*Official* BBCWatcher club

[w1rbelw1nd]

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.

1. I dont know how something which returns is clearly subject to change, which withdrawal details are also subjected to change can be considered a "bond". Perhaps you can find me a "bond" where the issuer does not need to get the bondholder approval when there are change in coupons, or bond covenants? I guess you have less concern about substance than the label you choose to give CPF SA? To each its own.

2. CPF OA can be used to invest in STI ETF, CPF OA can be used for bank loan, freeing up cash for other investments.

3. About the point of "you do both", yes there are situations where "doing both" would make sense, even for someone more cautious about CPF SA like myself. This is a nuanced decision that has to look into the individual's cashflow projections. Its not right to assume that it is a default consideration because not everyone is that well-off to pay tax, not everyone has that much certainty in their expenses and their lives.

 

[BBCWatcher]

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

Exactly! You’re 26 years old, and you’ve already got more than enough for a 20% down payment on a HDB BTO and a big cushion besides. I love it! Awesome stuff. You’ve even already nailed down a basic retirement income stream, so even if everything goes pear shaped (let’s hope not), age 65+ is locked and loaded. And you’ve still got 38+ years to run. Wow, what’s not to like?

....OK, I do have two minor suggestions.

1. When you get to the stage where tax relief is possible, give MA another look. (Already mentioned this.)

2. Currently you’re 100% invested in Singapore. I’m uncomfortable with that now that you’ve accumulated about $200K of wealth (and growing), so I think you ought to consider allocating a portion of your savings flow to a low cost global stock index fund, such as IWDA or VWRD. That doesn’t necessarily mean you raise the total percentage of savings going into stocks, although you might. But I’m not a huge fan of a long-term stock bet that’s only riding 30 stocks listed in one small country. Heck, I’m not even a fan of only betting on 500 stocks in the world’s biggest economy. I prefer to bet on planetary commerce.

 

[crimsontactics]

Exactly! You’re 26 years old, and you’ve already got more than enough for a 20% down payment on a HDB BTO and a big cushion besides. I love it! Awesome stuff. You’ve even already nailed down a basic retirement income stream, so even if everything goes pear shaped (let’s hope not), age 65+ is locked and loaded. And you’ve still got 38+ years to run. Wow, what’s not to like?

....OK, I do have two minor suggestions.

1. When you get to the stage where tax relief is possible, give MA another look. (Already mentioned this.)

2. Currently you’re 100% invested in Singapore. I’m uncomfortable with that now that you’ve accumulated about $200K of wealth (and growing), so I think you ought to consider allocating a portion of your savings flow to a low cost global stock index fund, such as IWDA or VWRD. That doesn’t necessarily mean you raise the total percentage of savings going into stocks, although you might. But I’m not a huge fan of a long-term stock bet that’s only riding 30 stocks listed in one small country. Heck, I’m not even a fan of only betting on 500 stocks in the world’s biggest economy. I prefer to bet on planetary commerce.

IWDA/VWRD need to pay tax?

 

[BBCWatcher]

1. I dont know how something which returns is clearly subject to change, which withdrawal details are also subjected to change can be considered a "bond".

You don’t?

Everything has some degree of uncertainty attached. Yes, even the 30 year Singapore Government Security. Why? One reason: the government could levy tax on it, literally overnight. Another reason: monetary policy and inflation. The bond pays fixed coupons. It is entirely reasonable and rational to forecast that CPF floor interest rates will increase if/when market interest rates ever do. Can’t say that about a bond.

Yes, it’s a bet, but everything is a bet in investing. And it’s a damn good bet right now.

Of course nobody is suggesting only CPF, but if you don’t need OA funds, then of course you should shove those dollars into SA. Easiest decision ever.

Yes, you could hypothetically put OA dollars into the CPF Investment Scheme in a STI fund. But have you taken a look at the STI on a total return basis, net of fund costs? Let’s take a look.... ES3 has the following 1, 3, 5, and 10 year total annualized returns (not counting broker commissions): 4.30%, 2.69%, 3.80%, and 4.08%. Yes, that’s right, add in broker commissions and over that entire 10 year period you’re either matching or trailing behind CPF SA/MA yields. (Crimsontactics was 16 years old a decade ago.)

Do you understand why so many people, including Crimsontactics, don’t want to bet on the STI with CPF dollars that could be bet on SA instead? Yes, I know, past performance is not indicative of future results, but Crimsontactics isn’t ignoring the STI. He’s got that, and he used cash to do it.

