All posts by Mickey J

Reader Question: Should I surrender my annuity and top up my CPF Retirement Account?

Last week, I received an email from a reader asking for my opinion if she should surrender her annuity and top up her CPF Retirement Account to get a higher monthly payout from CPF Life.

Grab a cup of coffee while you read this article because it’s going to be a long one.

Here’s how the email goes.

Hello,

I have been following your blog for a while. I refer to your blog about the CPF Life and Private Annuity Plan.

I am 65 this year, self-employed. Yearly I top-up my RA for tax relief in addition to Voluntary Contribution to the 3 accounts (OA, SA, MA). A month ago, I decided to defer my CPF payout to age 70 to enjoy the interest rate. By 70 years old, I probably would chose to join the CPF Life Scheme for life-time payout.

5 years ago (year 2014), my friend, a NTUC Income agent convinced me to buy a private annuity from her. I bought one with cash of SGD 150,000, and deferred the payout to age 65. At that time, the content in the contract communicated to me that the interest on the premium was 2.5% and the bonus was 2%. So, over the years before payout, I would receive a bit of money from the interest and bonus, even though the distribution cost is at 2%, which I think is high and for doing nothing – no financial advice whatsoever needed from NTUC Income. 

Recently, I asked for some numbers from NTUC Income. Actually, the rate of interest they pay was only 1.75% and the bonus ranging between 1 to 2% depending on their investment performance. I understand the interest rate should be guaranteed and bonus varies. I am not very happy about this reduced interest rate.

Currently, the attraction from CPF was the high interest rate at 4% as compared to all financial institutions and private insurance companies. Another 1% and an extra 1% based on the formula.

Last week, out of curiosity, I threw out a question to myself. Would it be better off for me to surrender the Annuity Life with NTUC Income and use the surrender value to top up my RA to the maximum cap allowed? 

With my original premium of SGD 150,000, the surrender value now stands at SGD 163,834.66.

My RA at CPF is currently at SGD 115,000. If I top-up my RA with the surrender value from NTUC Income, this will bring my RA amount to about SGD 279,000.

My NTUC Income Annuity plan monthly payout is on SGD 668 which shall commence monthly payout in Feb 2020. For the same amount of surrender value of SGD 163,834, using the CPF Life estimator, the monthly payout with CPF Life at age 65 is between $841 to $890 (standard plan); and if I chose the monthly payout at 70 years old, the amount is higher at $1098 to $1184 (standard plan). Just by comparing the payout at age 65, the difference is $173 ( I am using the lower amount $841 in CPF Life to less the monthly payout of $668 from NTUC Income). $173 more is quite a bit of money to receive every month for a full-time retiree in the future.

Also, even the monthly payout commences at age 65 or age 70, CPF continues to pay the 4% on the premium until the age of 82, but the 4% is put to the Lifelong Pool to sustain the payout for life, and this amount is not reflected in the premium statement. Whereas, for NTUC Income the interest and bonus will stop as soon as the payout commences at age 65. 

Based on the above reasoning, would it be wise for me pull out from NTUC Income private annuity? If I pull-out, I would want to top-up my RA with the surrender value from NTUC Income to enjoy a higher payout in CPF Life. 

Actually, I have another small annuity of $56,000 with NTUC Income since 2009. After 10 years the surrender value now is $77,000. The monthly payout is $368 and shall pay me in June 2019.

I like to hear your comment.

Thank you.
M

Before I begin, I wanted to address a few points that M has done incorrectly.

Calculating the additional CPF Life payout received if the annuity was surrendered and added to CPF Retirement Account.

This way M calculated how much additional CPF Life payout she would receive if she surrendered the annuity and moved that money into her CPF Retirement Account was incorrect.

She should use the total of $115,000 + $158,000 (I’ll explain why we don’t use the full annuity surrender value later) to calculate the surplus monthly payout instead of just the $163,834.66 (annuity surrender value) alone.

Here’s how the figures look like:

  • Monthly payout from just $115,000 in CPF Life Standard Plan: $613 – $649 (withdraw at age 65) and $801 – $861 (withdraw at age 70)
  • Monthly payout from $115,000 + $158,000 in CPF Life Standard Plan: $1,358 – $1,441 (withdraw at age 65) and $1,764 – $1,907 (withdraw at age 70)

Like what M did earlier, we use the lowest amount to calculate the surplus monthly payout. The additional monthly payout M will get for putting the surrender value of her annuity in CPF Life becomes $745 (withdraw at age 65) and $963 (withdraw at age 70).

