CPF – Page 5

Are my parents ready for retirement?

07.21.2016 by Finance Smiths //

I read an interesting post from this US personal finance blogger (Broke Millennial) – Are You Your Parent’s Retirement Plan? It sets out conversation topics on insurance, retirement funds, mortgage and debt that adult children can consider having with their parents to better understand their retirement plans.

This got me thinking about my parent’s retirement plans and whether they are financially fit for retirement. I have had conversations with my parents about this before to see where I can assist them in their financial planning for retirement.

We usually end up discussing the sufficiency of the CPF Life payouts after taking into account the other factors of insurance, active & passive income and debt. That might be how I will write this post for a more complete financial analysis of my parents’ retirement plans.

1. Insurance

My parents have health insurance plans that cover for hospital and surgical expenses. Although these health insurance plans are not the most comprehensive, the annual premiums to be deducted from their Central Provident Fund (CPF) – Medisave Account (MA) are quite high due to their age (60+).

In fact, the annual premiums are expected to increase as my parents get older and my siblings & I might have to top up their CPF – MAs or have the withdrawals come from our CPF – MAs instead. Medical costs from hospitalisations and emergencies can be a significant drain on the family finances when not managed well. My parents are relatively healthy for now due to their active lifestyles but we will continue to budget for their medical expenses.

My parents used to have term life insurance policies but they have since expired. I’m not sure how useful life insurance policies will be for my parents now that they no longer have any dependants. My siblings & I can take care of ourselves and will look after them financially as well.

2. Active Income

My dad stopped working a few years ago and has since moved to Malaysia. He built a house on top of a small piece of family farmland that we have and grows a variety of fruits & vegetables while rearing a few chickens. He also catches fish from the farm drainage canals and ponds when there is heavy rain.

Having lived for a number of years on a farm in Malaysia when he was young, my dad really likes this lifestyle and I’m glad he gets to enjoy it in his retirement. Although my dad no longer has any active income, his expenses are low since he only spends on necessities (i.e. items that he can’t grow on the farm like rice and other meat produce).

Since the cost of living in Malaysia is much lower than Singapore and my dad is a lot happier and healthier from the manual labour tending to the farm, his expenses have gone down over the years. He comes out to Singapore to visit us or we go in to Malaysia to stay with him on the farm once in a while.

My mum works as a retail promoter a few days each week and is paid monthly based on the number of hours worked. It’s not a strenuous job and she gets to interact with her colleagues and customers. The active income helps to pay for the travel trips my mum goes on with us or her friends.

I have to admit that this is not a normal or common living arrangement for most families out there. However, it has worked out well for my parents because both of them get to enjoy doing the things they like. This is especially so when you have adult children living their own lives so everyone gets to spend quality time with each other when we get together.

3. Passive Income

My parents own a residential apartment in Malaysia that is about to be completed and leased out. Since they did not take out a mortgage to pay for the apartment and had enough cash to purchase it, the rental income net of rental expenses will constitute passive income to sustain my dad’s lifestyle on top of their savings in Malaysia.

If money gets tight due to unforeseen circumstances, my mum can rent out a room in the family apartment in Singapore (where the housing loan has been paid off) for additional rental income on top of their savings in Singapore.

Since my parents do not have an investment portfolio of equities and bonds, they rely a lot on the CPF Life payouts as their main source of passive income. I never realised the importance of CPF Life until I see its payouts sustaining my parent’s retirement.

Even though my siblings & I make monthly contributions to my parents and manage their living expenses, these CPF Life payouts provide a strong layer of support. It’s usually the dual impact of reduced income and increased expenses that cause financial problems in retirement. Hence the need to find ways to maintain the income while reducing expenses.

4. Debt

This section is going to be short because one of the best things my parents have done financially is not to have any type of debt in retirement. No mortgage, no student loan and no credit card debt.

Although my parents did not manage to build an investment portfolio of shares and bonds, they have put themselves in a strong financial position to retire by managing their income and expenses. Their lifestyle does not consist of luxury spending but they get to enjoy doing the activities that make them happy. That’s all I can ask and wish for in my parent’s retirement.

