Category Archives for Retirement

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 atm⁵, 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.

How Budget 2015 impacts my retirement plans

Over the past week, the local media has been giving bite-sized news about what’s going to be announced in Singapore Budget 2015 plan and today, the Deputy Prime Minister and Finance Minister, Tharman Shanmugaratnam gave the speech to give the full details about Singapore Budget 2015 on local television.

I didn’t really care much about Singapore Budget announcements in the past but as I started planning for my retirement, I started keeping an eye out for articles about policy changes that could have an impact on my retirement plans.

I can’t say I was thrilled about the policy changes that were announced today. Let’s talk about how the changes affect me, a middle-income Singaporean in his early 30s.

50% rebate for personal income tax

The Finance Minister announced that one-off 50% rebate for personal income tax will be given this year for income earned in 2014. The rebate is capped at $1,000 so that the benefit goes mainly to middle and upper-middle income groups. After calculation, I found that this rebate is fully utilised if you earned around $60,000 in 2014.

Although my current income is above $60,000 per annum, I won’t be able to fully utilise this tax rebate. This is because I went on a 6-month unpaid sabbatical last year. On top of that, I made a contribution of $12,750 to my SRS account to minimise my total taxable income. In estimate, I should be looking at a double digit figure for my tax payable for income earned in 2014.

In my opinion, this is just a low hanging fruit that our Finance Minister is using to score some points with Singaporeans. It does not have any sustainable impact at all. I wouldn’t care too much about this.

CPF salary ceiling raised from the current $5,000 to $6,000

The last time changes were made to the CPF salary ceiling was in September 2011 when the CPF salary ceiling was raised from $4,500 to $5,000. Starting from 1st January 2016, the CPF salary ceiling will be raised to $6,000.

This is the policy change that impacts me the most because I am currently earning $1,000 above the CPF salary ceiling of $5,000 each month and that $1,000 goes straight into my pocket each month. From January 2016 onwards, I will have to contribute an additional $200 (20% employee CPF contribution) each month.

Being a glass-half-full kind of guy, it just means I would have to either find a way to earn $200 passive income each month, or spend $200 lesser in order to maintain my monthly saving limit. I prefer not to reduce my monthly saving limit because I need the money to pay for the new property I bought in Cambodia.

On the flip side, the government is making me commit a forced saving of $200 into my CPF account. This additional $200 is something I won’t need as the property loan that I refinanced recently is within my current monthly CPF Ordinary Account contribution amount. That makes a total of $2,400 that I can consider transferring to my CPF Special Account to maximise the interest.

I did my own calculations based on my current income and retirement strategy and here’s what I found.

My Basic Retirement Sum projection is $308,492.60 (assuming the Basic Retirement Sum continues to increase at 3% each year). At the current CPF salary ceiling of $5,000, I should be able to achieve a Retirement Sum of $422,177.86 when I reach 55 years old. With the new CPF salary ceiling of $6,000 kicking in from 2016 onwards, the Retirement Sum increases to $543,138.75.  That’s an huge increase of 28.6%! If I transfer the forced saving of $2,400 from my Ordinary Account to my Special Account for the extra interest, my Retirement Sum grows by another $14,000 to $558,102.06!

Do note that my calculations are based on the current plan to retire and stop working at the age of 50.

Supplementary Retirement Scheme contribution cap raised from $12,750 to $15,300

In line with the increase in CPF salary ceiling, the contribution cap for the Supplementary Retirement Scheme (SRS) will also be raised to $15,300. It is a good thing because this increases the amount of tax savings for middle income Singaporeans who want to reduce their total taxable income. However, I wonder what kind of impact does a $2,550 increase really have.

Although I contributed to my SRS account last year, I don’t think I would do the same this year due to my property purchase in Cambodia which I intend to pay off fully with cash.

Extra 1% interest on first $30,0o0 in CPF accounts for Singaporean from 55 and above next year

To encourage older Singaporeans to continue working, the Finance Minister is giving an additional 1% interest on the first $30,000 in CPF accounts for Singaporeans. My current retirement plan is not to have to work after the age of 50 and the extra 1% interest is not attractive enough for me to change my plan.

Looking at my projections for the Basic Retirement Sum and the estimate Retirement Sum that I would achieve, I’m still face a shortfall of more than $50,000 to meet the Full Retirement Sum. There’s a high chance that I would use my property charge or pledge my property and contribute the Basic Retirement Sum at the age of 55. That means I would still have more than $30,000 in my CPF accounts to receive the extra 1% interest anyway.

Increasing CPF contribution rate of older workers

2016 will be the year where we see a change in CPF contribution for older workers. Here is what the increase looks like.

Age Band Percentage Increase
50-55 2% (1% by employee)
55-60 1%
60-65 0.5%

Do take note that the increase in employer contributions will go to the Special Account, while the increase in employee contribution will go to the Ordinary Account. While there will be some Singaporeans who will lament that the employer contribution going into the Special Account can’t be touched, we should remember that the objective for the increase is to supplement our retirement nest.

What I didn’t like about this is that, is this increase too little too late? I mean at aged 50-55, the extra 1% from employer works out to only $720 per year and anyone who understands compound interest would know that having this increase in the Special Account so late in the game of retirement would make little impact even with a high interest rate.

That said, I’m glad that workers aged 50-55 are getting the same employer CPF contribution rate as the younger workforce. It is a step in the right direction.


My overall opinion about Budget 2015 and retirement planning

I find that while Budget 2015 does address retirement adequacy, the key initiatives is only the first step to tackling retirement adequacy. What the Finance Minister has done is to force Singaporeans to save more money through CPF for retirement. As shown in this post, forced saving has its benefits as I can expect my CPF retirement nest to increase by more than 25% in the next 23 years.

Apart from that, Singaporeans have to depend on themselves to plan their retirement. If one does not cultivate good money management habits, retirement will be nothing but a dream. For example, if one pours the additional CPF contribution (OA portion) into a home loan to get a bigger property, he/she is going to lose out on enjoying the additional interest that CPF pays out.