Category Archives for Retirement

How much do you need to retire?

“Am I ready to retire?”

This is a question that many people ask themselves when they are thinking of quitting a job and wishing to travel the world for the rest of their life. When I say ‘them’, I’m kind of referring to me. ūüôā

The Rule of 300

The Rule of 300 is basically an explanation of having a 4% safe-withdrawal rate (SWR). The 4% SWR is a guideline for a sustainable rate of spending during a 30-year retirement. So, if you have $1.2 million invested, you could take out $48,000 during the first year. That provides you with $4,000 per month.

The Department of Statistics Singapore highlighted in their Household Expenditure Survey 2012/13 that on an¬†average, a family spends $4,724 per month. That means¬†a family’s annual expenses is¬†$56,688 ($4724 x 12). To make sure that they have enough to retire, we need to¬†multiply this amount¬†by 25 which brings us up to $1,417,200.

Now, they are able to withdraw 4% of this $1,417,200 portfolio in their first year which is $56,688. They can then divide this money up by month to derive $4,724 per month (notice that this is the same amount we started with).

You’re probably thinking, ‘Would I run out of money in my investment portfolio if I keep withdrawing¬†4% each year?’ A study using data from the past few decades¬†shows your investment portfolio will not run dry if you maintain a conservative¬†withdrawal rate of¬†4% for 30 years. It is important to note that past performance doesn’t necessary represent future performances.

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As time goes on the portfolio balance will continue to increase as the markets increase. The question is, what allocation should your investment portfolio be so that when utilizing the 4% SWR, your portfolio balance should never bottom out. So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

What do you need to do to retire early?

  • Take control of your expenses. If you can reduce your annual expenses, your SWR would much lesser and it would be much easier to achieve your investment portfolio size.
  • Focus on increasing your monthly saving ratio. If you diligently put your monthly savings into your investment portfolio, it will grow and reward you in time to come.
  • Eliminate debt. Growing your investment returns is useless if your debts are holding you back.

So let me ask you now this, are you ready to retire?

Singapore Savings Bonds – a new investment option for retail investors

The Government and Monetary Authority of Singapore (MAS) are planning to introduce Singapore Savings Bonds (SSB), a new type of bonds to help individual investors get a better return on their savings.

“In short, the Singapore Savings Bonds will offer the higher returns of a long-term bond and give what investors call a term premium, while retaining the flexibility of a shorter-term deposit, and the safety of an instrument guaranteed by the Government,” –¬†Senior Minister of State for Finance Josephine Teo

While details about SSB are still being finalised, here’s what we know about this product:

  • It is a low-cost investment made widely available to retail investors to encourage¬†individuals to save and invest to meet their long-term financial goals and retirement needs.
  • SSB will be principal-guaranteed by the Government which means the investor’s original outlay is fully protected.
  • Bond-holder will be able to sell the bond and¬†get his money back in any given month without incurring a penalty.
  • SSB will pay higher coupons if the bonds are held longer unlike conventional bonds where the same coupon rate is paid each year.

Given that my current portfolio is 100% equities instead of an 80-20 split between equities and bonds, I certainly look forward to rebalancing my portfolio after SSB becomes available.

In my opinion, SSB has a steep hill to climb in order to be well-received by retail investors.

Offer higher interest rates than the regular bank deposits

I don’t think this will be difficult seeing how the average interest rates that banks are offering for deposits are very low. The highest bank deposit interest rate offered in the market right now is the OCBC 360 deposit account where account holders can earn up to 3.05% per year in interest by performing these tasks every month:

  • Crediting their salary to the account
  • Spending at least $400 on an OCBC credit card
  • Paying any 3 bills using OCBC online or GIRO

If SSB could offer an interest rate of approx. 2.5-3.5% per year, I’m pretty confident that investors would move their deposits from OCBC to SSB because it is much more simple. I for one would love to not have to spend at least $400 on my OCBC credit card if I don’t have a need to.

Be more attractive than Singapore Government Securities (SGS) bonds

Singapore Government Securities (SGS) are marketable debt instruments of the Government of Singapore. These debt instruments take the form of either Treasury bills (T-bills) or bonds and are backed by the full faith and credit of the Singapore Government.