 

[BBCWatcher]

IWDA/VWRD need to pay tax?

No, there’s no personal tax on those funds in Singapore (for non-U.S. persons). The fund managers pay whatever tax is owed, such as 15% dividend tax on the stock dividends paid by the U.S. listed companies in those funds. But that’s nothing special and all handled within the fund, before they pay (or accumulate) dividends. ES3’s fund managers and/or the 30 companies in that STI fund pay whatever taxes they owe, too, before distributing dividends to you.

 

[w1rbelw1nd]

Haha. I totally anticipated the same old tax/monetary policy argument again. If that's the strongest point you can pull out, then let's leave it as that. Talking about how CPF SA is not a bond here because of unilateral change in terms of CPF, you talk about monetary policy, inflation, things that has nothing to do with the obligations between a borrower (us) or the lender (CPF).

You don’t?

Everything has some degree of uncertainty attached. Yes, even the 30 year Singapore Government Security. Why? One reason: the government could levy tax on it, literally overnight. Another reason: monetary policy and inflation. The bond pays fixed coupons. It is entirely reasonable and rational to forecast that CPF floor interest rates will increase if/when market interest rates ever do. Can’t say that about a bond.

Yes, it’s a bet, but everything is a bet in investing. And it’s a damn good bet right now.

Of course nobody is suggesting only CPF, but if you don’t need OA funds, then of course you should shove those dollars into SA. Easiest decision ever.

Yes, you could hypothetically put OA dollars into the CPF Investment Scheme in a STI fund. But have you taken a look at the STI on a total return basis, net of fund costs? Let’s take a look.... ES3 has the following 1, 3, 5, and 10 year total annualized returns (not counting broker commissions): 4.30%, 2.69%, 3.80%, and 4.08%. Yes, that’s right, add in broker commissions and over that entire 10 year period you’re either matching or trailing behind CPF SA/MA yields. (Crimsontactics was 16 years old a decade ago.)

Do you understand why so many people, including Crimsontactics, don’t want to bet on the STI with CPF dollars that could be bet on SA instead? Yes, I know, past performance is not indicative of future results, but Crimsontactics isn’t ignoring the STI. He’s got that, and he used cash to do it.

 

[crimsontactics]

No, there’s no personal tax on those funds in Singapore (for non-U.S. persons). The fund managers pay whatever tax is owed, such as 15% dividend tax on the stock dividends paid by the U.S. listed companies in those funds. But that’s nothing special and all handled within the fund, before they pay (or accumulate) dividends. ES3’s fund managers and/or the 30 companies in that STI fund pay whatever taxes they owe, too, before distributing dividends to you.

Thank you very much for your advice!

 

[jyoz90]

Hi BBCW,

Would like to seek your view on my current situation:

I am in my late 20s and my bto is due for completion in early 2022.
From now till then, I have roughly 3-4 years.

1. Should I focus on saving up my monthly spare cash (in bank account) into a lump sum and reduce my housing loan amount when bto is ready? This projected saving over the period works up to around 70-80k.

Or

2. Invest my current monthly spare cash (around ~2k) into IWDA, ES3 and SSB? In the suggested ratio.

I am incline to do the first as in general I don't like to be on high debt and home loan interest rate seems to be going up.

Just want to check if you have any other thoughts on this.

Thank you very much in advance.

Sent from Xiaomi MI 5 using GAGT

 

[fun4life]

Hi, sorry to hijack the thread to ask a newbie question:

- if to use CPF to invest stock/ETF etc, the amount will be deducted from CA or SA account first?

- if to use CA money to invest, what products (in SGX?) could you recommend most likey , to beat its 2.5% interset rate ?

 

[tangent314]

Hi, sorry to hijack the thread to ask a newbie question:

- if to use CPF to invest stock/ETF etc, the amount will be deducted from CA or SA account first?

- if to use CA money to invest, what products (in SGX?) could you recommend most likey , to beat its 2.5% interset rate ?

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/Schemes/schemes/optimising-my-cpf/cpf-investment-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.

 

[tangent314]

1. Should I focus on saving up my monthly spare cash (in bank account) into a lump sum and reduce my housing loan amount when bto is ready? This projected saving over the period works up to around 70-80k.

Or

2. Invest my current monthly spare cash (around ~2k) into IWDA, ES3 and SSB? In the suggested ratio.

I am incline to do the first as in general I don't like to be on high debt and home loan interest rate seems to be going up.

You do need to get a grip on your emotions. Having debt is fine if the interest rate is low and if your current assets are earning higher interest than your loan interest.

