*Official* BBCWatcher club

[crimsontactics]

Dear Bro BBC,

I'm 26 this year.

My net worth is 200k, but 95k is inside CPF.

5k in OA
85k in SA
5k in MA

Is it too much in CPF? Should I stop putting money in CPF?

Sent from . using GAGT

 

[Gainduia]

Thanks tangent and BBCW advice.

I do have emergency fund (in maxigain) and monthly CPF into my account.

Will stick to having some % in SSB (bond) for my portfolio.

 

[Milla3113]

Hi Tangent314,

I did see that thread but it was for structured deposits while this is a structured note.

If there is an old thread on structured note, pls let me know as I was not able to find it when I did a search. Thanks!

 

[Tiger9119]

There's no such thing as a good structured deposit, to be quite frank; they're all an exercise in gouging fees out of you and sticking you with terrible risks.

I'm going to guess that if any of those stocks closes below that knock-in price in any one of the six months, that you get stuck with the returns of the stock... after it's dropped 20-30%. That's a pretty awful deal!

And do you know anything about Viacom, Baidu, or CVS that makes you want to own the stock? Not just "I know this is a company", but do you know about Baidu's corporate structure? Do you know about Viacom's wrangling with CBS and National Amusements? Do you have a view on how the US retail and pharma sectors are going to be affected by Donny Two Scoops' economic policies?

Thank you to Shiny Things and BBCWatcher for the replies. Looks like I have to temporary put the USD in 3 months FD @ 2.1% pa.

 

[BBCWatcher]

I'm 26 this year.
My net worth is 200k, but 95k is inside CPF.
5k in OA
85k in SA
5k in MA
Is it too much in CPF? Should I stop putting money in CPF?

First of all, congratulations. You've maxed out your CPF bonus interest (5%) by age 26 (or 25?), and that's remarkable, really. You've hit the Basic Retirement Sum for all intents and purposes ($85,500 in 2018)! My guess is you've done some OA to SA transfers and also SA top-ups for tax relief to get to this point. Well played.

What next? It really depends on whether you need OA for housing going forward. If you don't, or don't any time soon, I'd keep transferring OA to SA. That strategy is sound. If you do need OA for housing, you can ease back to partial monthly OA to SA transfers or stop the transfers altogether.

I'm assuming you don't have a spouse or partner yet, so we'll skip that part.

I don't think I'd recommend cash SA top-ups at this point. I actually prefer MA top-ups for tax relief first, since they're tougher to squeeze within the CPF Annual Limit as your work career progresses, since they can be useful at any age, and since the "spillover" behavior from MA to SA (thence to OA) is nice. You're also going to have the compulsory CareShield Life premiums coming up soon enough (30th birthday) -- you're part of the compulsory CareShield Life cohorts -- so you can juice up MA a little if you wish. Anyway, if you've got spare cash that doesn't have a better outlet, I'd give MA a little more love, for the tax relief of course.

If you "never" need OA for housing then what you could do is continue topping up MA (first) and SA (second) for tax relief, continue the full OA to SA transfers, and then, at some point (Full Retirement Sum), your OA will start to swell from compulsory contributions. Whereupon you could consider dabbling in the CPF Investment Scheme-OA. This is maybe the one exceptional situation when I think the CPF Investment Scheme has some merit: MA/SA full, OA piling up, don't need OA for housing. And/or you use OA to service your mortgage, if 2.5% (or whatever the OA yield is) just isn't appealing enough. But that's in the possible future, some years hence.

CPF at 5% (or 4% now) is "weird." It's bond-like, but it's strangely high yielding. I view it as roughly similar to ES3 (Straits Times Index fund) in terms of expected yield, and that's just...weird, in a good way. And having that base allows you, prudently, to be somewhat more aggressive elsewhere in your investing. That's pretty special.

 

[w1rbelw1nd]

Is it well played if crimson is going to buy a HDB and he doesn't have CPF OA to pay for his HDB? Not sure if CPF SA 4% is worth it if he has to cough up cash to buy his home...

