Category Archives for Retirement

Donald Trump is now the President of the United States! So what?

Unless you’ve been hiding in North Korea, you’ve probably know a little about the US presidential election that Donald Trump has been campaigning for a long time now.

Most of the information probably revolves around the crap he spews every time they put a mike in front of him.

us-election-result

What some of my friends consider to be the worst case scenario has happened today.

Donald Trump has won the presidential race and is now the President of the United States.

Without a doubt, everyone is going to be talking about the election results today. As the results surfaced in Google, there’s was five minutes of buzz in the office from colleagues discussing about the results. A mere five minutes! That’s right, everyone got back to work and the world continues to spin.

As a regular employee in a multinational corporation striving for FIRE (Financial Independence and Retiring Early), let me offer four contrarian reasons about why I think the impact of the US presidential election result isn’t going to have a big impact on your retirement strategies.

Your company is not going to close down the Singapore office lah

Donald Trump wants to move jobs back to the United States and kudos to him if he manages to do that and get more Americans employed.

Global companies set up shop in Singapore to establish a regional presence in Asia and their Singapore offices primarily functions as a regional hub to connect to countries in Asia. Nothing has changed.

There’s no compelling reason for your global office to shut down regional offices just because Donald Trump is President of the United States.

In fact, your regional office is probably more important now than ever because Asia may be the only region that is bringing in the revenue.

So continue working and squirrelling away your savings as planned for FIRE.

With or without Trump, Singapore’s economy is already heading south

What you need to know is that if the government announces that the Singapore economy is down, it means that in reality, the Singapore economy has been heading south for quite a while.

Through my contacts, I’ve been hearing news about how many startups are dropping like flies, small and medium enterprises in Singapore are suffering and how it’s harder to generate new revenue nowadays.

If you haven’t been managing your expenses and making adjustments, it’s definitely a good time to start.

Foreign investors have nowhere to go except Asia

Europe is already in a mess. Donald Trump as the new President of the United States will bring a lot of uncertainty into the country.

Global investors will have nowhere to turn to except Asia and Singapore will have a high chance to be in the center of everything.

With more foreign investment potentially on the table, I’m confident that Singapore will be able to tide through this rough patch.

Stay on track with your investment strategies and don’t invest with your gut

We’ve had two major events this year. Brexit and the US presidential elections. If you were swayed by emotions on hopes that Britain would remain in EU and Hillary Clinton would win the presidency, you would have gotten caught by market sentiments by making irrational decisions.

Personally, I’m comfortable with my current retirement strategy and don’t see the need to make any drastic changes just because of the US presidential election. There’s no reason to panic.

What are your thoughts about Donald Trump being the new President of the United States?

A different perspective on the Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) was started in 2011 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of a greying population by helping Singaporeans to save more for their old age. It is operated by the private sector (mainly local banks).

Participating in SRS is voluntary and you can contribute any amount to your SRS account, subject to a cap ($12,750 in 2015 and $15,300 from 2016 onwards). In 2013, the three local banks administering the scheme said they have seen up to 20 per cent annual growth rate in the number of new SRS accounts opened over the past five years which to me, is a good sign because that shows that more Singaporeans are planning for their retirement.

Why naysayers are against contributing to the Supplementary Retirement Scheme

Despite the increase in new SRS accounts, there are many naysayers who are against the idea of contributing cash to SRS accounts.

Here’s a calculation on tax savings that I’ve taken from OCBC’s website on Supplementary Retirement Scheme based on an individual who earns $60,000 per year (that’s $5,000 per month) and $20,000 in personal reliefs.

supplementary-retirement-scheme-calculations

Naysayers would say that it’s ridiculous to contribute $12,750 in cold hard cash just to enjoy $405 in tax savings, especially the case for the lower-tier of middle income earners. They also argue that the tax savings is minimal when compared to returns generated from investments made with the same amount of money.

It’s really just a retirement savings plan with tax benefits

The way I look at my SRS account, I see it as a retirement savings plan with the added bonus of tax benefits. It acts as forced saving to prepare me for future retirement and I can’t access the money until the age of 62. As a reward for saving for retirement, the same amount is deducted from my taxable income.

Some people see it the other way round, where the sole purpose of having a SRS account is for tax deductions and totally missed the point that it’s meant to complement their CPF accounts and build their retirement funds.

supplementary-retirement-scheme-diagram

Consider the money in your SRS account as a part of your investment portfolio

Using my OCBC Blue Chips Investment Plan (BCIP), I am able to use the money in my SRS account to make regular investments in the stock market. As I am focusing on creating an investment portfolio of ETF index funds, I use the money in my SRS account to purchase Nikko AM STI ETF shares every month. In the past few months where the market is on a downturn, the monthly investment from my BCIP account using my SRS money benefited me because it helped to average down on my Nikko AM STI ETF stock holdings.