Financial advice for a new graduate

07.14.2016 by Finance Smiths //

My wife’s brother just had his SMU commencement ceremony on Wed at the Suntec Convention Centre. Since he has already started work as an audit associate at one of the accounting firms in Singapore, he had the day off to attend the ceremony. But he has to go back to work on Thurs.

Just like that, we have a new graduate in the family who has just finished his university education. Although my brother-in-law is three years younger than my wife, the impact of a 2 years National Service and 4 year SMU degree has resulted in my wife working for six years before he started work. It’s a lag at the start line and he will have to work hard to make up for it.

This reminds me of the time I started as a tax associate six years ago in an accounting firm in Melbourne. I had a basic understanding of personal finance & investments and it took me a long time to learn the lessons I have now. This post is about the financial advice I would give to my wife’s brother sprinkled with some personal and professional development anecdotes that he can learn from.

Since this is based on our life experience, whether the advice is practical and applicable to you might vary greatly. Take away the lessons that you find useful and amuse yourself with the rest that you find irrelevant. I just hope my brother-in-law finds this post and read it!=)

1. Starting from Square One

Now that you have graduated and started work at your first job, you are officially starting from square one in the real world. It doesn’t matter how hard or little you studied at university because not much of your academic experience and performance will be relevant at work.

If you have accumulated financial experience by investing your savings in the equity or bond markets during university, that is one of the few useful things you can bring with you upon starting work. Then again, you wouldn’t have had much funds to invest with and plenty of time to do your research on the shares, ETFs and bonds you were planning to buy. Besides, it’s much easier to learn from your mistakes when you don’t have much at stake.

Since I know the family upbringing you had, I can safely say you have very little financial experience at this stage. Your parents have done well not to let you worry about financial matters by taking care of everything. It’s time you step up and learn how to handle your own financial issues.

2. Find a new bank account

You are probably still using the POSB savings account that your parents set up for you two decades ago. The interest rate on that POSB savings account is ridiculously low and it’s time to find a new savings account with a higher interest rate.

You have to start doing your own research on the savings accounts offered by the different banks in Singapore. It’s not difficult and there is plenty of material online about the benefits and cons of the variety of savings accounts on the market.

Since you are not working at a bank and there is no restriction on the bank you have to open a savings account with, find one that offers you a higher interest just by crediting your salary into it. Your sister and I use the OCBC 360 and UOB One Accounts, which is something you can consider first if you really have no idea where to start looking.

3. Apply for a main credit card

You have a supplementary credit card for certain expenses incurred at university. I understand you were using your debit card for most expenses and that is a good financial habit to have. Your spending was generally quite low, which is why your bank account balance is larger than your sister’s when she first started work.

If you open a new higher interest savings account, you will find that one way to increase the interest you earn on the balance is by spending on an associated credit card. Do not be afraid. Managing debt is a skill you will eventually have to learn and I rather you do it now than later in your life.

Read up on how a credit card operates. Basically, you charge an expense (e.g. lunch at McDonald’s with your colleagues) to the credit card where you would previously have paid cash or used your debit card to pay for it. Repeat the process for other expenses you would have incurred with cash or debit card previously.

At the end of the monthly billing cycle of the credit card, you will be sent a statement with all these charges as an outstanding amount due by a certain date. Make sure you pay off the full outstanding amount by the due date.

At this stage, you only need one credit card associated with the bank that you open the higher interest savings account with. The whole point of having the credit card is to earn reward points or cash rebate from those expenses.

With more experience, you might find that there are many ways to optimise the reward points or cash rebate by having additional high interest savings accounts and credit cards. You are not there yet.

4. Budget your salary by percentage

I can see you are tired every day now. That’s normal at your first job because you have not adjusted to working so many hours in an office each weekday. I’m sorry to be the bearer of bad news but it’s going to get worse before it gets better.

Your first peak period as an audit associate is coming up and you will find yourself struggling to keep your head above water. Your sister and I had it better in Australia where we didn’t have to work as long hours in our graduate roles. Life is not fair and you have to learn how to deal with it.

It’s unlikely you will have the time and energy to track all of your expenses. That doesn’t mean you don’t do any budgeting with your salary. Use a percentage budget approach for now. Since you live at home and don’t incur rental/mortgage and groceries expenses, this is a good time to save. Your transport costs are low as well since you mostly carpool with your mother, sister and I when going in to work.

