CPF SA Shielding hack - RIP (Obsolete)

[BBCWatcher]

$982 * (5/12) * 4.08% = $16.69

Let's take this example and convert it to a generalized algebraic formula. I'll use these variables:

• TBP = 6 month T-Bill Price ("break even" price compared to a bond unit trust)
• LM = Lost Months of SA interest with bond unit trust-based shielding (either 1 or 2)
• R = CPF SA interest rate (floor rate of 4.00%, currently 4.08%)

That gives us an algebraic equation of:

• TBP * [(7-LM)/12] * R = 1000 - TBP

I assume you are only going to consider 6 month T-bills that only result in the loss of 7 months of SA interest, not 8 months. (A safe assumption!) OK, let's rearrange the equation to solve for TBP:

• TBP + TBP * [(7-LM)/12] * R = 1000
• TBP * [1 + (7-LM)/12 * R] = 1000
• TBP = 1000 ÷ [1 + (7-LM)/12 * R]

Now let's test this algebraic equation using LM = 2 and R = 4.08%:

• TBP = 1000 ÷ [1 + (7-2)/12 * 0.0408]
• TBP = 1000 ÷ (1 + 5/12 * 0.0408)
• TBP = 1000 ÷ (1 + 0.017)
• TBP = 1000 ÷ 1.017
• TBP = $983.28

OK, so that's the "break even" price for a 6 month T-bill in this scenario (2 months of lost SA interest with the bond unit trust-based shielding method because your birthday is too close to the beginning or end of the calendar month, 4.08% SA interest rate). Let's round that up to $983.50 (add a few cents) because a bond unit trust could wobble in price for the few days you hold it, so you might reasonably prefer to take the "sure deal" of the T-bill even if it's a little more expensive than the "break even" price. Now let's convert that to a Cut-Off Yield (COY) for competitive T-bill bidding purposes. This COY formula may be approximate but will be "close enough," and note there are 366 days this year (2024 is a leap year)....

• (risk-adjusted) TBP = $983.50
• COY = (366÷183) * (1000 - TBP) ÷ 1000
• COY = 366÷183 * 16.50 ÷ 1000
• COY = 3.30%

So in this example (LM=2, R=4.08%) you should be at least happy enough using a 6 month T-bill with a cut-off yield of 3.30% or higher for your SA shielding purposes.

Someone please double check my algebra!

 

[dork32]

common sense says that the calculation is wrong.. how can the breakeven coy be less than 4%?

you are making a very simple calculation so complex and wrong some more

 

[BBCWatcher]

common sense says that the calculation is wrong.. how can the breakeven coy be less than 4%?

Because you lose 2 months of SA interest with bond unit trust-based shielding in the example provided (birthday too close to the beginning or end of the calendar month). The “break even” is relative to the unit trust-based shielding method, not to keeping SA dollars parked (no shielding).

If you see something you still don’t like after this important point then please post a followup.

 

[s0crates]

Unit trust investing is very efficient. There is no fixed holding period like tbills. Once you are done with shielding you are free to sell it immediately.

NAV changes is reflected daily as well.

Perhaps some of the folks here never invested using CPF OA and/or SA and look at how the cash flow works.

The funny thing here is that I always immediately invest my CPF OA from employment once it hits my cpf account. For my scenario, the inefficiency is when people consistently LOSE interest from cpf on a monthly basis for that half a month, while I am able to compound my wealth very efficiently.

 

[kickass22]

I personally prefer it too.

But maybe some people have not done it before and need to do account creation etc plus they are more familiar with tbill which they have purchased using OA. Also there are people who have advised that less risk with tbills (I don't support this thinking) .

I only came to realise its disadvantage for birthday near beginning and end of the mth when I was working out the sums for my friend's shielding last year. So no choice have to tell her to shield with tbill.

Whichever method, shielding is better than not shielding. It is a matter of less loss or more loss. But if do not intend to drawdown SA soon, the additional interest in future makes up for it.

That's why for those not working or planning to retire before 65 (CPF life start), it is good to withdraw some OA while SA is shielded. So that no need to withdraw SA till many years later.

Hi vs24, Got two questions : 1) Is the volatility of the money market fund like Sheraton high? thus making it risky? 2) Can you load and unload with a week?

Thank You.

 

[reddevil0728]

Hi vs24, Got two questions : 1) Is the volatility of the money market fund like Sheraton high? thus making it risky? 2) Can you load and unload with a week?

Thank You.

Per what vsvs24 shared right.

you need to know that volatility data is historical.

Keeping it short reduces the chances of huge volatility.

if you see the price data, and you are not able to deal with black swan event which is rare but not impossible, then this might not be the most suitable shielding method for you.

