Retirement plans

[BBCWatcher]

OK, let's make these assumptions:

$0 initial savings
both of you are ~28 years old
both of you will retire at ~63 years old (+35 years)
$3,500/month desired retirement income (2020 dollars)
3%/year average real yield on your long-term savings, net of all costs
3%/year safe withdrawal rate in retirement, as applied to the first year

With those assumptions, you'll need $42,000/year (2020 dollars) in retirement. Take $42,000, divide by 3%, and you get $1.4 million (2020 dollars) as your target goal.

OK, now you figure out what the initial monthly savings amount is (still 2020 dollars) at 3%/year average yield over 35 years. And the answer is about $1,380, or $690 per person. (Many online calculators can help you figure that out.)

Before you panic, bear in mind that while you're age 35 or under 6/37ths of your compulsory CPF contributions are going into your Special Account. That works out to $300/month/person if your gross wages are $5,000/month, for example. Add $390/month/person, and you're on pace in 2020, with these particular assumptions. One critical assumption is that you stay at or above real dollar pace, meaning that your savings flow increases every year at least to keep pace with inflation.

Your CPF Special Account currently earns at least 4%/year nominal interest, which is currently at or above 3%/year real interest since Singapore dollar inflation is currently quite low. However, that probably won't always be true, so some long-term, low cost, well diversified stock index fund investing is merited to try to keep your average real yield at or above the 3% assumed.

You can run the numbers using different assumptions if you like. For example, what happens when you work and save for 38 years instead of 35? And so forth.

 

[purpleberry]

OK, let's make these assumptions:

$0 initial savings
both of you are ~28 years old
both of you will retire at ~63 years old (+35 years)
$3,500/month desired retirement income (2020 dollars)
3%/year average real yield on your long-term savings, net of all costs
3%/year safe withdrawal rate in retirement, as applied to the first year

With those assumptions, you'll need $42,000/year (2020 dollars) in retirement. Take $42,000, divide by 3%, and you get $1.4 million (2020 dollars) as your target goal.

OK, now you figure out what the initial monthly savings amount is (still 2020 dollars) at 3%/year average yield over 35 years. And the answer is about $1,380, or $690 per person. (Many online calculators can help you figure that out.)

Before you panic, bear in mind that while you're age 35 or under 6/37ths of your compulsory CPF contributions are going into your Special Account. That works out to $300/month/person if your gross wages are $5,000/month, for example. Add $390/month/person, and you're on pace in 2020, with these particular assumptions. One critical assumption is that you stay at or above real dollar pace, meaning that your savings flow increases every year at least to keep pace with inflation.

Your CPF Special Account currently earns at least 4%/year nominal interest, which is currently at or above 3%/year real interest since Singapore dollar inflation is currently quite low. However, that probably won't always be true, so some long-term, low cost, well diversified stock index fund investing is merited to try to keep your average real yield at or above the 3% assumed.

You can run the numbers using different assumptions if you like. For example, what happens when you work and save for 38 years instead of 35? And so forth.

Need to read and reread your post. Thanks for you the advice!

Is it better in my case to put bit by bit under CPF SA account? I am not savvy on investments although I tried to look up at stashaway at one point and got lost.

 

[BBCWatcher]

Is it better in my case to put bit by bit under CPF SA account?

Short answer: Yes, I think CPF is a great choice to start a long-term investment plan.

Longer answer: If either or both of you have total CPF assets under $60,000 (or under $40,000 total in MA+SA), then you are still in bonus interest territory, meaning a MA or SA deposit will earn 5% interest. I tend to prefer depositing into MA first, because those deposits must fit within both the CPF Annual Limit and Basic Healthcare Sum, which can be more difficult limits as you progress in your career. Also, MA funds can be useful at any/every age. And MA top ups also qualify for tax relief, but with no separate limit. And you can think of them as retirement savings since you'll likely spend those particular dollars mostly in retirement.

However, while you're giving your CPF accounts some love and attention, you will want to learn about low cost, long-term global stock index fund investing. Stashaway is not particularly low cost.

 

[mummynew]

Is it better in my case to put bit by bit under CPF SA account? I am not savvy on investments although I tried to look up at stashaway at one point and got lost.

