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BBCWatcher 27-07-2018 11:34 AM

Quote:

Originally Posted by tangent314 (Post 115699888)
Having debt is fine if the interest rate is low and if your current assets are earning higher interest than your loan interest.

Just to give you one example of this, Apple, the world's most valuable publicly traded company, has a cash hoard of something like US$267 billion at last report (their 2Q2018). This cash is invested, but it's an insane amount of money. So Apple should be debt free, right?

Wrong. Apple issues bonds and borrows money. The company has about US$122 billion in total debt, roughly half as much as its cash.

Why does Apple do this? Well, one reason is tax optimization, although that's less of a reason now. But the other fundamental reason is that Apple can borrow very inexpensively -- it enjoys the cheapest money any corporation gets from banks and other lenders -- and it can invest that borrowed money for reliably higher returns. In the event that situation changes, and borrowing costs are less attractive relative to investment opportunities, Apple is extremely well defended and can pay down some or all of its debt. And Apple is extremely well defended because it's been able to invest and grow its cash hoard over many years, including using borrowed money to grow its tremendous wealth.

Households can do the same thing. No, not on the scale of Apple, certainly, but it's the same basic principle. If mortgages are genuinely cheap, great, take the deal, and pay down the mortgage at standard pace. That gives you more ability to save/invest, and your long-term savings/investing can grow higher and more quickly to help you better defend, sooner, against life's various possible calamities. Then, if mortgage rates do climb enough such that the mortgage is no longer cheap enough, you're in a stronger position to accelerate repayments.

Did you ever wonder why extremely wealthy people who can easily afford to pay cash for a home usually don't -- why they still take out mortgages? It's for this same reason: the mortgage is cheap relative to the returns on their investments. There are sometimes extreme cases of this, such as the ICBC Singapore fixed deposit example. Another, more common example in the United States is car financing. Car manufacturers fairly often offer 0.0% or 0.9% loans for up to 36 or even 48 months on new car purchases, especially for models that aren't selling as well as they hoped. The cars are built, so they really need to sell them since the carrying costs are rather high and the end of the model year keeps approaching. So they're often willing to finance them free or basically free. So should you pay cash when somebody is offering 0.0% financing for 36 months? No, of course not -- that'd be silly. You can take that same cash, push it into a 3 year fixed deposit (called a certificate of deposit in the United States) which is government insured up to US$250,000, earn some interest, and pocket that extra money. Free (or cheap) loans are wonderful when they're offered. Then you just set up your car loan payments to be automatic (so you don't forget one), and you pay off the car loan on schedule, but no faster than on schedule.

fun4life 27-07-2018 12:09 PM

Quote:

Originally Posted by tangent314 (Post 115699519)
I believe you mean OA, not CA.
Under the CFPIS, you can invest anything about $20k of your OA balance, and anything above $40k of your SA balance. Naturally, you would prefer to use your OA first.

You should read up the details, including the list of products you can invest in here: https://www.cpf.gov.sg/Members/Schem...stment-schemes

Most of the equities products can beat 2.5%, but it all depends on the market, and there is no guarantee that they will do so within the period that you intend to invest the money for.

The best way to get better than 2.5% on your OA balance is simply to move it into SA to get 4%. Of course, you have to bear in mind this is a one way transfer and that you don't intend to use that amount of money for housing/education.

If you still need to retain the money in OA, have some liquidity and can accept some volatility, then STI ETF (ES3) would be the recommended product to buy.

If you cannot accept volatility, then you should stick with 2.5% from OA because nothing available can beat that significantly. The upcoming Nikko AM IG Bond Fund (MBH) has potential though, I'm guesstimating about 2.9-3.0%. Unfortunately you may have to wait a long time (3 years minimum) before it gets included under CPFIS.

We don't normally recommend unit trusts, but for CPFIS it may make sense if you can find a good one, because there's a lot more UT products available than ETFs (only 4) under CPFIS.

Sorry for my typo and thanks so mcuh for your advice.

If to use CPFIS-OA to invest, say STI ETF (ES3), is there any low cost Dollar-Cost Averaging scheme available? Otherwise if to invest $1k or $2k per month via broker house, the cost would be too high. It seems DCA is mostly for cash, not for CPFIS-OA? Thanks again.

tangent314 27-07-2018 01:06 PM

Not that I am aware of. Yes, CPFOA investments are probably best done in a lump sum, with minimum commissions at $25. Usually those that offer $10 minimum commission either aren't authorized to do CPFIS (like SCB), or that $10 min doesn't apply to CPFIS (e.g. Vickers).

BBCWatcher 27-07-2018 02:30 PM

I agree with Tangent314. You really need to think this one through carefully.

The CPF Ordinary Account pays 2.5% interest. That's slightly better than what the 10 year Singapore government bond yields, as I write this. In order to try to increase yield in the investment markets you have to assume greater risk, and you would/should only do that for long-term funds -- funds that you are going to invest for a decade or more.

The first question, then, is if you're investing OA funds for the long term, why not simply transfer some or all of these dollars to your Special Account which is earning 4% interest (or maybe a little more if you still qualify for bonus interest)? A 4% yield is rather tough to beat.

