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Some Thoughts on CPF Rants, Bond Tents and New Financial Adviser Money Management

After a tiring day, I don’t really feel like putting out an article that was supposed to be meant for this Sunday.

However, there are some comments to be made.

How Should A Financial Adviser Manage His Own Money?

My friend Jason here heeded my call to have more self-employed folks show us how they manage their variable income, or how they kick start their business in the initial years.

Jason applied my Phase 1 and 2 planning. He worked out how much is his Essential expenses ($24,000 a year).

He would have a 1-year runway to proof that he could get business off the ground.

You can see how he is going to get a diversified stream of advisory income going forward. I think the family (his wife and himself) is being pragmatic about it.

To be fair, if phase 1 for this kind of business lasts 1 year, then setting aside $50,000 before taking the plunge would be adequate. If Jason is a fresh graduate, then he may not have the luxury of such a safety net. But then again, as a fresh graduate, Jason would also have a much more frugal lifestyle (this is not to say that Jason is not frugal).

I think he has a lot of buffers but he chose to compartmentalize it away. For the time being, he could cash flow from his dividend portfolio. However, he is pretty clear that he is in the stage where he would rather reinvest the dividends so that the portfolio will be able to grow.

I do wish Jason all the best in his new job. If you look at his finances, it is in tip-top shape. Cleared off his mortgage, build-up a portfolio that allows him to do career transition.

If You Solely Depend on CPF for Your Retirement, You May Not Be the Best Person to Manage your CPF

A certain Clifford Theseira decided to follow a certain Toh Thiam Hock’s footsteps by complaining about his CPF on social media.

Mr. Thesiera complained that his CPF payout of $575 a month is rather measly and not enough for his wife and himself to live on. He would have to drive Grab to supplement and at 72 years old, he might not be able to drive for long.

So CPF came up with a swift rebuttal on a Sunday (!)

There were some who felt that CPF should not be opening up the people’s details to respond this way. However, what were they suppose to do when it seems Mr. Theseira wishes to use his own situations as evidence of our CPF’s failure?

CPF revealed that $140,000 was withdrawn from his CPF since he turned 55 and that the Medisave contribution from his pay would be 1% of his monthly income.

Here is my guess. There is a few information not reveal to us at this point but I believe Mr. Theseira pledge his 5-room flat so he set aside half his minimum sum (the old scheme) which goes into his CPF retirement account. Upon turning 55, about $140,000 was taken out. At the same time, he also had $60,000 in his CPF Medisave.

If you ask me, that does not seem like a person who does not have much money.

In February this year, Josephine Teo provided some figures on how much older Singaporeans are getting from CPF Life and Retirement Sum Scheme. It looks like what Mr. Theseira got is much higher than the average.

To top that, the Medisave is super healthy.

I think Mr. Theseira have inevitably showed what a “success” the CPF has been for Singaporeans like himself.

TOC came up with a rebuttal to CPF’s response:

Of course, the CPF Board did not disclose that from 55 to 65, there is no payout from one’s CPF Life. To survive, one will either have to work, assuming he can find a suitable job at the age of 50s to 60s, or to start using his withdrawn CPF funds from 55 to 65 to survive.

Assuming Mr Theseira used up the $140,000 from 55 to 65 before getting his monthly payouts of $575 after 65, on average, he would be surviving on $1,170 per month for both himself and his wife during the “lost decade”.

This is, in fact, a sum already less than the minimum $1,379 a month by a study for a single elderly aged 65 and above, in order to attain a “basic standard of living” in Singapore

– The Online Citizen

Even the SDP decided to jump on this bandwagon and criticize the government on the CPF:

The SDP also questioned, “To date, the Government has refused to provide data on how many individuals squander their savings and turn to the state for help. Does the number warrant a blanket punishment for the vast majority of retirees like Mr Theseira who are responsible and astute managers of their own funds and lives?”

“Another crucial question that the PAP must answer is why at the age of 72 must Mr Theseira and others like him continue to work to support himself and his wife?

The answer, if the PAP cares to admit, is that many retirees are now asset rich but cash poor. In simple words, Singaporeans have had little choice but to use their retirement savings during their working years to pay for their HDB loans.

These loans are often stretched to 25 to 30 years because of the inflated prices of the flats. When they now have to retire, they find themselves with insufficient savings”, they added.

– SDP

SDP brought up some good points. Home too expensive. Asset Rich Cash Poor. Both are not the CPF’s problem.

It is an Asian mentality problem. We just love properties. And the HDB can be purchased at less than 5 times price to combined income. If you are conscientious, you can finish paying in 12 years.

In fact, I am 39 this year. Most of my friends are like finish paying, almost finish paying and thinking of upgrading to EC. They have a choice. Yet they choose to upgrade. They finish paying for their HDB and decided to upgrade.

I will tell you of another group of people that have to work at 70-year old to support their lifestyle. These are the friends who need $5,000 a month to have “bare minimum living”. They have no choice because that is what they believe in. Whether you are 70, 50, if your CPF is not enough, you gotta find a way to have a residual stream of income.

The beef that Toh Thiam Hock, Mr. Theseira have with the system would always be the shifting goal post, not allowing them to withdraw all their money at 55 years old. Whether they die or not die is none of the government’s business.

But the problem is real. For the better part of 30-40 years, if they have not been able to engineer a more comfortable situation for themselves at age 50 or beyond, what are the chances that they are likely to be able to manage their wealth well when they get all their money at age 55?