I am not in favour of saving via CPF as your first layer when you are now in the early stage of your family planning.

Maybe you can park a few hundreds monthly in the STI ETF first for a start (if you are like my nieces/nephews/kids that don't even have a trading account and not interested to learn about trading, then this is the simplest way for you to use DBS online to start the RSP. ).

This saving investment will give you flexibility to liquidate if you really need cash in urgent situation (that you may suffer a loss if such situation arises and when the market is bad).

If you can't even manage this simplest RSP, then perhaps annual CPF top up maybe the next best for you with your tight disposable cash position now but still intending to save.

Look at your family expenses/budget to see where you can save. My experience is to raise your kid/s well in terms of good attitude (manners, thinking skills, doing some light housework like packing own toys, reading habits etc) so that you don't need to over-spend on kids' preschools and subsequent tuition (this part can save a lot of money if you manage to build their independence from young).

 

[BBCWatcher]

I am not in favour of saving via CPF as your first layer when you are now in the early stage of your family planning.

Oh? Why?

Maybe you can park a few hundreds monthly in the STI ETF first for a start (if you are like my nieces/nephews/kids that don't even have a trading account and not interested to learn about trading, then this is the simplest way for you to use DBS online to start the RSP. ).

Yes, you could do that. Here's a fun fact, though: according to the official performance data through July 31, 2020, for ES3, the Straits Times Index stock fund, if you had done that (and with dividend reinvestments) over the past 10, 5, 3, or 1 year historical periods you would have been MUCH better off in a CPF Special Account. Ridiculously better off, actually.

"Past performance is not indicative of future results," but I would point out that I'm using a 3%/year average real yield (net of costs) forecast estimate in the simple model I illustrated. In bonus interest territory, at least, CPF MA and SA should be able to accomplish that, or more, even without counting the tax relief.

This saving investment will give you flexibility to liquidate if you really need cash in urgent situation (that you may suffer a loss if such situation arises and when the market is bad).

If it's an urgent medical situation, MediSave can be quite helpful. It'll also soon be possible (from October 1, 2020) to tap MediSave in cases of serious disability. And even CPF Special Accounts can be tapped in dire situations. Of course a lower income tax bill (tax relief) improves cashflow.

These are long-term savings, though. The working assumption is that the household maintains sufficient liquidity at all times. And I'm not arguing against low cost, well diversified stock index fund investing. I believe if you check what I wrote I think some would be a good idea. (ES3 or G3B alone, certainly not.) But that doesn't mean CPF is bad. No, CPF is quite good!

Could we please strive for at least a little balance here? If CPF is where this couple wants to start their long-term savings journey, I applaud that. The most important part is to get started now, and that's really a rather good start.

If you can't even manage this simplest RSP, then perhaps annual CPF top up maybe the next best for you with your tight disposable cash position now but still intending to save.

An ES3 or G3B Regular Savings Plan (RSP) is not "simple," especially if you don't know what the heck it is or what it might do or not do.

 

[mummynew]

Oh? Why?

For the very simple reason that this is a young family with many uncertainties ahead of them.

 

[BBCWatcher]

For the very simple reason that this is a young family with many uncertainties ahead of them.

Yes, including retirement, medical, and investment uncertainties. Neither you nor I can promise that ES3 will beat 5%-with-tax-relief CPF going forward. (Bonus interest assumed here, which is a reasonable assumption in this case.)

 

[mummynew]

Yes, including retirement, medical, and investment uncertainties. Neither you nor I can promise that ES3 will beat 5%-with-tax-relief CPF going forward. (Bonus interest assumed here, which is a reasonable assumption in this case.)

I am not disputing about CPF has its full merits but it is just not a suitable instrument yet for TS who is now with young kids and not much savings.

 

[maple96]

Any good plans to share? Not the high risk investment type ones but more for guaranteed returns like endowment. Any comments on Prudential, Great Eastern and Manulife?

ok, TS, this is your question, this is what u want. Is it still what u want now?