If we compare against the monthly payout of $668 from M’s annuity, the difference is actually $77 (withdraw at age 65) and $295 (withdraw at age 70) instead of M’s original calculation of $173 (withdraw at age 65).

How much can you top up into your CPF Retirement Account?

When M reached the age of 55, her CPF Retirement Account would have been created and money would have been moved from her Special Account and Ordinary Account into her Retirement Account.

As M’s birthday falls before 1 July 2009, her Full Retirement Sum is $106,000.

The way to calculate the maximum amount M can top up into her Retirement Account is by subtracting M’s Full Retirement Sum with the Enhanced Retirement Sum (2019). The current Enhanced Retirement Sum is $264,000.

$264,000 – $106,000 = $158,000

While M’s annuity has a surrender value of $163,834, there will be an excess $5,834 that can’t go into her Retirement Account. M can make a Voluntary Contribution into her CPF accounts and let that money go into her Ordinary and Special Accounts (her Medisave Account is already maxed out) to continue growing her money.

By the way, I’ve clarified this with the CPF Board and they do not consider the interest earned in the Retirement Account in this calculation. So the extra $9,000 in M’s Retirement Account has been excluded.

Pros and cons of keeping your money in an annuity

Below is a list of pros and cons of having an annuity on top of CPF Life.

ProsCons
Ability to surrender your plan to have access to emergency fundsMonthly payout is subjected to bonus declared by the insurer
A separate stream of retirement income for diversificationMonthly payout is usually not as high as CPF Life

In M’s case, she will have access to $163,834 from her annuity as part emergency funds if anything bad happens. Naturally this figure will gradually shrink as the insurer makes monthly payouts to her.

Pros and cons of surrendering your annuity and topping up your CPF Retirement Account

Here are the pros and cons of surrendering your annuity and topping up your Retirement Account for CPF Life.

ProsCons
Higher overall monthly payout for retirement incomeCPF Life monies cannot be withdrawn
Steady monthly payout from CPF Life with minimum fluctuations

Since M is willing to defer her CPF Life payout till 70, she’s looking at an additional CPF Life monthly payout of $295 which is make a substantial difference to a retiree.

It could easily pay for your monthly transport and/or utility bills easily. If basic living expenses are already covered, that $295 can even pay for a few nice meals in restaurants with family and friends each month.

So what should M do?

I’m assuming that M healthy and will live till at least Singapore’s average life expectancy of 85.4 years. That’s at least 20 years of retirement life that she can look forward to.

Here’s how I think M can consider doing.

Option A: If M already has a reasonably large sum of money (say $200,000) set aside in risk-free investments like Singapore Savings Bonds, she can choose to surrender her annuity and to top up $158,000 into your CPF RA. she can also choose to surrender only partial of her annuity to top up her CPF Retirement Account. That will maximise the retirement income she will receive from CPF Life.

Option B: But if she doesn’t have any other emergency savings set aside and these annuity plans are basically her only liquid assets, then I’d suggest she keeps her annuity plans (she can choose to surrender the annuity plan with a lower value to top up her CPF Retirement Account and keep the other plan) so that she has some flexibility in her retirement lifestyle in exchange for a slightly lower monthly payout from CPF Life and her annuity plans.

In any case, M sounds like she’s a prudent person so I don’t think she can really go wrong with either options. It’s more about making an informed decision based on her circumstances.

Side note on CPF Life enrollment

By the way, M can enroll into CPF Life as early as 1 month before your 65th birthday. But what’s important to note is after choosing her CPF Life Plan (Basic, Standard or Escalating), she will only have a 30-days grace period to amend your choice of CPF Life Plan.

Getting my feet wet with dividend investing with NetLink Trust

It’s been 4 years since I’ve held any individual stocks in my portfolio. I decided to explore the markets again for stocks to build a portfolio on top of my existing ETF investment portfolio using spare cash that I have accumulated from surplus in my monthly budget.