 

[crimsontactics]

First of all, congratulations. You've maxed out your CPF bonus interest (5%) by age 26 (or 25?), and that's remarkable, really. You've hit the Basic Retirement Sum for all intents and purposes ($85,500 in 2018)! My guess is you've done some OA to SA transfers and also SA top-ups for tax relief to get to this point. Well played.

What next? It really depends on whether you need OA for housing going forward. If you don't, or don't any time soon, I'd keep transferring OA to SA. That strategy is sound. If you do need OA for housing, you can ease back to partial monthly OA to SA transfers or stop the transfers altogether.

I'm assuming you don't have a spouse or partner yet, so we'll skip that part.

I don't think I'd recommend cash SA top-ups at this point. I actually prefer MA top-ups for tax relief first, since they're tougher to squeeze within the CPF Annual Limit as your work career progresses, since they can be useful at any age, and since the "spillover" behavior from MA to SA (thence to OA) is nice. You're also going to have the compulsory CareShield Life premiums coming up soon enough (30th birthday) -- you're part of the compulsory CareShield Life cohorts -- so you can juice up MA a little if you wish. Anyway, if you've got spare cash that doesn't have a better outlet, I'd give MA a little more love, for the tax relief of course.

If you "never" need OA for housing then what you could do is continue topping up MA (first) and SA (second) for tax relief, continue the full OA to SA transfers, and then, at some point (Full Retirement Sum), your OA will start to swell from compulsory contributions. Whereupon you could consider dabbling in the CPF Investment Scheme-OA. This is maybe the one exceptional situation when I think the CPF Investment Scheme has some merit: MA/SA full, OA piling up, don't need OA for housing. And/or you use OA to service your mortgage, if 2.5% (or whatever the OA yield is) just isn't appealing enough. But that's in the possible future, some years hence.

CPF at 5% (or 4% now) is "weird." It's bond-like, but it's strangely high yielding. I view it as roughly similar to ES3 (Straits Times Index fund) in terms of expected yield, and that's just...weird, in a good way. And having that base allows you, prudently, to be somewhat more aggressive elsewhere in your investing. That's pretty special.

Thank you for your kind advice Bro BBC!

Sent from . using GAGT

 

[crimsontactics]

Is it well played if crimson is going to buy a HDB and he doesn't have CPF OA to pay for his HDB? Not sure if CPF SA 4% is worth it if he has to cough up cash to buy his home...

What's the cons of using cash to pay HDB?

Sent from . using GAGT

 

[BBCWatcher]

I'm not sure why people don't understand this one. It's pretty basic, or so I thought.

Let's start with this basic fact: for a saver/investor, 4% compounded interest is better than 2.5% compounded interest. Your money will double in approximately 18 years at 4% and in approximately 29 years at 2.5%. (And that's not counting bonus interest, which is skewed toward MA/SA.)

OK, now let's suppose your (or your family's) net worth is $100 million, you're working and have compulsory CPF contributions at least, and you're going to buy a HDB BTO about 5 years from now. Got all that? So, what should you do? Well, duh! You transfer every penny of OA to SA, every month. You zoom up SA as fast as you can; you go for the yield. Making a down payment on a HDB BTO is like buying a kaya toast breakfast for you and your family, so it's absolutely absurd to deny yourself the higher interest for even one month. Wealth has its privileges, and this is one of them.

....So some people are in this fortunate position, namely that they don't need and never could plausibly need OA as OA, for housing. OA is fundamentally a middle class construction. That's not to say it's bad; not at all. It helps so many Singaporeans save for housing. But some people don't need it, and for them, it's OA to SA transfers every month, in full.

Now, what's the cut-off? How much personal and/or family wealth do you need to adopt this CPF optimization strategy? "It depends." If you're not interested in buying housing in Singapore -- for example, you're working overseas for a Singaporean company and contributing to CPF, but you are pretty sure you're going to stay overseas -- then no matter what your wealth you'd rationally, prudently slam OA funds into SA every month. Those dollars have to stay in CPF -- that isn't a choice -- so they might as well work as hard as possible for you.