 

[peacefulday]

Let's take this example and convert it to a generalized algebraic formula. I'll use these variables:

• TBP = 6 month T-Bill Price ("break even" price compared to a bond unit trust)
• LM = Lost Months of SA interest with bond unit trust-based shielding (either 1 or 2)
• R = CPF SA interest rate (floor rate of 4.00%, currently 4.08%)

That gives us an algebraic equation of:

• TBP * [(7-LM)/12] * R = 1000 - TBP

I assume you are only going to consider 6 month T-bills that only result in the loss of 7 months of SA interest, not 8 months. (A safe assumption!) OK, let's rearrange the equation to solve for TBP:

• TBP + TBP * [(7-LM)/12] * R = 1000
• TBP * [1 + (7-LM)/12 * R] = 1000
• TBP = 1000 ÷ [1 + (7-LM)/12 * R]

Now let's test this algebraic equation using LM = 2 and R = 4.08%:

• TBP = 1000 ÷ [1 + (7-2)/12 * 0.0408]
• TBP = 1000 ÷ (1 + 5/12 * 0.0408)
• TBP = 1000 ÷ (1 + 0.017)
• TBP = 1000 ÷ 1.017
• TBP = $983.28

OK, so that's the "break even" price for a 6 month T-bill in this scenario (2 months of lost SA interest with the bond unit trust-based shielding method because your birthday is too close to the beginning or end of the calendar month, 4.08% SA interest rate). Let's round that up to $983.50 (add a few cents) because a bond unit trust could wobble in price for the few days you hold it, so you might reasonably prefer to take the "sure deal" of the T-bill even if it's a little more expensive than the "break even" price. Now let's convert that to a Cut-Off Yield (COY) for competitive T-bill bidding purposes. This COY formula may be approximate but will be "close enough," and note there are 366 days this year (2024 is a leap year)....

• (risk-adjusted) TBP = $983.50
• COY = (366÷183) * (1000 - TBP) ÷ 1000
• COY = 366÷183 * 16.50 ÷ 1000
• COY = 3.30%

So in this example (LM=2, R=4.08%) you should be at least happy enough using a 6 month T-bill with a cut-off yield of 3.30% or higher for your SA shielding purposes.

Someone please double check my algebra!

your coy 3.30% given me some lights. I planned for the worst to low 3% when it's time for my next year's shield.

 

[kickass22]

There will be movements. Key is keeping it as short as possible. I had shared a few posts earlier quoting the dates I did the purchase and sale.

Someone also shared his.

You can see the price history of the fund. See earlier post with the link.

Thanks. This is helpful to understand when it come to my turn to shield!

 

[dork32]

your coy 3.30% given me some lights. I planned for the worst to low 3% when it's time for my next year's shield.

bbc, see what i mean, now people would want to bid 3% tbills to do shielding because of your calculations.

 

[BBCWatcher]

bbc, see what i mean, now people would want to bid 3% tbills to do shielding because of your calculations.

I didn’t compute 3% even for the “edge birthday“ case.

Something’s bothering you. What is it? That’s why I showed the math, so anybody can find any errors or omissions I might’ve made. Did I? If so, where’s the error or omission?

 

[s0crates]

bbc, see what i mean, now people would want to bid 3% tbills to do shielding because of your calculations.

I don't even know where's the assumption that unit trust investing will lose 2 month worth of SA interest relative to tbills come about.

Tbills will lose 1 to 2 months of interest.
UT will lose 1 to 2 months of interest. In fact UT will less likely to lose 2 months since you can time the buy/sell to be at middle of the month.

So why does tbills have a 2 month advantage over UT?

After some time I just get too lazy to read into those fringe scenarios and convoluted way of looking at things. I do my own stuff and trust my own analysis. Mathematically not difficult, all of us better at it than we give ourselves credit.

 

[s0crates]

Let me try to help everyone out on a fair and reasonable scenario.

Shielding should lose that individual 7 months of interest, be it using UT or tbills.

COMPARING TBILLS RETURNS VS ut returns over 7 month time frame

Tbills returns
= UT Investment strategy returns

So what's are fair assumption of UT investment strategy here?

Some people wanting to reduce volatility will keep the CPF SA monies in cash and only shield it nearer the period. This means you will have 6 months worth of SA rates and roughly half a month worth of UT returns, factoring transaction time buffer.

Other folks may be ok to invest the entire 6.5
Months in UT.

Based on above, can go look at the historical worst returns of the safest UT for the 0.5/6.5 months and solve the equation.

That's how I would approach it, and feel is more reasonable.

 

[BBCWatcher]

I don't even know where's the assumption that unit trust investing will lose 2 month worth of SA interest relative to tbills come about.

I don't know either. It's not something I wrote.

Tbills will lose 1 to 2 months of interest.

No, 6 month T-bills will lose 7 or 8 months of SA interest. There are plenty of 7 month SA interest loss T-bills to choose from. You can easily avoid the few 8 month SA interest loss T-bills by not bidding for them.

T-bills will also generate some of their own interest (yield).

UT will lose 1 to 2 months of interest. In fact UT will less likely to lose 2 months since you can time the buy/sell to be at middle of the month.