1. U want retirement plan
2. Not high risk
3. Not investment type
4. Want guaranteed returns
5. Like endowment

Before u even consider long term plans, like a retirement plan, U should have already set aside some emergency funds and whatever funds for your kids/family. So now u are prepared to lockup some monies for retirement, ie after 55, 65, 70, correct? U must be aware u cannot touch or liquidate the plan. U must stick to your objective of starting the retirement plan.

If u are ready, the best retirement plan in Singapore for Singaporeans is CPF Life. Some forumers have already shared this in many posts here.

Some have shared how u can go about it, "investing" your monies thru a Regular Savings Plan, say mthly, into your CPF.

Someone suggest investing into STI ETF RSP. No, u should not do that, cos it is against your "request" as I have listed above (failed 2-4).

Just trying to help with my opinion and a summary of the various opinions provided here so far.

 

[purpleberry]

I am not in favour of saving via CPF as your first layer when you are now in the early stage of your family planning.

Maybe you can park a few hundreds monthly in the STI ETF first for a start (if you are like my nieces/nephews/kids that don't even have a trading account and not interested to learn about trading, then this is the simplest way for you to use DBS online to start the RSP. ).

This saving investment will give you flexibility to liquidate if you really need cash in urgent situation (that you may suffer a loss if such situation arises and when the market is bad).

If you can't even manage this simplest RSP, then perhaps annual CPF top up maybe the next best for you with your tight disposable cash position now but still intending to save.

Look at your family expenses/budget to see where you can save. My experience is to raise your kid/s well in terms of good attitude (manners, thinking skills, doing some light housework like packing own toys, reading habits etc) so that you don't need to over-spend on kids' preschools and subsequent tuition (this part can save a lot of money if you manage to build their independence from young).

Totally agree on the attitude and character part. It is often overlooked but far more important than grades itself. Like any new parent, we are guilty of splurging on our kids until when we realised they become quite spoilt and we made adjustments along the way.

I have heard about ETFs. What is the minimum amount to invest in order to try a bit? What's RSP btw?

Oh? Why?


Yes, you could do that. Here's a fun fact, though: according to the official performance data through July 31, 2020, for ES3, the Straits Times Index stock fund, if you had done that (and with dividend reinvestments) over the past 10, 5, 3, or 1 year historical periods you would have been MUCH better off in a CPF Special Account. Ridiculously better off, actually.

Do you mean STI performed slightly worse than parking your savings in CPF SA account? Stupid question, when can we withdraw the funds from CPF SA account?

ok, TS, this is your question, this is what u want. Is it still what u want now?

1. U want retirement plan
2. Not high risk
3. Not investment type
4. Want guaranteed returns
5. Like endowment

Before u even consider long term plans, like a retirement plan, U should have already set aside some emergency funds and whatever funds for your kids/family. So now u are prepared to lockup some monies for retirement, ie after 55, 65, 70, correct? U must be aware u cannot touch or liquidate the plan. U must stick to your objective of starting the retirement plan.

If u are ready, the best retirement plan in Singapore for Singaporeans is CPF Life. Some forumers have already shared this in many posts here.

Some have shared how u can go about it, "investing" your monies thru a Regular Savings Plan, say mthly, into your CPF.

Someone suggest investing into STI ETF RSP. No, u should not do that, cos it is against your "request" as I have listed above (failed 2-4).

Just trying to help with my opinion and a summary of the various opinions provided here so far.

Thanks for the profiling. Yes, this more or less fits me. I mentioned in the other thread that I am quite interested in the manulife savings plan where you put in one lump sum and get annual vouchers/coupons after 37/49 months until 120 years old. I suppose this is similar to endowment fund but it gives you flexibility not to withdraw everything just in case you dont need it just yet.

 

[boredboiboi]

Totally agree on the attitude and character part. It is often overlooked but far more important than grades itself. Like any new parent, we are guilty of splurging on our kids until when we realised they become quite spoilt and we made adjustments along the way.

I have heard about ETFs. What is the minimum amount to invest in order to try a bit? What's RSP btw?



Do you mean STI performed slightly worse than parking your savings in CPF SA account? Stupid question, when can we withdraw the funds from CPF SA account?