In the past, all SRS withdrawals must be made in cash. If money in the SRS account was used in investments, the investments had to be liquidated before the proceeds could be withdrawn in cash from the SRS account.

From July 2015, SRS account holders will be able to apply to their SRS operators to withdraw investments from their Supplementary Retirement Scheme (SRS) accounts without having to liquidate their investments (refer to Ministry of Finance website).

This means that if I reach the age of 62, where I am qualified to withdraw from my SRS account and I didn’t have any urgent need for the cash, I can transfer $40,000 worth of investments from my SRS account to my CDP account. That allows my SRS investments to continue to grow in my CDP account and I can liquidate them when I need the cash. This method of transfer will also qualify for 50% tax concession.

A contingency plan when the Singapore government makes more changes to CPF Life

As we continue to plan for our retirement, the reality is that policies governing our CPF accounts is ever changing and will continue to evolve according to our population trends, e.g. mortality rate, etc.

It’s safe to say that by the time I reach the stipulated retirement age, the age when payout from CPF Life commences is not likely to remain at 65. Having a fully funded SRS account of $400,000, I will be able to withdraw $40,000 from 62-72 without having to pay any taxes. That provides a fallback for me if the age where CPF Life payout commences is delayed by a couple of years.

Conclusion

As someone who is on the lower tier of the middle income class, I still believe that contributing to my SRS account has its merits and will continue to do so until it’s fully funded. I’m also pretty sure that my SRS account will play a pivotal role in my retirement planning many years later.

Are you contributing to your SRS account? I’d love to hear your thoughts.

Getting the maximum payout with CPF Life plans and private annuities

In my last article about CPF Life policy changes, I’ve analysed how the policy changes will affect my retirement plans and how I would aim to achieve the target of my projected Full Retirement Sum at the age of 55. Ever since changes to CPF Life plans were announced this year, I’ve been been thinking of different ways of maximising my payouts while keeping the option of a bequest available for my family when I pass away.

Let’s do a quick recap on CPF Life policies.

Retirement Sums, what are they?

Doing away with the name, CPF Minimum Sum, CPF has introduced 3 types of Retirement Sums – Basic Retirement Sum (BRS), Full Retirement Sum (FRS), Enhanced Retirement Sum (ERS). For simple calculations, FRS is double the BRS amount and ERS is triple the BRS amount.

If you were to opt for BRS, you will need to pledge your property or property charge to make up for the difference between the FRS and BRS in order to gain access to cash.

What are the CPF Life plans available today?

After numerous attempts to make CPF Life plans easier to understand for regular Singaporeans like you and me, there are now only two types of CPF Life plans – Basic plan and Standard plan.

The Basic plan caters to Singaporeans who are willing to receive a lower monthly payout in exchange for a higher bequest amount (the money your family will receive when you pass away) and the Standard plan is the exact opposite whereby it provides a higher monthly payout in exchange for a lower bequest amount.

The general consensus from people who made the effort to try to digest the pros and cons of both Basic and Standard plans are that while the Standard plan is the default plan that CPF would select for all Singaporeans, the Basic plan is actually much better because while the Standard plan provides a slightly higher monthly payout, it wipes out the your CPF Life premiums at a much faster pace.

So what’s my goal here?

The purpose of this article is to try to tackle a few variables that impact my retirement planning and increase flexibility in my retirement strategies.

  1. CPF Retirement Policies: The retirement age and retirement sums are constant moving targets and while I am able to forecast that my CPF Full Retirement Sum will be slightly above $300,000, the retirement age remains unpredictable.
  2. CPF Life plans: Both Standard and Basic plans are similar to private annuity policies offered by insurers. However, I could only choose one of the two.
  3. Private annuity policies: Could I use private annuity policies to increase my monthly payouts?

As my goal is to retire by 50 (or earlier), I will need to keep most of my post-tax money outside of CPF so that they can cover my expenses from age 50 onwards.

Here are the constraints that I am working with in this article.

  1. I will only be focusing on using the money I have in my CPF accounts to maximise monthly payouts.
  2. CPF Life payout calculations are based on the figures provided in this news article by Straits Times and will not increase over time.
  3. We won’t know if annuity policies will still exist in the future, but I will use current annuity policies as a reference for my calculations.

The CPF Life plan to beat

As my goal is to get a higher payout using my CPF money, I’m looking at trying to beat the CPF Life Standard plan with a Full Retirement Sum. Here’s how the monthly payout from CPF Life Standard plan for a Singaporean retiree who has the Full Retirement Sum injected in the CPF Life Standard plan. The target for me is to achieve a higher monthly payout of $1,397 or a yearly payout of $16,764. The disadvantage of this plan is that 20 years that after you start receiving monthly payouts from CPF Life, your Full Retirement Sum will be fully wiped out and there will be nothing left for your family when you pass away.

full-retirement-sum-cpf-life-plans

My big idea

The government wants all Singaporeans to pool their money together to build an annuity program that all Singaporean citizens can tap on upon retirement. Assuming that I am able to accumulate the Full Retirement Sum (projected to be around $300,000) in my CPF account, I want to see if I can get a better return if I only opt for the Basic Retirement Sum (and pledge my property charge) and use the remaining 50% of my CPF account to buy a private annuity.

