A call to kick-start your CPF retirement planning early

The average life expectancy for Singaporeans is 83.2 years, for year 2018. Singaporean males have to perform national services duties for 2 years, and if we were to include university studies, the average age of beginning work in society is 25 years of age. I would have mentioned earlier in my article, Investing from Age Zero, so for age 25 to 60, he has a good 40 years of investment horizon. Working backwards even more, if he had started even earlier (or his parents had given him a hand as a child), he would have a very good horizon of 65 years. Some of my readers have told me verbally that it is very hard to visualise without any figures or examples.

My Daughter’s Journey, from age 0 to 25

I started out my daughter’s savings journey in her CPF Special Account (assume 4% throughout, instead of 5% for the combined first $60,000 for SMRA) when she was very young. Assuming she had started off from birth, a $100 dollars monthly contribution (or $1,200 an annum), after 25 Years her savings account will have grown to $51,057.88 — of which $30,000.00 is the total of beginning balance plus deposits, and $21,057.88 is the total interest earnings.

This is what she would have attained at age 25.

Average Singaporean with 40 years investment timeframe

An average Singapore enters the workforce at age 25 after university education.

Assuming he has a 40 years timeframe and with all other conditions the same, a $100 dollars monthly contribution (or $1,200 an annum), after 40 Years his savings account will have grown to $116,501.28 — of which $48,000.00 is the total of beginning balance plus deposits, and $68,501.28 is the total interest earnings.

I have not included CPF contributions from his employment into account. This is what he would have attained at age 65.

Back to: My Daughter’s Journey, from age 25 to 65

We last left off where my daughter turns 25, the same age as the average Singapore earlier who enters the workforce at 25 and starts to have an interest in saving in his CPF. The latter starts off at zero, and the earlier at $51,057.88.

Fast forward to 40 years from now where my daughter is similarly age 65, after another 40 Years her savings account will have grown to $361,631.23 — of which $78,000.00 is the total of beginning balance plus deposits, and $283,631.23 is the total interest earnings.

At age 65, it is a comparison of $116,501.28 (for a 40 years timeframe) versus $361,631.23 (for a 65 years timeframe). A 25 years headstart means all the world — 3 times the resultant “fruits of labor”!

All of these work is done, just by committing a small amount of money consistently. In fact, it is applicable to any other forms of consistent savings and investments. You will find that over time, by comparing the pie charts, that your initial deposits is forming lesser and lesser of your overall wealth for this instrument.

This is in fact testament to the magic of Compounding Interest and my continued belief in why Investing early matters to everyone. There are various other scenarios which would be interesting to look at in my subsequent articles.

It doesn’t mean that 25 years is “too late” of an age to start or be invested. It is all relative, starting off at 25 is better off than the person who starts at 35, who is in turn better off than the person who starts at 40. The faster one starts, the better off one ends off the journey with.

Take control of yours and your children’s savings and investment journey in your CPF, and for that matter, any other investment instrument now.

Cutting down on being penalised

While I am trying my best to scrimp and save, invest and grow my wealth, it is subtle yet “shocking” sometimes to fin that easy money was slipping out of my hands. By that, I refer to penalties and fines for not doing or committing to some actions on time.

The most common types of overlooked payments are credit card bills. You get slapped with a late charge and interest charge penalties each time time you forget to pay by the due date; the longer the delay, the higher the slap. One might be lucky once or twice in waiving it, even banks have a certain level of tolerance and you put yourself in bad light as well as an awful credit history. This gets called up especially if you were to seek a loan not just from one bank but all banks, as your records are logged with the Credit Bureau.

I was once like that, though having gotten past that phase by GIRO-linking my credit card bills. However, I still fall into the similar trap often — a habit which I am still trying my best to break free.

I enjoy reading. I love heading to the public libraries to borrow tons of books for my reading pleasure. Call me lazy or forgetful, but returning them on time wasn’t my forte. At times, the fines do add up (at $0.15 per book per day) and the latest saga that took place added up to $24.45 – an average of 20 days overdue for 7 books.

When I look over it, yes it is ridiculous. But as an analogy, that is exactly what some are going through in reality. We save on cents on one hand, yet let dollars slip through on the other.