Put it another way, if you complain that you can only depend on your CPF money, I shudder to think if I were to let you have all your money at age 55, where would you put it to, so that your savings interest can beat the 4.78%?

The 2 Main Problems of FIRE in Singapore

Someone asked me about my thoughts on a Financial Trainer’s hard-hitting article on 2 main problems of FIRE in Singapore.

Here is the summary:

  1. You cannot estimate your expenses. Your expenses will rise from $50,000 to $100,000. You need other residual income
  2. Inflation in Singapore have been rather low. We are underestimating. You need to have 20-30% buffer
  3. 4% withdrawal rate based on the fact that the USA is a superpower. When you live in Singapore and you are not a superpower, your returns may be drastically different. If you use 4%, you are being lured into thinking your framework is sound
  4. Bond rates are low. How low can it go? Most likely it will go up
  5. SGD is strong. If you are in a portfolio of S&P 500 and 20 Year Treasury index, your returns may be cut due to forex risk
  6. His solution is an actively managed all-weather portfolio

I think the are valid concerns.

I do wonder how many people really understand how that safe withdrawal rate methodology work.

You might want to find out how to tackle FIRE from him. He has a course and have a solution to this tough monster.

Bond Tent in Singapore Context

Life Finance put out a good article discussing the traditional glide path during wealth accumulation and the bond tent.

The Traditional Glide Path happens when you increase your bond allocation as you approach retirement. This will gradually reduce your portfolio’s volatility over time.

The Bond Tent is a strategy to tackle the negative sequence of return risk.

Life Finance tries to test the bond tent out with Singapore data. I am not sure how much sample he has, but his conclusion is the traditional glide path does not work so well, the bond tent does not work so well.

Based on my research, the bond tent, as elegant as it sounds, does boost the success rate by a lot.

The overall idea is that you need adequate stocks to have a greater chance of lasting a longer retirement duration. But if you have too much, the volatility reduces the success rate. So the allocation tends to vary between 40% to 80% equities. The best result happens when we can ramp up to 60-80% equities in a smaller window.

Overall I think the 60% equity 40% bonds is still the preferred allocation.

Lastly, most people need to look at bonds, not in the traditional sense, but bonds from a total return perspective. Active bond managers are able to gain certain returns by switching to different bonds when the yield curve flattens or steepens. They can choose to find a higher-yielding bond with the same credit quality.

What this means is that it is not a buy and hold, collect coupon game. This means your return will look like an equity fund, which fluctuates year to year.

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Johnson Lee

Monday 19th of October 2020

Hi Kyith,

I am curious to know if bond tents work the same way for Unit Trusts like any portfolios of individual stocks and bonds?

Life Finance

Monday 4th of November 2019

Thank you for your interest in my scribblings! As noted in the article, a portfolio with 90% in bonds would likely last though a 30 year retirement at a withdrawal rate of 3.35%, which is around the level I believe many local bloggers are aiming for. While there are many investment options available, ultimately retirees consume in Singapore, and would need S$ to do so. Foreign exchange risk is something they may not want to bear, as the S$ has fluctuated between a low of 1.80 to the US$ to a high of 1.20, just in the last 20 years! And GIC has just managed to earn 3.4% above the inflation rate over the last 20 years as well, in US$ terms (probably 2.2% in S$ terms), investing in overseas assets. Sustaining returns over the long term is not an easy task.

Createwwealth8888

Monday 4th of November 2019

The older generation folks may remember those days 2 to 3 years NZ fixed deposits were above 10% but when FD matured after 3 years and after Forex rate. It was negative return. I learnt first hand on Forex. Many depositors may think that they are savers but in fact they are unaware Forex speculators.

steven

Sunday 3rd of November 2019

wad do u say to using cpf as the bond component in a 60/40 portfolio? does it work that way?

Kyith

Sunday 3rd of November 2019

hi steven, that works pretty well. Though if you wish to retire before 65 years old, you have to think carefully how your draw down plan is. for those years, you will need an additional portfolio, or additional bonds outside if you need some lower volatility.

TSL

Sunday 3rd of November 2019

I don’t understand what Mr Theseira is complaining about. As he rightfully said, CPF is his own money, so the Low payout of $575 is simply because he didn’t have enough money in his CPF. How do you blame the government for that?

Also, I note he has a 5 room HDB, so perhaps he has over spent his retirement money (CPF) for a flat bigger than he can afford?

Regarding the $60k in his medisave, it can be used for approved medical treatments. The fact that Mr Theseira has not benefited from this means he is very healthy at 72, and I feel happy for him. Upon his death, all Medisave balance will be distributed to his nominees in cash. Yes, cash, unless he choose to use a special form and process to distribute to the nominees CPF accounts.

Kyith

Sunday 3rd of November 2019

Hi TSL, I think what we can agree on is that.. it infers he is really healthy. Which is a good thing essentially. My dad is that age and dealing with problems and all. His CPF Medisave is running low as well. To have $60,000 in Medisave is either super good in health or healthcare is funded by other sources.

I do reckon folks just wish to put the CPF in a very poor light. The post is not there anymore.

Sinkie

Sunday 3rd of November 2019

I'm always amused at people who die-die use only local stocks & local bonds to analyse and then say a methodology doesn't work. But at the same time, they always go overseas for their holidays, never a staycation. LOL!

Kyith

Sunday 3rd of November 2019

well.... they do have a point. we are Singaporeans after all. Let us see what other data Life Finance can get out.

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