If you are on a private bank loan, your rates are around 2.0% or below, it makes more sense to keep money in CPF OA and earn 2.5%.

If you are on HDB loan, the 2.6% loan costs more than the 2.5% CPF OA interest, so it may make sense to pay off this loan, if you don't think you can get higher than 2.6% returns on your investments... but generally, you can if you invest for the long term.

I wouldn't worry about rising interest rates. If it does get too high, you can simply pay off the loan later if you wish, after the lock in period, which generally isn't more than 2 years these days.

So ya, generally we would just recommend that you continue servicing the loan, then invest using the usual boring strategies that gets repeated in this and the ST's thread.

 

[BBCWatcher]

I am in my late 20s and my bto is due for completion in early 2022. From now till then, I have roughly 3-4 years.

OK. So you and your significant other will need a chunk of money for the down payment. Ideally you'll want to have some cash so that you could choose a bank loan if you wish, but CPF Ordinary Account funds can also be used. SSBs work great for the cash portion of your down payment.

1. Should I focus on saving up my monthly spare cash (in bank account) into a lump sum and reduce my housing loan amount when bto is ready? This projected saving over the period works up to around 70-80k.

At current and even somewhat higher interest rates, no. If you expect to be able to qualify for the HDB loan rate of 2.6%, that's really the "worst case." Last I checked, market interest rates would still have to rise more than 2 percentage points before the HDB concessionary loan rate would rise. And, even if that happened, Ordinary Account interest rates would rise, too. Mortgages are still inexpensive in Singapore, and so I think it's still perfectly reasonable to take, say, a 75% mortgage (25% down payment).

The interesting question 3 to 4 years from now is whether you should take the HDB concessionary loan rate (2.6%), if you qualify. That rate is looking somewhat more attractive these days. But I think I'd still put 20% down on a HDB loan, if you can reasonably afford it. And you can decide that question 3+ years from now.

This all may seem counterintuitive, but it is correct. Cheap debt is great, while it's cheap. If you can borrow money at 1.8% fixed for 3 years and take that money over to ICBC Singapore, deposit it in a fixed account, and get 1.85% -- and some people really can do this -- then of course it makes sense to accept the cheap money and not to accelerate loan repayment. Effectively the banks are paying you (in this example) to take their loan, and that's ridiculous and crazy, but if that's the offer, take it! That's just an extreme example, but certainly if you can put your money to work and reliably earn 3% or more (let's suppose), even a 2.6% mortgage is cheap. So I'm not opposed to cheap debt, but I like to be well defended if that debt turns into something that's no longer cheap. Your savings and investments, per normal long-term practices, should defend you well against that risk.

2. Invest my current monthly spare cash (around ~2k) into IWDA, ES3 and SSB? In the suggested ratio.

I'm not sure which suggested ratio, but, regardless, it should be a ratio that you like for your goals. Yes, while mortgages are cheap, that's a very reasonable bet to make.

I am incline to do the first as in general I don't like to be on high debt and home loan interest rate seems to be going up.

Yes, I know we don't like "high debt," but we should like cheap debt while it's cheap. So for now just focus on making sure you have a decent down payment -- maybe you do already -- check the mortgage rates every once in a while, and see where we are 3+ years from now, especially with respect to the HDB concessionary loan rate if you qualify. If the banks 3+ years from now are lending at 2.5% fixed for 2 or 3 years and HDB is lending at 2.6%, let's suppose, I'd probably take HDB's offer. (This is an example.)

If you've got enough for a 20% or 25% down payment now, or you will based on your normal savings pattern, that's enough I'd say. Then, 3+ years from now, if banks are loaning at 3.5% and you don't qualify for HDB's 2.6% rate, you might decide to sell some ES3 (for example) to increase your down payment from 25% to, say, 40%. (Why focus on ES3 in that event? Because your new home is also in Singapore, exposed to similar valuation risks. So to maintain a similar global diversification level, you'd probably sell some ES3 if you wanted/needed to raise more funds to increase your equity stake in your new home, if and only if mortgages are genuinely expensive.) That could be a reasonable thing to do. But I don't think it's worth changing your portfolio allocations now for that possibility, not yet anyway.

 

[BBCWatcher]

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]

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/Schemes/schemes/optimising-my-cpf/cpf-investment-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]

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]

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]

Thanks BBCW and tangent for the insightful view!

Sent from Xiaomi MI 5 using GAGT

 

[AnTiLooP]

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]

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]

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.

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.