Another example is on maintenance fees for my property. Payment is made on a quarterly basis and each payment has a 30 days due date from the initial paper bill statement date. Similarly, I do get slapped a 10% penalty on the late amount, and that is equally painful.

Lastly, traffic-related fines. For the sake of convenience, it was quite often in the past for me to have parked at a season lot on the lower floors of a multi-storey carpark or even to park illegally by the side of the road to carry out some everyday tasks. It was not surprisingly that I earned quite a bit of penalties this way.

In short, you often “deserved” earning the penalties when you don’t follow rules. It’s human nature to be forgetful or rebellious at times, however these are habits which do not conform to societal rules. Habits could also be changed for the better over time. As much as possible, such bad money flow should be capped to a minimal as much as possible. A dollar lost today is a dollar that has the lost the opportunity to be invested many times further.

Maximising your family members CPF contribution

Within the family, you don’t actually need to be very savvy with financial-related or investment-related matters to be constantly bombarded with queries. You just need to have that delta, above and beyond which you automatically become the guru in the family.

I was just kidding. Jokes aside, I really enjoy looking at statements and see how I could further hack or maximise the benefits from the scheme. I strongly believe financial literacy education starts from within the family. After you have reached a stable or steady state within your core, what is stopping individuals from helping with their extended family members as well?

It didn’t help that the previous generation did not have the luxury nor the availability of the tools we have today: knowledge from books / e-books, online communities for Q&A, constant stream of paid and free investment seminars or enrichment workshops. Even till today, we haven’t solved the language barrier — many investment workshops or education materials are still primarily in English.

So primarily, we would be looking at how 2 of my extended family members fare for 2019 in their CPF savings and contributions. I came into the picture late. Both have crossed 55 years of age, thus shielding does not apply to them anymore. Both are still gainfully self-employed and enjoy working for still many more years to come.

FAMILY MEMBER (A)

Family member A was in the 22% tax bracket for Notice of Assessment (NOA) FY18. Objectively speaking, he was trying to save on taxes as much as possible. He had maxed out his Supplementary Retirement Scheme (SRS) contribution at $15,300. NOA FY18 self-employed contribution for CPF was $22,560. Tax bracket was brought down to 19.5%. His question was, what more can he do?

There is a certain level of skepticism by the older generation towards the provident fund or CPF. This is understandable. However, he was convinced to contribute even more from the self-employed contribution perspective (from $22,560 to $29,560) as well as max annual voluntary cash top-up ($7,000).

This move not only further bring down his tax bracket (expected) for NOA FY19 to 19%, it further increases his rate of saving towards retirement. His Retirement Account (RA) is $30,000 away from year 2020 Full Retirement Sum (FRS) amount. The prevailing rate is $181,000. Interest is a cool $11,000 which is further upside depending on what could be done for the monies in the Ordinary Account (OA).

FAMILY MEMBER B

Family member B was in the 7% tax bracket for Notice of Assessment (NOA) FY18, and has managed to bring it down to the 2% tax bracket. She had maxed out her Supplementary Retirement Scheme (SRS) contribution at $15,300. The main objective here is to save for retirement.

The plans for NOA FY19 stayed relatively the same, unless she has excess monies, she probably would do a cash top-up to her Retirement Account (RA) this year instead. We can tell that this member is a little more on the chill side, but an interest of $7,000 is still good money with proper planning.

CONCLUSION

I have to quantify that both members are not on the investment-savvy side of things. Their best investment are in Fixed Deposits and are constantly on the look for bargains. They are really good at their work, as well as being frugal and thrifty in life.

Many self-employed contribute the minimum to their provident fund, basically to their MediSave Account (MA), which is required by law. Excluding people from the financial sector (well, even quite a number have trouble with their personal finance), most are so busy at work that they hardly have time to keep abreast with what is going on in the financial world nor keep track or spend time analysing materials for investment.

Though rudimentary, provident funds contribution not only serve as a form of forced-savings, it has other benefits which we have seen, which is both tax savings and risk-free interest bearing accounts. Have you lend a hand to your family members?

People are rationally irrational

Ever since the first case of the 2019-nCOV discovered in Singapore on 23 Jan, the current number of confirmed cases stand at 40. The equities market, especially tourism-related stocks, have taken quite a hit. ‘Disease Outbreak Response System Condition’ (DORSCON) in Singapore had been raised to ORANGE (the second most serious tier) on 7 Feb 2020.