Let's take a look at ES3, the Straits Times Index fund, to understand what its past performance has been over 1, 3, 5, and 10 years. These figures are through June 30, 2018, looking back over those four intervals of time, and these are total nominal annualized gross yields:

1 Year: 4.30%
3 Years: 2.69%
5 Years: 3.80%
10 Years: 4.08%

You then have to subtract CPF Investment Account fees and broker commissions.... "Wait, what did you say, BBCWatcher? CPF Investment Account fees?" Yes, that's right. For the CPF Investment Scheme-OA, you have to pick one of the "big three" banks to hold your CPF Investment Account, the vehicle through which you invest OA funds. UOB seems to be the lowest cost, so let's go with them. But for every ES3 purchase you pay UOB $2, plus the broker commissions. UOB also charges a $2 quarterly fee per counter. These fees, and your broker commissions, reduce the annualized yields. While it's true that the past is not indicative of future results, it is true that the CPF Special Account outperformed ES3 in all of these lookback intervals.

Let's recap. First, if you're going to invest OA funds, you should be doing that with funds that are long-term invested, not short-term. However, if it's a long-term investment, you should probably just transfer some or all of your funds into SA. If it's short-term, because you're planning to spend OA funds on housing, then just leave them as OA earning 2.5% interest.

Once your Special Account has reached the Full Retirement Sum, you can no longer transfer OA to SA, you have OA funds piling up, you don't need those funds for housing, and you expect to invest them for at least the medium term, then the CPF Investment Scheme could make some sense.

jyoz90 27-07-2018 07:05 PM

Thanks BBCW and tangent for the insightful view!

Sent from Xiaomi MI 5 using GAGT

AnTiLooP 27-07-2018 07:48 PM

BBCW,

Qn on top ups to CPF prior to 55yo.

If I consistently top up to the CPF regardless of account type, upon hitting 55yo assuming I meet the FRS or BRS w/ pledge, will I be able to withdraw the top up contributions ive made for the years leading up to 55?

Asking as cpf has an article detailing that one can choose to withdraw excess funds after 55 anytime excluding top-ups so I'm getting confused.

BBCWatcher 27-07-2018 10:01 PM

Quote:

Originally Posted by AnTiLooP (Post 115707459)
If I consistently top up to the CPF regardless of account type, upon hitting 55yo assuming I meet the FRS or BRS w/ pledge, will I be able to withdraw the top up contributions ive made for the years leading up to 55?

It depends on the top-up. There are three voluntary top-up types available before age 55:

* Medisave Account top-ups. These top-ups stay in Medisave and can be used for any qualified Medisave purpose, such as MediShield Life and Integrated Shield base plan premiums.

* "All three" account top-ups. These are treated just like compulsory contributions.

* Special Account top-ups. These top-ups cannot be withdrawn except as CPF LIFE payouts starting any time from age 65 to 70.

The last point doesn't matter whatsoever unless you plan to make a property pledge and you're going to try to participate in CPF LIFE at the Basic Retirement Sum (BRS) level. I do not recommend that you do that, even if eligible to make a property pledge. It's just too low. Special Account top-ups effectively raise your minimum CPF LIFE participation level, but even the most aggressive top-ups will never require you to participate above Full Retirement Sum (FRS) level.

MrHighlander 27-07-2018 11:47 PM

Hi BBCW,

I have some concerns/queries about OA to SA transfer and SA cash top up:

(a) what happens when the SA hit the prevailing FRS (171K as of now)? Does all the compulsory contribution (which I understand as the employer/employe contribution if one is employed) flow automatically into OA?

(b) if I aggressively do transfer from OA to SA and hit the FRS or hit pretty close to FRS (say 150K), my concern is that it won’t allow me to do cash top up to SA in the future for tax relief. It seems that the FRS increase for these couple of years are 5K a year - plus the 4% compound SA interest and 7K cash top up tax relief a year, such 150K should expectedly hit the prevailing FRS sum pretty soon, leaving me with no room and opportunity to obtain tax relief from cash TOP up to SA.

On a related note to (b), will the interest earned from SA (the compounded 4%) stay and accrue in the SA notwithstanding that the prevailing FRS has been met?

Thank you for your advice.

Quote:

Originally Posted by BBCWatcher (Post 115709260)
It depends on the top-up. There are three voluntary top-up types available before age 55:

* Medisave Account top-ups. These top-ups stay in Medisave and can be used for any qualified Medisave purpose, such as MediShield Life and Integrated Shield base plan premiums.

* "All three" account top-ups. These are treated just like compulsory contributions.

* Special Account top-ups. These top-ups cannot be withdrawn except as CPF LIFE payouts starting any time from age 65 to 70.

The last point doesn't matter whatsoever unless you plan to make a property pledge and you're going to try to participate in CPF LIFE at the Basic Retirement Sum (BRS) level. I do not recommend that you do that, even if eligible to make a property pledge. It's just too low. Special Account top-ups effectively raise your minimum CPF LIFE participation level, but even the most aggressive top-ups will never require you to participate above Full Retirement Sum (FRS) level.