Why is this CPF optimization concept so difficult to grasp? It makes perfect sense, and I think it's pretty basic.

 

[w1rbelw1nd]

....So some people are in this fortunate position, namely that they don't need and never could plausibly need OA as OA, for housing. OA is fundamentally a middle class construction. That's not to say it's bad; not at all. It helps so many Singaporeans save for housing. But some people don't need it, and for them, it's OA to SA transfers every month, in full.

Now, what's the cut-off? How much personal and/or family wealth do you need to adopt this CPF optimization strategy? "It depends." If you're not interested in buying housing in Singapore -- for example, you're working overseas for a Singaporean company and contributing to CPF, but you are pretty sure you're going to stay overseas -- then no matter what your wealth you'd rationally, prudently slam OA funds into SA every month. Those dollars have to stay in CPF -- that isn't a choice -- so they might as well work as hard as possible for you.

Why is this CPF optimization concept so difficult to grasp? It makes perfect sense, and I think it's pretty basic.

It seems that you are assuming that crimsontactics here is in that privileged position, arent you?

 

[w1rbelw1nd]

What's the cons of using cash to pay HDB?

Sent from . using GAGT

Feel free to disagree, but for something that will be stuck into an account long term (not less than age 55 for a 26 year old, mind you), you can do better than a 4% return. With full flexibility of how you want to use the cash in case you decide not to grow it for future use. And also that cash is not subjected to as much policy risk (omg wall of text incoming...) as CPF.

I want all forummers to understand that there are a lot of considerations on whether to transfer OA to SA or not. Could be your own investment risk appetite, could be your own networth position, even your own views on how CPF is going to be handled. I can respect people for coming into a different conclusion, but I dont agree that there can only be one way to do things (ie. maxing out SA is definitely the best decision).

At least thats what BBCW seem to be doing without further understanding your situation. If you want to confirm any decisions you make wrt pumping in more money into CPF, looking at him for advice is the best way to give yourself more empty assurance I feel.

 

[crimsontactics]

Feel free to disagree, but for something that will be stuck into an account long term (not less than age 55 for a 26 year old, mind you), you can do better than a 4% return. With full flexibility of how you want to use the cash in case you decide not to grow it for future use. And also that cash is not subjected to as much policy risk (omg wall of text incoming...) as CPF.

I want all forummers to understand that there are a lot of considerations on whether to transfer OA to SA or not. Could be your own investment risk appetite, could be your own networth position, even your own views on how CPF is going to be handled. I can respect people for coming into a different conclusion, but I dont agree that there can only be one way to do things (ie. maxing out SA is definitely the best decision).

At least thats what BBCW seem to be doing without further understanding your situation. If you want to confirm any decisions you make wrt pumping in more money into CPF, looking at him for advice is the best way to give yourself more empty assurance I feel.

Thank you for your kind explanation.

But I very risk averse and my income not high.

Just that I got windfall from gambling that's why got the first 100+k...

The rest is from income and interest.

Sent from . using GAGT

 

[w1rbelw1nd]

Thank you for your kind explanation.

But I very risk averse and my income not high.

Just that I got windfall from gambling that's why got the first 100+k...

The rest is from income and interest.

Sent from . using GAGT

Ok, just as an add-on, I too have done a tiny top-up on CPF SA using my OA to make sure I get my additional 1% interest (the 40k SA 20K OA thing) some time in my second year of employment.

I personally prefer to do SRS top up over CPF SA top up to use "pre-tax money" (thanks for the term BBCW) to invest, rather than being satisfied with the 4% (not confirmed) return. There are trade-offs, yes, but my execution is based on my logic, risk appetite, and in my opinion not any less logical. rational and "optimised" versus what other people may advocate.

 

[w1rbelw1nd]

Bbcw, any idea on how the Nikko am "corporate bond fund etf" will respond to a rising interest rate environment?

I can answer that if you dont mind. Price will drop, as with all bonds, if the market is smart enough. The greater the bond ETF duration, the greater the % drop in price.