They are offered in the following options:

  • 3-month Treasury Bill
  • 6-month Treasury Bill
  • 1-year Treasury Bill
  • 2-year SGS bond
  • 5-year SGS bond
  • 7-year SGS bond
  • 10-year SGS bond
  • 15-year SGS bond
  • 30-year SGS bond

The SGS bonds and Treasury bills are not widely marketed and I’m quite sure that the average investor would not have the knowledge on how to go about applying for one. I personally have participated in a 1-year Treasury Bill auction many years ago when the interest rates offered back then were quite attractive. In recent years, the interest rates offered for SGS bonds and Treasury Bills have been rather unattractive for me to make the effort to add them into my portfolio.

Our senior minister has mentioned that SSB offer interest rates close to long-term SGS bonds and would not have any lock-in periods tagged to them. Awesome! The next hurdle to cross would be to make SSB easy to buy (and sell). The best way to do this would be to allow investors to purchase SSB through internet banking platform of local banks and making payments with their deposit accounts.

Remain simple to understand and sustainable in the long run

With lofty ideas such as to offer interest rates close to long-term SGS bonds and allowing investors to get their money back any time without penalties, this product will need to be well-planned and given a thorough scrutiny to ensure that it is self-sustainable and not become a ponzi scheme.

As an investor, I would want to know how the money in the bond is being invested in order to generate the returns promised. As they say, if it sounds too good to be true, it probably is.

If done correctly, the SSB could become a disruptive innovation that forces the fixed-income market to improve on its offerings in order to retain its investors. Banks may be pressured to increase their interest rates for deposit accounts to keep account holders from withdrawing their money to buy SSB. Bond issuers will have to think out of the box in order to entice investors in parking their money in their bonds.

What if CPF created a bank for retirees?

As I started planning for my retirement, I began to pay attention to how our Central Provident Fund (CPF) system works for retirees.

As retirees reach the age of 55, CPF allows them to withdraw $5,o00 and transfers the rest of the money from their Ordinary Account (OA) and Special Account (SA) to their Retirement Account (RA). Retirees can also withdraw anything above the Full Retirement Sum (FRS) or Basic Retirement Sum (BRS) by pledging their properties.

At 65, retirees can choose to withdraw 20% of their Retirement Account (less the $5,000 withdrawn at 55). Naturally the monthly lifetime payout from CPF Life would decrease if they make the withdrawal.

Here’s a gap that I noticed.¬†What if I plan my retirement strategy early, manage to achieve the Basic Retirement Sum (and pledged my property) as planned, and still have excess money in my Retirement Account? At the current CPF life scheme, it looks like the excess money would be channeled into the CPF Life scheme if I don’t withdraw them.

An idea that came to mind would be for CPF to provide banking features to retires by setting up Retirement Savings Accounts (RSA) for retirees to manage the excess money after deducting the BRS/FRS for CPF Life.

Here’s how I think the system could work.

The proposition for a Retirement Savings Account

The RSA¬†would replace the Retirement Account at age 65 where CPF Life kicks in and deducts¬†the BRS/FRS amount. It would hold the leftover money in the Retirement Account so that retirees do not have to withdraw the money at age 65 if they don’t need it. Retirees could also choose to make the RSA the default account of choice to receive CPF Life monthly payouts.

The RSA would continue to generate an interest of 4% like the Retirement Account to provide the added incentive for retirees to leave their money in the account until they have an actual use for it.

Provide a simple mechanism for retirees make withdrawals

Like a bank, CPF can install automated teller machines (ATMs) to allow retirees to withdraw cash from their RSA in small amounts. In fact, CPF can choose to link to¬†atm‚ĀĶ,¬†an interbank network in Singapore that connects the ATMs of six of Singapore’s eight qualifying full banks to facilitate cash withdrawals to minimize costs.

A Pioneer Generation card that matters

The current Pioneer Generation card serves little purpose for retirees apart from medical subsidies. By integrating RSA with the Pioneer Generation card, the card can function as an ATM card for retirees to make withdrawals or even pay for purchases (at a later stage).

Making Retirement Account top-ups a lot easier

RSA would make it a lot easier for retirees and their loved ones to top-up the account easily through bank transfers. As loved ones know that retirees can access¬†the top-up amount easily, they would be motivated to top up the retirees’ RSA.¬†Like typical bank accounts, RSA will have¬†a digital paper trail that allows IRAS to¬†manage relief claims easily.

This is just a wild idea that came right off the top of my head and is just a proposition at best. This idea could debunk the idea that most Singaporeans have where CPF money does not belong to them. While I can’t think of any reason why this idea wouldn’t work, I would really love to hear your thoughts.