Human behaviour however has skewed towards the irrational path, which is rational yet puzzling at the same time.

Panic selling in the equities market

Understandably, the current situation has created a drop in confidence in the economic situation. One thing to understand is this, the drop has little or nothing to do with the fundamentals of companies. Quality companies are still technically strong; their share prices are just relatively depressed. Tourism-related stocks (e.g. hospitality, airlines) remain the hardest hit, which is still heading for the bottom for the tourism cycle.

Yet people are irrational. I am not referring to investors who got out early on the onset and to prepare entering the market latter at further depressed prices. Investors who are dumping their stocks on fear and rumours, chasing the market to the bottom by selling and up to the extent of staying out of the market completely — these investors have lost their logic, in my honest opinion.

It is in fact never a best time to begin accumulating in the market than now. Much wealth have been reported as “lost” during times like this; in reality, it is a transfer of wealth. Wealth does not just disappear or evaporate into thin air, it ends up in someone else’ hands, from the foolish to the smart.

The savvy long-term investors would have started or prepared to offload their warchests and snapped up the bargains. This is how some people become several times more wealthy and others fall into this investment trap, time and time again!

Panic buying in the super-market

Interesting, just 2 hours after the announcement of upgrade of DORSCON level to ORANGE, people have been swarming supermarkets to wipe out basic essentials such as toilet paper, cleaning materials, food perishables and even instant noodles. Fear and rumours have taken over once again.

I am pretty sure the minds of the people who started it out were visualising an “apocalypse” or city lock-down or wide-spread that causes families unable to leave their homes for weeks. And as “kiasu” Singaporeans who fear of missing out, people start to take on the group mentality and follow suit in the behaviour.

Empty shelves greets customers who possibly need these items more than the hoarders. For example, people who just need to buy some bread or cereal for their daily breakfast. My friend who gave birth recently could not get the greens she wanted for her meals nor the wet wipes to clean off or sanitise her baby stuff.

From these 2 examples, we see that masses follow what the masses think and do. And it is a behaviour that is rooted and hard to change. To these folks, we are probably the illogical ones. However, times have shown that people who progress positively do not react to fears, do not listen to rumours and do not not follow the masses. If there is anything you could do, it is to weigh in your own assessment and make sound decisions.

Investing from Age Zero

My daughter has begun her savings and investment journey ever since she was born. To date, the amount isn’t much but it goes a long way. Why Investing early matters? The investment horizon of an average adult is roughly 40 years — from the time you enter the working society at age 25 till you possibly retire at age 65. Many less savvy ones actually start off much later, either due to circumstances or not understanding the importance of wealth building. Personally, I started off late at 34, and that leaves me with just a good 30-ish odd years.

For my daughter, starting off the right footing early means she has a long timeframe of at least 60 years. An earlier headstart of 25 years work wonders, as the beauty of compound interest will show.

Syfe, one of the 11 robo-advisors or digital wealth manager in Singapore, has reached out for a collaboration with TOC to bring forth this segment on financial planning from a long-term horizon perspective on the 26 February 2020.

I am definitely enthusiastic in sharing how young parents like yourself and myself can invest for your children’s future needs today, with the various investment instruments available today. With the many personal finance communities, as well as the vast availability, you really can’t say you don’t know the benefits or how to get started. I guess even for adults, sometimes we just need a push or an inspiring story from another’s experience to really get down to work and kickstart the process.

For our children, there is always a conscious decision to attempt to increase wealth not just for the near future, but also for large ticket items such as their university education, wedding preparation, assistance towards first home etc. Inflation is a real thing. If you don’t plan for it, you will get hurt real bad when it is time to fork out the money.

There is sometimes a misconception between assisting your child with a headstart and spoiling them by giving them a headstart. Instead of being in a grit-lock that parents are harming their children by handing them a golden spoon, it would be the prudent growing of the base money that would have been theirs anyway. We are talking about red packet money from Chinese New Year or special occasions, school allowances etc.

As parents who have spent years in society and managing money, we are probably more in the know of what works and don’t. Even if we are bad in managing our own finances (with a history trail), we could assist our children in starting off with a clean slate.

I am excited to engage with parents with young children who are similarly in the position to do good for their children over the long run, from young.

You can sign up for the event using this link.