 

[bobobob]

I can answer that if you dont mind. Price will drop, as with all bonds, if the market is smart enough. The greater the bond ETF duration, the greater the % drop in price.

Why do longer duration bonds' prices drop more when interest rates rise?

 

[w1rbelw1nd]

Why do longer duration bonds' prices drop more when interest rates rise?

Bond valuation is basically doing a DCF of the fixed coupons and the eventual return of principal using the interest rate, to keep things simple (lets not talk about spot/forward rates).

When a bond is more long dated (ie far from maturity) and hence longer duration, the principal will be discounted more (think $1000 divide by (1+ ir)^n, where n is greater), and hence bond value will drop further.

Thats the best summary I can do.

 

[crimsontactics]

Ok, just as an add-on, I too have done a tiny top-up on CPF SA using my OA to make sure I get my additional 1% interest (the 40k SA 20K OA thing) some time in my second year of employment.

I personally prefer to do SRS top up over CPF SA top up to use "pre-tax money" (thanks for the term BBCW) to invest, rather than being satisfied with the 4% (not confirmed) return. There are trade-offs, yes, but my execution is based on my logic, risk appetite, and in my opinion not any less logical. rational and "optimised" versus what other people may advocate.

My income not high enough to be taxable.

So tax deduction not really a factor for me.

 

[w1rbelw1nd]

My income not high enough to be taxable.

So tax deduction not really a factor for me.

Then all the more you may want the money in a more flexible account (ie CPF OA) for your future purposes, if you project that your income will not be high in the future man. Your child's education can be paid by CPF OA, not CPF SA

Have to plan more carefully if your finances are tight. Well off people may be choosing between "good" and "better" plans, but chao sinkies like us choices are sometimes just "bad" and "ok"...

 

[crimsontactics]

Then all the more you may want the money in a more flexible account (ie CPF OA) for your future purposes, if you project that your income will not be high in the future man. Your child's education can be paid by CPF OA, not CPF SA

Have to plan more carefully if your finances are tight. Well off people may be choosing between "good" and "better" plans, but chao sinkies like us choices are sometimes just "bad" and "ok"...

But I got around 100k in savings and STI ETF, so not really an issue for emergency fund or buying house.

Just that right now income not high enough to attract tax.

So my situation a little bit unique.

 

[BBCWatcher]

Your child's education can be paid by CPF OA, not CPF SA

You’re just not getting it, and that’s OK I guess. To each his/her own.

For the record, yes, your child’s education can be paid from SA. Here’s how that works:

(a) Have a child at age 35+;
(b) Wait 18 years (plus 2 years of National Service if applicable);
(c) Withdraw CPF SA funds at age 55+ (after Retirement Account set aside) to pay for 2+ years of university tuition.

You’ll have many more dollars for education that way. And you’ll likely also have OA, and lots of it, before age 55 because — and here’s the magical part — your MA and SA have reached their respective limits, and you’re still making compulsory contributions.

Now, if you’re having your child at age 25, different story perhaps. But that’s not what most Singaporeans are doing these days. They’re not having many children, and when they are it’s age 35+, often ++.

I think you might be struggling with the concept that individuals who are doing moderately well or better can use CPF in some more interesting ways than you might expect. They can use it as the strangely high yielding bond portion of their portfolio, fundamentally. They fully expect to hit the FRS and BHS rather easily, and they’ll simply, rationally accelerate that process. They still end up with plenty of OA and age 55+ withdrawable SA — much more of it, because they’ve crushed it.

OK, could somebody shunt OA dollars into the CPF Investment Scheme and maybe do better than 4+%? Maybe. But that’s not the smart play. A 4+% AAA-rated bond with tax relief maturing at age 55 is just too damn attractive to pass up in 2018, and the CPF Investment Scheme...well, it sucks, let’s just say it. There aren’t great investment choices, and your cash savings can be much more cost-effectively invested. If you don’t immediately need OA, and if you’ve got cash that can go chase stocks (e.g. IWDA), then you do that. And you crush your CPF SA/MA. You do both. All very logical and sensible, and very powerful.