil

We are investors who are seeking to make money. Whatever happen in the future is what we are concerned about. To find out whether the cash flow is growing and recurring, we look at the past to find results.

And since the intrinsic value of a stock is based upon the aggregate of future cash flow discounted to present value, what if all these riots and protests fundamentally alters Hong Kong?

Wharf REIC highlighted how the 3 mall revenue changes during the recent 2 downturn. In 2008, we observe a -19% shift in rental revenue.

The webcast or the webcast transcripts were not out yet, but in an article on the South China Morning Post (SCMP), Stephen Ng, the chairman & managing director of Wharf REIC and Doreen Lee, vice-chariman and executive director of Wharf REIC have these to say:

  1. “This time, it is like a perfect storm. External factors and internal factors are all erupting at the same time,”
  2. “In July and August, Hong Kong’s overall retail sales are not [expected to be] very optimistic. We will be affected,”
  3. “Overall, tenants’ businesses [have become] more difficult.”
  4. “We all know Hong Kong’s retail and catering industries are [facing difficulties], particularly in shopping areas [such as] Tsim Sha Tsui and Causeway Bay,”
  5. “The second quarter was worse than the first quarter. But it is not a significant plunge. It is worsening gradually. The hotels [sector] is not optimistic, nor is retail.
  6. “Will it be worse than [the 2008 financial crisis]? It is possible but … I do not have a crystal ball. I hope there will not be such a big wave.”
  7. “Demand is weakening. In the short term, we think the outlook is not very optimistic,”
  8. “Currency is a very important factor … As the Hong Kong dollar strengthens, it has a very big impact on Hong Kong’s overall consumption and demand,” “Yesterday, the yuan broke the 7 [yuan to a US dollar] threshold. This is an even bigger warning.”
  9. “In these few months, all tenants suffered from a certain degree of impact,”
  10. “We have to pray for the best, and hope the situation improves,”
  11. How long will it take? It is difficult to determine.” A drop in office rents in the second half, if any, will be in single digits,

When you put out information to the media and shareholders, you will wish to control the narrative. Some of my peers will say there is no value in attending AGMs or results brief.

I will say attending these briefs gives me some insights on the narrative of things the management cannot provide in data. You have to view these subjective data in the context of what they have been saying in all these briefs. If a certain management have always been positive, positive, positive and suddenly become…. withdrawn in their outlook, it may be significant enough to take note.

Management usually tries to give a balanced narrative. Some companies with less substance will talk up their company. So these tend to paint a rather positive picture.

But man, Doreen and Stephen were asked some tough questions and they are not hiding much. From what they say, in the short term, you will expect the second half results to be not as good. Just to what extend it is not good.

Recall that we annualized the earnings and say the earnings yield is 7.6%. Going forward, at least in the short term, the earnings yield might not be as high as 7.6%. As a longer term investor, what we are more concern of is not these short term earnings yield BUT the longer term ones.

This might be murky because… has Hong Kong permanently been altered? Would the international retail scene changed in a permanent manner? How fast is this change? How secular is this change?

The above questions are the more pertinent ones than all the pictures of the riots and mayhem.

Some short term changes remained short term. Those are noises. Some… become secular. Those are the ones that may make a gem like Wharf REIC become a value trap.

The history shows us evidence of quality or absence of quality. True quality is a moat. Short term it gets disturbed. The stock price may be mispriced. However, when the quality really disintegrates, then it becomes a real value trap.

If you run a concentrated portfolio, you make educated bets. If quality retains, your portfolio will flourish as a result. However if quality disintegrates, your portfolio will take a big hit.

This is what makes individual investing tough. There is value in good critical thinking. But that is not enough, you also need to go at least deeper into understanding something more than crowd. You also need more info about the business more than the crowd.

There will be those that say this is a secular shift bet on it. There will be those that say this is not a secular shift and bet on it.

I write more about my thoughts on active investing below.

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.

Here are My Topical Resources on:

  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 Wharf REIC (1997) – a Storm coming for Dividend Yielder appeared first on Investment Moats.

]]>
https://investmentmoats.com/stock-market-commentary/value-investing/wharf-reic-1997-storm-coming-dividend-yielder/feed/ 2 10369