Compared to your friends working in banks, your salary will be lower than them. Trust me, I know. Don’t be disheartened because you will learn a lot in an accounting firm. But you should know that it is still a decent salary compared to the many other industries out there.

However, you have to save more aggressively to make up for the lower salary. Since you are still single and have sensible colleagues & friends that don’t overspend, you should aim to save 80% of your net salary. You don’t have to track all of your expenses but only need to ensure they don’t exceed 20% of your net salary.

Calculate this once at the end of each month and make your lifestyle adjustments in the next month. This approach should work for you since you have a low spending lifestyle and are less inclined to inflate it like your sister and I.

5. Read up on the Central Provident Fund (CPF)

You will notice that 20% of your monthly salary is automatically deducted as contributions by you as an employee to your CPF. This is the national retirement fund scheme and you need to know what the Ordinary Account (OA), Special Account (SA) and Medical Account (MA) can be used for.

You can learn about the fancy CPF moves you can do such as topping up your SA for tax relief, transferring amounts from OA to SA etc. Before you do any of them, think about whether they make sense for you first. Your situation is unique to you and what works for others might not work for you. For now, just watch these balances grow.

6. Understand your income tax return

You should know that the personal income tax rates in Singapore are low. The Inland Revenue Authority of Singapore (IRAS) also makes it convenient for you to file your income tax returns at the end of each year.

Although your tax payable for this year is expected to be nil or very low, you should try to understand your income tax return even if IRAS has pre-filled your salary and tax reliefs data. Your sister had me to navigate the complex personal income tax returns in Australia since she fell asleep the first time I went through her first tax return with her.

Your tax return and the filing process in Singapore are much simpler but that does not excuse you from understanding its components and ensuring all the data is correctly captured. If you don’t understand something, ask me.

That’s about it from me for now. Notice how I didn’t mention anything about investments? That’s because I reckon it’s too early for you to learn about it at this stage. Given your limited savings and time, there are few investment options available to you.

That’s not to say you can’t start reading about shares, ETFs, bonds etc. But don’t get too hung up about them. You are better off developing your career by improving your job skills, professional and social networks. Work hard at increasing your salary and savings but know that your human capital has the potential to grow much faster than your financial capital in the early stages of your career.

Besides, you first have to work on the basics of personal finance before you advance to actually investing your money. The self-discipline, research skills and ability to learn from your mistakes will be critical to your success as an investor.

It might take a few years for you to establish your foundation before you start investing and that’s okay. Your colleagues and friends might have started earlier because they are better prepared and thus have a few years of head start. No matter, you are young and a slow & steady approach should suit you well.

In any case, I might have another post on this blog for you then about how to invest when you are ready. By then, I hope your sister and I are more experienced and in a stronger financial position ourselves to be able to guide you so you can avoid the mistakes we have made.

Which retirement scheme do I prefer?

05.09.2016 by Finance Smiths //

In my previous post, I gave an overview of my Superannuation in Australia and Central Provident Fund (CPF) in Singapore. This post will be about my personal opinion on which retirement scheme I prefer. It’s important to note that Superannuation and CPF serve as retirement funds in Australia and Singapore respectively where the cost of living, tax rates, lifestyle etc are different.

It can be difficult to compare these two retirement schemes on a level playing field. This comparison might not be fair but it will be based on my experience and views. At the very least, isn’t it interesting to read about how different retirement schemes measure up against each other?

Employer Contributions

The purpose of retirement schemes is to provide you with income in retirement. The more funds you have in the retirement schemes, the more income you will receive when you retire and stop working. Employer contributions can go a long way in building up these funds especially when you can’t make as much employee contributions.

The current employer contribution rate is 9.5% for Superannuation and 17% for CPF. However, there is a monthly Ordinary Wage (OW) ceiling cap of S$6,000 for CPF i.e. the employer only needs to contribute 17% of your monthly salary up to S$6,000. The employer does not need to contribute 17% of your excess salary above S$6,000. I don’t think there’s such a cap on employer contributions for Superannuation.

This probably only makes a difference when you are a high income earner in Australia or Singapore. Given I have only been working for a few years in each country, this point goes to CPF for me since I had more employer contributions on an average salary.