Based on my calculations, the ETF investment portfolio that I’m currently building will be more efficient left alone till 62 before I start drawing down from it. So I’ve been thinking about setting up another investment portfolio.

The purpose is to build a separate investment portfolio that has the potential to provide retirement income before I reach 62 and complement the excess CPF money that I will have in my CPF accounts after 55.

I intend to make this portfolio contain a mix of value, growth and dividend stocks, with a larger portion being dividend stocks.

As a start, I decided to pick a safer stock to invest in. After screening through a number of stocks, I decided to invest in NetLink Trust for dividend income.

Here are some of the criteria I used to evaluate my purchase.

Resilient business model and strong economic moat

This is an important one for me because of my past history in stock investment. Each time I invest in a stock, I don’t even look at their performance, much less sell them for many years.

Netlink NBN Trust has a unique economic moat since it designs, builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Generation Nationwide Broadband Network. The trust’s extensive network provides nationwide coverage to residential homes and non-residential premises in mainland Singapore and its connected islands.

In the next few years, I can only foresee that more service providers will be moving their customers over from cable services to fibre optics connection (if they have not already done so already) and fibre optics connectivity will be the norm in Singapore. That represents a stable recurring (and potentially slowly increasing) revenue for the company.

On the technology front, there’s nothing more advanced than fibre optics communication and when one comes up, it will take several years before it reaches a level maturity that the Singapore government would be willing to take a risk and make a nationwide change from fibre optics.

In my opinion, the number of residential fibre optics users is also unlikely to decrease, ever. If the Singapore economy goes into recession and you will probably choose to shop less and eat at home more often. But would you think about cancelling your Internet service? I highly doubt so.

Pays dividend and dividend per share is stable or rising

In 2018, NetLink Trust paid out 0.068 cents in dividends over 2 periods (May and November). That’s around 8.4% dividend yield at the time of this article where the last transacted price is $0.81 per share.

While what I’ve learnt is that we want to pick stocks that have a stable or rising dividend paid for at least 5 years, I’m choosing to make a concession given that NetLink Trust’s distribution policy is to distribute 100% of its cash available for distribution (“CAFD”).

Decent market capitalisation

In most of the investment workshops I’ve attended, the trainers have mentioned that market capitalisation is important in screening stocks since it generally corresponds to a company’s stage in its business development.

A company with low market capitalisation is seen as less conservative since it has a high chance for massive growth and also a high risk of massive failure. A company with mid to large market capitalisation is naturally considered much safer with lower risk of getting wiped out in a recession. However, they often also have lower chance for growth since they would have already achieved a certain stage of growth.

Since the purpose of this investment is for stable dividend payouts, mid to large market capitalisation is preferred. NetLink Trust has a market capitalisation of $3.16 billion which makes it a mid cap stock.

Net Asset Value

The Net Asset Value of a company represents its net value as an entity and is calculated by using subtracting the total value of its liabilities with the total value of the company’s assets.

We can use the net asset value of a company as one of the measurements to tell if the current share price is worth paying for. To do this easily, we will take the net asset value of the company, divided by the total number of shares to derive the net asset value per share. Using the net asset value per share, we can then compare it with the current share price of the company.

If the net asset value per share is higher than the current share price, then it is an indication that the company could be undervalued. To truly tell if a company is undervalued, we will need to examine the company’s profitability and operating cash flow to see if the company has any issues.

I’ll write about it next time when I’m looking at value stocks.

For NetLink Trust, its net asset value is $0.77 and that’s pretty close to the current price of $0.81 per share (5% premium of net asset value). I think it’s a fair price.

Current Ratio

A company with a current ratio less than 1 most likely does not have the capital on hand to meet its short-term obligations if they were all due at once. Likewise, a company with a current ratio greater than 1 indicates that it has the financial resources to remain solvent in the short-term.

For long-term investors like me, this is important as we will always keep current ratio in mind whenever we re-examine our portfolio to ensure that the companies we invest in have the financial strength to weather through any short term turbulence, should its debtors come knocking on its doors.

With NetLink Trust having a current ratio of 2.64, it gives me the confidence that NetLink Trust has the financial strength to keep the business going.

Irrelevance of dividend payout ratio

I struggled with this at first because by plugging in the formula, the dividend payout ratio came out to be almost 3 times the earnings and looked crazy unsustainable.