Enrolling in the CPF Life Standard plan with Basic Retirement Sum

Putting a Basic Retirement Sum into the CPF Life Standard plan, I would receive a monthly payout of $767 or a yearly payout of $9,204. That means I will have to find a private annuity plan that provides a monthly payout of at least $630 ($7,560 per year) and higher to make this work.

basic-retirement-sum-cpf-life-plans

Diversifying risks and maximising payouts with Tokio Marine annuity plans

I was fortunate enough to have a friend who works as an insurance agent with Tokio Marine who was kind enough to help me generate some figures based on Tokio Marine’s Retirement GIO and Retirement PaycheckLife for the calculations in this article. These two annuity plans fit my bill as they are similar to CPF Life plans where I would receive monthly/yearly payouts for the rest of my life. There are probably other similar private annuity plans in the market but I did not do a thorough check.

I had my friend help me generate both Retirement GIO and Retirement PaycheckLife plans simulating a scenario whereby I would withdraw the remainder of my CPF money ($150,000) out of my CPF account at age 55 after opting for the Basic Retirement Sum and put that money into premiums for either a Retirement GIO or a Retirement PaycheckLife plan. The plan is to let the money sit in a private annuity plan until the age of 65 where the monthly payout would start in conjunction with monthly payouts from CPF Life.

When you look at the payouts and bequest amounts below, you will notice that the Retirement GIO plan pays a lower monthly payout than the Retirement PaycheckLife plan but you would be able to recover the full amount of your premiums upon death or surrender of your annuity plan. The Retirement PaycheckLife plan not all that bad though because it would still return a fraction of your premiums upon death or surrender of your annuity plan unlike CPF Life Standard Plan where all your premiums would be entirely wiped out.

Annuity Plans Tokio Marine Retirement GIO Tokio Marine Retirement PaycheckLife
Monthly payout from age 65 $676.67
($443.33 non-guaranteed)
$900
($450 non-guaranteed)
Bequest/death benefit
Age 65 $161,555
($11,375 non-guaranteed)
$163,501
($13,377 non-guaranteed)
Age 75 $161,555
($11,375 non-guaranteed)
$108,961
($13,377 non-guaranteed)
Age 85 $161,555
($11,375 non-guaranteed)
$54,421
($13,377 non-guaranteed)
Age 95 $161,555
($11,375 non-guaranteed)
$40,647
($13,377 non-guaranteed)
Surrender value
Age 65 $156,723
($8,029 non-guaranteed)
$162,015
($13,377 non-guaranteed)
Age 75 $156,723
($8,029 non-guaranteed)
$108,015
($13,377 non-guaranteed)
Age 85 $156,723
($8,029 non-guaranteed)
$54,015
($13,377 non-guaranteed)
Age 95 $156,723
($8,029 non-guaranteed)
$40,377
($13,377 non-guaranteed)

As we can see in the table above, both the Retirement GIO and Retirement PaycheckLife pays out more than $630 each month. That means I am able to get a better return by combining a CPF Life Basic plan (Basic Retirement Sum) and a private annuity plan together, instead of just sticking to a CPF Life Standard plan (Full Retirement Sum).

Conclusion

Let me summarise this really long article for readers who just want the short story. We have determined that by combining a CPF Life Basic plan (with Basic Retirement Sum) and a private annuity (in this example, either Tokio Marine Retirement GIO or Retirement PaycheckLife will do) bought at the age of 55, we can achieve a higher monthly payout than just a CPF Life Standard plan (with Full Retirement Sum).

Personally, I’m more inclined to take up Tokio Marine’s Retirement GIO annuity plan because there’s an additional safety net of being able to get all my premiums back if I choose to surrender my plan at say, the age of 80 if I need the extra money. This is also very useful if CPF Life plans actually provide a better value than the existing Retirement GIO plan. I can always surrender the policy and buy another CPF Life plan (yes you can buy more than one CPF Life plans if you want to).

I know we can’t predict what the future holds for us (30 years in the future, in my case), but I hope this article opens up new ideas for readers who are planning their retirement.

I would love to hear your thoughts about this article and what you are planning for your retirement. Please share them in the comments below.

Short advertisement: This article wouldn’t have been possible without the help from my friend who works in Tokio Marine as an insurance agent. If you found this article useful and are interested to find out more about Tokio Marine’s annuity plans, please let contact me with your details so that I can forward it to my friend who can provide more details about their annuity plans.