Not if your birthday is too close to the beginning or end of the calendar month. You can't choose your birth date. You can choose which T-bill(s) to bid for.

So why does tbills have a 2 month advantage over UT?

I don't think anyone wrote that.

 

[royalmix]

I don't know either. It's not something I wrote.

No, 6 month T-bills will lose 7 or 8 months of SA interest. There are plenty of 7 month SA interest loss T-bills to choose from. You can easily avoid the few 8 month SA interest loss T-bills by not bidding for them.

T-bills will also generate some of their own interest (yield).

Not if your birthday is too close to the beginning or end of the calendar month. You can't choose your birth date. You can choose which T-bill(s) to bid for.

I don't think anyone wrote that.

You or your spouse recently turned 55? What was your experience?

 

[peacefulday]

bbc, see what i mean, now people would want to bid 3% tbills to do shielding because of your calculations.

It's definitely not bbc's calculation that deter me to come out with a nonsense figure. I am actually just expressing my worst-case bet could go down to that extreme cpf sa bid since interest rate could heading lower. btw, my birthdate falls at 'edge' thus a disadvantage loses more.

 

[BBCWatcher]

You or your spouse recently turned 55? What was your experience?

Yes, one of us has. 6 month T-bills work as long as the yield is at least good enough, and it was.

This recently established Retirement Account is funded to the Enhanced Retirement Sum (ERS) using a mix of minimum SA, self OA, spousal OA, and cash. (The cash part came first and was useful for a bit of tax relief in this case.) Boosted to the new 2024 ERS, too, via spousal OA. The plan is to keep boosting the RA whenever the ERS is raised — indefinitely. When the other one of us reaches 55, the same deal is planned. MAs maintained at the BHS, too.

 

[KeytoFreedom]

appreciate advice if say birthday on the 27th , what is the latest date date that the CPF shielding needs to take place to avoid the SA funds being locked up?

what is the earliest date my shielded funds can safely be transferred back to the SA account, i.e what date is the shielding over?

if say I am still considering whether to take up the ERS, can I leave only the BRS amount for the funds lock up on my bday and only top up at a later date, if yes what is the latest date to top up to ERS?

Thank you!



Read HWZ Forum Rules!

 

[fr33d0m]

You can leave bare minimum in the CPF SA/OA to form CPF RA.

 

[BBCWatcher]

appreciate advice if say birthday on the 27th , what is the latest date date that the CPF shielding needs to take place to avoid the SA funds being locked up?

Probably the business day before the 27th, but there's absolutely no need to cut it close. You have lots of (business) days between 1 and 27. How about the 20th for example?

what is the earliest date my shielded funds can safely be transferred back to the SA account, i.e what date is the shielding over?

As soon as you see your new Retirement Account with dollars swept into it (morning of the 27th probably) I'd get that unit trust sale done. (And immediately withdraw any excess OA dollars if you want to do that, if you have them.) The 27th is very close to the end of the calendar month, so there's no time to waste on that part.

if say I am still considering whether to take up the ERS, can I leave only the BRS amount for the funds lock up on my bday and only top up at a later date, if yes what is the latest date to top up to ERS?

That'll depend on your Ordinary Account Balance. Let's suppose you're celebrating your 55th birthday later this year (2024). The Full Retirement Sum this year is $205,800. And let's suppose you "shield" all but $40,000 of your Special Account. (You cannot shield $40,000, sometimes more.) If your OA balance is at least $165,800 then your new Retirement Account will be funded to the Full Retirement Sum with $40,000 from OA and $165,800 from OA. If your OA has less than $165,800 then every dollar will be swept from your OA into your new RA. (Unless you tell the CPF Board otherwise, in advance, because you have housing payments you want to make from OA.)

If your MediSave Account has reached the Basic Healthcare Sum then the MediSave portion of compulsory contributions (and "all three account" Voluntary Contributions, a.k.a. VC3A) will land in your RA. If you're interested in injecting as much cash as possible into your RA then you'll need to raise it quickly at least to the Full Retirement Sum in order to avoid those payroll cycle contributions.

Note that certain qualified family members (especially a spouse) may be eligible to transfer his/her OA dollars into your RA. That's often a really great choice instead of cash, or in addition to a lower amount of cash. And it can be up to the ERS if he/she wishes. Just be aware that it may take a few days for the CPF Board to verify the family relationship if this is the first time that person is transferring OA dollars to you, and the 27th is very close to the end of the calendar month. You could try contacting the CPF Board to see if they'll verify the relationship in advance. Once the relationship is verified (and recorded in CPF's database) those cross-spousal (or other family-based) OA to RA transfers can be instant, or near-instant.

 

[limlg73]

When your next compulsory contributions come in (from payroll cycles) whatever would ordinarily land in your SA will now go into your RA. That's because your RA hasn't reached the Full Retirement Sum yet

hi BBCWatcher, may I know whether this is stated in CPF website? can share the link if it is?