That was until I researched further and after reading an article on probuttefly.com, I learnt that the Trust may choose to distribute dividends from operating cash flow instead of accounting profits like regular companies.

Therefore dividend payout ratio as a screening metric for NetLink Trust is no longer considered.

Going in with 60% confidence

I can’t say I’m spotting sure wins here. I mean, I’ve only attended a couple of workshops and picked up some knowledge about investing. I’m trying to put them to good use by making investing decisions based on data.

My purpose for picking up NetLink Trust is purely for its dividend payouts so if it fails to deliver its promise on dividends, I’ll remove it from my portfolio.

What are your thoughts about NetLink Trust as a dividend stock investment? Do you think I should be using other metrics to analyse this stock instead? Please share them in the comments below.

You won’t trust Mickey Mouse to manage your portfolio so there’s no reason to trust Mickey J to make investment decisions for you either. The contents in this article should be considered as entertainment until you do your own due diligence by spending time researching about stocks and make your own investment decisions.

Photo by William Iven on Unsplash

Why SG Budget Babe Readers’ Investment Workshop is a godsend for beginner investors

This blog article is not sponsored and although I attended the workshop with a free ticket, the contents in this article are purely my own opinion.

After I attended the Seedly Personal Finance Festival, I walked away determined to learn more about investing on my own. When I was given an opportunity to attend a Readers’ Investment Workshop conducted by Dawn from SG Budget Babe, I jumped at the opportunity in a heartbeat. I learnt so much from the workshop and walked away with so many actionable items in my notepad.

In my circle of friend, many consider Dawn as a mummy blogger who is great at personal finance. Little did they know, that Dawn is also an expert in investing.

Here’s why I find her workshop a godsend for beginner investors like me.

In-depth explanation about investing

Although the workshop is very heavy with many topics, Dawn explained each topic in great detail. One of the topics that I remembered vividly was how she explained what is ETF.

Most speakers would simply breeze through this topic by using STI ETF as an example of ETFs and move on to the next topic but Dawn spent time to explain the different types of ETFs available in the market and what to look out for when reading about ETFs.

Dawn explained in detail about how the ETF’s expense ratio and management fees can impact the ETF’s returns. She also touched on how we can understand the ETF’s methodology, counters invested and tracking error.

While the above is just an example, Dawn practically did the same level of explanation for all the other types of investments – stocks, bonds, etc. and I was able to pick up new information about each investment vehicle.

Up to date case studies and stock picks

Many speakers tend to reuse their case studies, especially when it comes to stock picks and identifying trends.

One thing that Dawn emphasised in planning her workshop was that all the case studies must be up to date and stock picks have to be stocks that her speakers are investing in themselves.

I could see the difference in how enthusiastic Dawn and her speakers spoke about their stock picks and why they chose to invest in those stocks. With skin in the game, they were able to elaborate why their stock picks were worth investing in and the various factors that made the stocks attractive.

Authentic and balanced view on investing

Almost all the investment workshops that I’ve attended so far, the speakers would speak very positively about their investment strategies and why they work. If it were that simple, wouldn’t everyone be rich by now, had they followed what the speakers taught?

The truth is, we can learn everything that was taught but that doesn’t necessarily mean we will be able to replicate the same success. Dawn was very frank about this in her workshop.

In fact, she openly shared the successes and failures in her investment journey with the audience so that everyone is aware that there’s no such thing as a sure-win in investing.

No holds barred sharing of investment methodology

In most investment workshops, I usually walk away with 1-2 pages of notes containing key points shared by the speakers. This is the first workshop where I walked away with 7 pages of notes. Wow!

No I didn’t doodle on my notepad. What happened was that the workshop had so many gold nuggets of information that my hands got tired from all that writing.

The presentations were very detailed and there were lots of information to write down. We even got to see the screening criteria used by the speakers to choose their stocks. Dawn even had a few slides dedicated to formulas used to evaluate stocks.

A investment workshop not to be missed.

I wish I could tell you when the next SG Budget Babe investment workshop is going to be and how you can sign up because I got so much value out of it.

But even Dawn doesn’t know when she’s going to conduct the next workshop.

My recommendation is to subscribe to SG Budget Babe so that you’ll be one of the first to know when the next workshop is happening.

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