Thanks for the profiling. Yes, this more or less fits me. I mentioned in the other thread that I am quite interested in the manulife savings plan where you put in one lump sum and get annual vouchers/coupons after 37/49 months until 120 years old. I suppose this is similar to endowment fund but it gives you flexibility not to withdraw everything just in case you dont need it just yet.

I have heard about ETFs. What is the minimum amount to invest in order to try a bit? What's RSP btw? Usually $100/month min



Do you mean STI performed slightly worse than parking your savings in CPF SA account? Stupid question, when can we withdraw the funds from CPF SA account? Sti is investment, no min or stable return. Cpf sa is 4% “no risk”



Thanks for the profiling. Yes, this more or less fits me. I mentioned in the other thread that I am quite interested in the manulife savings plan where you put in one lump sum and get annual vouchers/coupons after 37/49 months until 120 years old. I suppose this is similar to endowment fund but it gives you flexibility not to withdraw everything just in case you dont need it just yet
For this plan, payout on 37th month monthly income is higher than 49th month, but min lumpsum is 100k.

 

[BBCWatcher]

Do you mean STI performed slightly worse than parking your savings in CPF SA account?

No, not slightly worse: MUCH worse over the past 1, 3, 5, and 10 year intervals.

“Past performance is not indicative of future results.”

The Manulife policy you mentioned will almost certainly perform worse than CPF SA. That one we can predict with high confidence.

Are these dollars you want to save for retirement, or are they for something else sooner?

 

[purpleberry]

For this plan, payout on 37th month monthly income is higher than 49th month, but min lumpsum is 100k.

No, not slightly worse: MUCH worse over the past 1, 3, 5, and 10 year intervals.

“Past performance is not indicative of future results.”

The Manulife policy you mentioned will almost certainly perform worse than CPF SA. That one we can predict with high confidence.

Are these dollars you want to save for retirement, or are they for something else sooner?

My plan is two-fold. Primary is for retirement and secondary is for education. I think TM has a similar plan which gives some flexibility to withdraw based on the coupons issues on a yearly basis. This can help in kids' education but if we don't need that money, we can just keep it and let it grow.

I am not sure what such plans are called as it is a mixture of endowment plus yearly bonuses/vouchers/coupons after XX months. Do you think this is guaranteed to lose money after, say 30 years?

 

[boredboiboi]

My plan is two-fold. Primary is for retirement and secondary is for education. I think TM has a similar plan which gives some flexibility to withdraw based on the coupons issues on a yearly basis. This can help in kids' education but if we don't need that money, we can just keep it and let it grow.

I am not sure what such plans are called as it is a mixture of endowment plus yearly bonuses/vouchers/coupons after XX months. Do you think this is guaranteed to lose money after, say 30 years?

Coupons usually u can choose to reinvest back with company at a non guaranteed return of 3%. After year 30, capital is guaranteed without including the coupons.

 

[maple96]

My plan is two-fold. Primary is for retirement and secondary is for education. I think TM has a similar plan which gives some flexibility to withdraw based on the coupons issues on a yearly basis. This can help in kids' education but if we don't need that money, we can just keep it and let it grow.

I am not sure what such plans are called as it is a mixture of endowment plus yearly bonuses/vouchers/coupons after XX months. Do you think this is guaranteed to lose money after, say 30 years?

Change in objectives, so any proposed solution should be changed accordingly.

Just helping to navigate the discussion, investment in STI and CPF should be out (but CPF can also be used for certain education purpose, best to stay out), not here to provide any solution. Just cannot tahan the chicken and duck debate.

Goodluck.

 

[BBCWatcher]

Change in objectives, so any proposed solution should be changed accordingly.

Just helping to navigate the discussion, investment in STI and CPF should be out (but CPF can also be used for certain education purpose, best to stay out), not here to provide any solution. Just cannot tahan the chicken and duck debate.

Agreed.

Purpleberry, you have these two basic options:

1. Attempt to combine your children's educational and your retirement savings objectives in one vehicle. You can do this, possibly with the very high cost insurance company sold product you found. But you'll have to reduce your expectation of net returns, meaning you have to save more to achieve the same forecast goals, especially your retirement goal. That's because the educational objectives are shorter term objectives and also because there are high costs involved.