Employee Contributions

There is no mandatory employee contribution for Superannuation but the mandatory employee contribution rate for CPF is 20%. I like how the Singapore Government is essentially forcing each employee to save for his/her retirement by contributing to the CPF. It might not be a bad idea since I chose not to make any contributions to my Superannuation.

However, it would be nice to have the choice of my employee contribution rate to CPF. After all, I might decide that having the cash on hand is more useful at the start of my career when I am anticipating future significant expenses. Although I agree that the Government should encourage employees to contribute to their CPF, I don’t agree with the current paternalistic approach to mandate a rate of 20%, which is even higher than the employer contribution rate. This point goes to Superannuation for me.

Flexibility of use

Superannuation can be used to cover life, disability, and income protection insurance premiums but there are not many other uses. CPF can be used for a variety of purposes – housing, investment, education, insurance and medical expenses. By allowing for greater flexibility in using CPF, this offsets the disadvantage of me having to make mandatory contributions to CPF.

Although you could make an argument that having so many uses for CPF detracts from its main purpose as a retirement fund scheme, it does come down to how you manage your CPF.

Superannuation is difficult to understand at the start but easy to manage once you get the hang of it. Once you start working after graduation and select a superannuation fund, ensure that the investment option is balanced or aggressive and the monthly contributions will take care of the rest.

The problem with CPF is that you really have to monitor how much of the OA you are using for housing, how much you can contribute to the SA and how much MA you have left for medical expenses.

Nevertheless, this point goes to CPF for me because it’s better to have more options of use for the retirement fund schemes. After all, you can always decide not to use your CPF for anything and just allow the balances to build up.

Growth of funds

This one is tricky. Superannuation works by dollar cost averaging into the units of a fund on a balanced or aggressive investment option i.e. growth by exposure to equities. You could replicate this by using the CPF Investment Scheme, which allows you to invest your OA and SA in a wide range of investments to enhance your retirement funds.

Both schemes require you to not attempt market timing by changing the investment options for Superannuation funds or buying & selling the investments for the CPF Investment Scheme.

I guess where CPF takes the point for this is that the interest rate on the SA can reach 4% to 5%. Even by not using the CPF Investment Scheme, effective utilisation of the SA can enable your retirement funds to build up quickly over time without taking on much risk.

Fees

Superannuation funds charge fees for maintaining your retirement balances and CPF don’t charge fees for the same service (unless you are using the CPF Investment Scheme). You could argue that Superannuation funds have to execute more monthly transactions (i.e. buying and selling of units) to justify the fees.

After all, CPF doesn’t have as many monthly transactions since interest only gets paid at the end of the calendar year. You do have withdrawals for other purposes such as housing and insurance but those can be automated and require less monitoring.

My view is that fees eat into the returns of all funds and CPF takes the point for charging little to no fees.

Access at retirement

This generally refers to when and how you can access the Superannuation or CPF. The conditions of access can be complex for both Superannuation and CPF. For a simple comparison, Superannuation can be fully accessed at age 60 but CPF can be partially accessed at age 55 and fully accessed at age 65. More importantly, the entire amount of Superannuation can be withdrawn but CPF can only be withdrawn as a monthly payout once you hit the preservation age.

FYI, my view is that the preservation age for retirement schemes in most countries are likely to get higher over time. I would think this applies to both Superannuation and CPF i.e. I have no idea how old I would have to be to access my retirement funds.

As much as I think it’s a good idea not to allow for retirees to withdraw the entire amount of CPF at one time, this should be a choice that they have. Again, I don’t agree with the paternalistic approach that the Singapore Government has taken on restricting retirees’ access to their own retirement funds. Hence, point to Superannuation for me. It might be a better approach for more personal finance education in schools and companies to empower everyone with the ability to make good financial decisions.

Conclusion

I must emphasize that you could reach a different conclusion even after assessing the same factors. In my case, I find that CPF is my preferred retirement scheme. It allows for me to build up retirement funds quickly from higher employer and employee contributions. This is especially effective when I have not been working in Singapore for the initial few years of my career. CPF also gives me more options in utilising the funds for other purposes and I find the flexibility useful as long as I have the self-discipline and knowledge to manage this.