BBCWatcher 28-07-2018 12:38 AM

Quote:

Originally Posted by MrHighlander (Post 115710813)
(a) what happens when the SA hit the prevailing FRS (171K as of now)? Does all the compulsory contribution (which I understand as the employer/employe contribution if one is employed) flow automatically into OA?

No change. The normal allocation rules still apply, and a portion of funds continues to flow into SA.

Quote:

(b) if I aggressively do transfer from OA to SA and hit the FRS or hit pretty close to FRS (say 150K), my concern is that it won’t allow me to do cash top up to SA in the future for tax relief.
The tax relief is a nice bonus, but the compounded interest is even better. And you may still have other tax relief opportunities such as topping up your Medisave Account, topping up a non-working spouse’s Special Account, topping up another qualified family member’s (such as a parent’s) Retirement Account, and SRS.

Quote:

On a related note to (b), will the interest earned from SA (the compounded 4%) stay and accrue in the SA notwithstanding that the prevailing FRS has been met?
Yes.

MrHighlander 28-07-2018 12:48 AM

Thank you BBCW. My income is hitting the 19-20 per cent tax bracket and I am in my mid thirties. Will your advice change that SA interest is preferable to tax relief for cash top up if the income tax bracket is relatively high ?

Quote:

Originally Posted by BBCWatcher (Post 115711373)
No change. The normal allocation rules still apply, and a portion of funds continues to flow into SA.


The tax relief is a nice bonus, but the compounded interest is even better. And you may still have other tax relief opportunities such as topping up your Medisave Account, topping up a non-working spouse’s Special Account, topping up another qualified family member’s (such as a parent’s) Retirement Account, and SRS.


Yes.


JuniorLion 28-07-2018 07:37 AM

Quote:

Originally Posted by MrHighlander (Post 115711471)
Thank you BBCW. My income is hitting the 19-20 per cent tax bracket and I am in my mid thirties. Will your advice change that SA interest is preferable to tax relief for cash top up if the income tax bracket is relatively high ?

If it is hitting the 19-20 percent bracket, all the more you should contribute $7000 to your Medisave AND $15300 to your SRS per year.

The tax savings you get are: $22300*0.19 = $4237 - huge amount.

BBCWatcher 28-07-2018 08:43 AM

Quote:

Originally Posted by MrHighlander
My income is hitting the 19-20 per cent tax bracket and I am in my mid thirties. Will your advice change that SA interest is preferable to tax relief for cash top up if the income tax bracket is relatively high ?

Quote:

Originally Posted by JuniorLion (Post 115712588)
If it is hitting the 19-20 percent bracket, all the more you should contribute $7000 to your Medisave AND $15300 to your SRS per year.

If you’re in the 19, 19.5, or 20 percent tax bracket, you could be hitting the CPF Annual Limit. It really depends on the pattern of your employment income. If you are hitting the CPF Annual Limit, you won’t be able to make a Medisave Account top-up.

No, the recommendation doesn’t change. Tax relief is great, but the 4% (versus 2.5%) compound interest is more important. Although, in fact, the OA funds you would transfer to SA did enjoy tax relief if they were part of your compulsory contributions, so you aren’t “missing” anything, really.

MrHighlander 28-07-2018 09:45 AM

So there are NO instances ever where SA savings or contributions will ever spill into OA (even where prevailing FRS is reached)?

Quote:

Originally Posted by BBCWatcher (Post 115711373)
No change. The normal allocation rules still apply, and a portion of funds continues to flow into SA.


The tax relief is a nice bonus, but the compounded interest is even better. And you may still have other tax relief opportunities such as topping up your Medisave Account, topping up a non-working spouse’s Special Account, topping up another qualified family member’s (such as a parent’s) Retirement Account, and SRS.


Yes.


BBCWatcher 28-07-2018 10:02 AM

Quote:

Originally Posted by MrHighlander (Post 115713520)
So there are NO instances ever where SA savings or contributions will ever spill into OA (even where prevailing FRS is reached)?

No. Cash top-ups, and transfers from OA, to SA are simply not permitted once the SA has reached the Full Retirement Sum (FRS). (They are also not permitted once the member reaches age 55. Cash top-ups to the Retirement Account, up as high as the Enhanced Retirement Sum, are permitted from age 55.) The portion of compulsory contributions, and of “all three” voluntary top-ups (CPF Form VC/1 or electronic equivalent), ordinarily allocated to the Special Account continues to flow into the Special Account — no change.

The portion of compulsory contributions, and of “all three” voluntary top-ups, to Medisave can spill over into the Ordinary Account. MA to OA spillover happens if both these conditions hold:

(a) The Medisave balance has reached the Basic Healthcare Sum (BHS);
(b) The Special Account has reached the FRS.

tangent314 28-07-2018 12:36 PM

There's a window of time when a higher BHS is announce you can quickly top up your MA to the new limit before compulsory contribution does it for you.

It's not much, but it's something.

It may work for SA too but I'd imagine most people that have hit the FRS limit will have compulsory contributions covering the raised FRS prices.


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