2. Keep these separate objectives largely separate (at least conceptually), and save/invest accordingly. For the educational objectives, you'll expect low to moderate returns (depending on how far away children are from needing this financial support), but for the retirement objectives you'll expect moderate to high returns since those objectives have a longer time horizon. Then you choose the appropriate vehicles to line up with the two different objectives, still not very many vehicles. (It doesn't have to be complex.)

My suggestion is to give serious consideration to approach #2. Both savings objectives are worthy objectives, both merit your attention, and both deserve one or a couple appropriate vehicles that best align with the goals.

Metaphorically, you could use a screwdriver to hammer a nail. It sort of works. But how about one screwdriver and one hammer? Savings Flow A gets deployed to support education in the best way for education expenses in Year 20AA+, and Savings Flow B gets deployed to support retirement in the best way for retirement in Year 20BB+.

Maple96 is absolutely correct that neither CPF nor a stock index fund are particularly well suited for Savings Flow A (typical children's educational spending needs), especially if Year 20AA is fast approaching. Not usually, anyway.

How'd you like to proceed with this discussion?

 

[purpleberry]

Agreed.

Purpleberry, you have these two basic options:

1. Attempt to combine your children's educational and your retirement savings objectives in one vehicle. You can do this, possibly with the very high cost insurance company sold product you found. But you'll have to reduce your expectation of net returns, meaning you have to save more to achieve the same forecast goals, especially your retirement goal. That's because the educational objectives are shorter term objectives and also because there are high costs involved.

2. Keep these separate objectives largely separate (at least conceptually), and save/invest accordingly. For the educational objectives, you'll expect low to moderate returns (depending on how far away children are from needing this financial support), but for the retirement objectives you'll expect moderate to high returns since those objectives have a longer time horizon. Then you choose the appropriate vehicles to line up with the two different objectives, still not very many vehicles. (It doesn't have to be complex.)

My suggestion is to give serious consideration to approach #2. Both savings objectives are worthy objectives, both merit your attention, and both deserve one or a couple appropriate vehicles that best align with the goals.

Metaphorically, you could use a screwdriver to hammer a nail. It sort of works. But how about one screwdriver and one hammer? Savings Flow A gets deployed to support education in the best way for education expenses in Year 20AA+, and Savings Flow B gets deployed to support retirement in the best way for retirement in Year 20BB+.

Maple96 is absolutely correct that neither CPF nor a stock index fund are particularly well suited for Savings Flow A (typical children's educational spending needs), especially if Year 20AA is fast approaching. Not usually, anyway.

How'd you like to proceed with this discussion?

How does option 2 look like? Supposing you have 100k to save up for education+retirement for easier calculation?

For option 1, you're right. It may be sufficient only for the first 2-3 years of university overseas but need to save up for the remaining X number of years. It is more suited for retirement purposes.

 

[BBCWatcher]

How does option 2 look like? Supposing you have 100k to save up for education+retirement for easier calculation?

There are a couple different sub-approaches. The sub-approach I prefer is to decide on a long-term savings/investment plan but then adjust the risk level downward a bit so that you feel comfortable tapping a portion of your investments for university tuition bills. Let's suppose for example that retirement is 35+ years away but you expect university tuition bills starting 15 years from now. Ordinarily for retirement you'd pick something like 80% stocks, 20% bonds. (The "bonds" could be CPF.) But you have that 15 year objective, so to reduce the risk (and expected yield) you could run along at, say, 65% stocks and 35% bonds. So it'd look like this:

1. Now to university start: keep at 65%/35%
2. University years: slowly, steadily shift from 65%/35% to 80%/20%
3. Post-university to ~8 years before retirement: 80%/20%
4. ~8 years before retirement to retirement: slowly, steadily shift from 80%/20% to 30%/70%
5. Retirement: keep at 30%/70%

In phases 1, 2, 3, and 4 you keep diligently saving every month, raising your savings as you progress through your career, get windfalls, etc. For retirement savings, CPF (MA/SA) is a viable option, but CPF cannot be everything because you'll need some university dollars, too.

I'll stop there to make sure you understand the basic concepts before getting too much more specific.

Another possible sub-approach is to buy a university education savings plan from an insurance company for some or all of the expected university part and just make the retirement part 80%/20% from now to ~8 years before retirement (like phase 3 above) then proceed with phase 4 per the outline above. So you don't throw everything into one "investment program" (with two logical goals) but you keep the university savings part partially or completely separate, with an insurance company in this case. Unfortunately the insurance company university plan offers are especially awful right now. We live in a low interest rate world at the moment. So it's not my favorite variation, but it's possible. And it's more comfortable for many people to do it this way.

MoneyOwl lists the various university savings plans here.

For option 1, you're right. It may be sufficient only for the first 2-3 years of university overseas but need to save up for the remaining X number of years. It is more suited for retirement purposes.

I don't think it's well suited for either, actually. It's very reasonable to forecast it'll have a lower net yield than even your CPF Special Account, and you're really screwed (I could use a stronger word) if you have to skip a premium, especially earlier in the policy term. Because you're screwed if you have to skip a premium, you'll correctly try not to purchase "too big" a plan. But that means you're saving that much less and tempted to spend more.

 

[purpleberry]

There are a couple different sub-approaches. The sub-approach I prefer is to decide on a long-term savings/investment plan but then adjust the risk level downward a bit so that you feel comfortable tapping a portion of your investments for university tuition bills. Let's suppose for example that retirement is 35+ years away but you expect university tuition bills starting 15 years from now. Ordinarily for retirement you'd pick something like 80% stocks, 20% bonds. (The "bonds" could be CPF.) But you have that 15 year objective, so to reduce the risk (and expected yield) you could run along at, say, 65% stocks and 35% bonds. So it'd look like this:

1. Now to university start: keep at 65%/35%
2. University years: slowly, steadily shift from 65%/35% to 80%/20%
3. Post-university to ~8 years before retirement: 80%/20%
4. ~8 years before retirement to retirement: slowly, steadily shift from 80%/20% to 30%/70%
5. Retirement: keep at 30%/70%

In phases 1, 2, 3, and 4 you keep diligently saving every month, raising your savings as you progress through your career, get windfalls, etc. For retirement savings, CPF (MA/SA) is a viable option, but CPF cannot be everything because you'll need some university dollars, too.

I'll stop there to make sure you understand the basic concepts before getting too much more specific.

Another possible sub-approach is to buy a university education savings plan from an insurance company for some or all of the expected university part and just make the retirement part 80%/20% from now to ~8 years before retirement (like phase 3 above) then proceed with phase 4 per the outline above. So you don't throw everything into one "investment program" (with two logical goals) but you keep the university savings part partially or completely separate, with an insurance company in this case. Unfortunately the insurance company university plan offers are especially awful right now. We live in a low interest rate world at the moment. So it's not my favorite variation, but it's possible. And it's more comfortable for many people to do it this way.

MoneyOwl lists the various university savings plans here.


I don't think it's well suited for either, actually. It's very reasonable to forecast it'll have a lower net yield than even your CPF Special Account, and you're really screwed (I could use a stronger word) if you have to skip a premium, especially earlier in the policy term. Because you're screwed if you have to skip a premium, you'll correctly try not to purchase "too big" a plan. But that means you're saving that much less and tempted to spend more.

As option 2 involves stocks, is it very risky at this stage? I have known friends who got burnt due to bad investments but didnt probe further as I dont have much interest in that stuff.

Do you feel strongly that insurance companies, even though they are endowment plans, will not be attractive as what CPF SA is offering?

 

[BBCWatcher]

As option 2 involves stocks, is it very risky at this stage?

Not for retirement 35+ years from now, not with simple dollar cost averaging into a low cost/well diversified index fund (and with dividends reinvested), no, I don't think it's very risky.

Do you feel strongly that insurance companies, even though they are endowment plans, will not be attractive as what CPF SA is offering?

I don't think an insurance company is going to beat CPF MA/SA with bonus interest and tax relief, no. At 4% interest (past the bonus interest limit) it's more of a contest, but my personal view is CPF still wins that contest overall.