CPF (Assisting your Retirement?)

Whenever we touch on the topic of CPF, also known as Central Provident Fund (Pension Fund – The Europeans and Americans call it), people get kind of edgy and upset. What I do observe is that mostly a certain group of people is really anti CPF. The first group is those who are anti-government, not fueling anything here but just a general consensus. The second group is the retirees or about to retire folks who didn’t have a decent education (At that point in time, it wasn’t necessary to have the paper qualifications) and the last group is the self-proclaimed Warren Buffet who claims to beat the market.

The Central Provident Fund

The CPF in my opinion, is something of a great system. There are certainly flaws to it but in my view it is the perfect, AAA grade, higher yield returns that can supplement all our retirement fund. There are certain risks but There are no investment tool has no risk in reality. I finally conclude that as a result of these 3 group of people, these are the reason why so many people dislike the CPF system.

The AAA rating

a. Unfortunately, it is a complex system – You need to read up and understand how it works to appreciate the system

b. Inflation rate is here to stay hence the increase in the minimum sum yearly

c. No one is taking your money away.

d. No. There is no crystal ball. Statistically, it is proven that you can never win 100% of the time. Anyone who have tried or attempted to invest their monies will know that there is no clear strategy out there but a lot of hard work so you will not be able to beat the benchmark all the time.

e. Good quality investments and yields are hard to find these days. Perhaps it is a reality check and time to reflect about strategies as well as accepting facts and the markets

Understanding what CPF is about

When I first explored CPF, it was when I was out of school into my first job. At that time, CPF seems like a Goliath – You think you know but eventually, you slowly find out stuff which you never know before and for a long period of time I put off reading up more about them. It was many years back that I started reading financial blogs and it became like a ritual. I’ll do that almost any other day.

Back in those days, there were less bloggers so you will still need to dig deep to find out how stuff works. Then came Technology advancements, social media and super apps/content apps. I also discovered a few more bloggers who actively shared about CPF. One one those whom I follow really closely is 1M65. His is a well-known blogger for CPF and he developed his own strategies around what the CPF has been doing for many years.

Life Cycle

1M65 is really about having a million in your CPF by 65 years old. Depending on how you look at it, he is preaching a 4M65 these days and base on his concept – I do think that is possible if you start really young. Anyway, his idea about have these sum of money is really to get you thinking about your own retirement early, not just when you are in your mid stage or even late stage of your life cycle.

Everyone is different

Most importantly, everyone is different. There is no need to look at it in the form of a showboat or saying that it is impossible. Being open and understanding how these people are doing do help yourself to be ready for retirement – You are doing your next generation a favour so that they will not fall into the sandwich class or fall in the same cycle again and again. Of course, teaching the value of money to the next generation is something that needs to be worked on as well. It’s not like they were given a sum of money to deal with in life.

Some people actually worked two jobs or even saved excessively so that they can put all their money into retirement. Again, lifejourney preaches about having your own quality of life. If you need to feel like you have to give up everything just to be thrifty (It is a really thin line to term it as miserly), then you would most likely have to re-think your strategy.

The Practical Approach

There are a lot of concepts that you can read about but most of them come from a theory. Personally, I don’t really like to dissect those as they are so technical and heavy. Most importantly, it is extremely boring to put them down in words and executing them is really the best way to practice

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

As 1M65 says, you can hate who or whatever but don’t hate free money. Initially, it sounded like a money grubber statement but eventually I came to realise that, it is really free money. If you have no plans to be an entrepreneur, there is a few things you have to take note of in CPF. Yes, I am sorry but everything has to start from the basics.

My View on CPF

a. My biggest take on CPF is to compound the interest. The more you have, the greater the growth. The younger you fill up your CPF account to accumulate interest, the faster and bigger your pension fund will grow.

bi. If you are below 55 years of age – Your first $60k in CPF will gain an extra 1% p.a. (This is capped at S$20k in your OA) The current base Ordinary Account (OA) is 2.5% (3-month average of major local banks’interest rates, whichever is higher)

bii. For most people, the next S$40k will most likely be in your Special Account (SA). For others who are still building your SA, that will be whatever that is in your MediSave Account (MA). The base rate for your SA and MA is at the current floor of 4% p.a. (which is also the 12 month average yield of 10-year Singapore Gov Securities – 10YSGS)

My Tips:

Your CPF interest is computed monthly based on the lowest balance for the month. This means that for interests paid out on your CPF accounts in Year 2020, the interest amount is based on what was captured monthly, compounded and only paid out to you in full before 1st Jan of 2021. (This is subjected to changes if you have transactions every month)

c. As much as possible, you have to try your best to hit the minimum sum as early as you can. (Combined OA and SA)  Once you manage to do that, you do not need to worry about the annual increase in minimum sum that is subjected to inflation.

My Tips:

Don’t lose faith if you have not or still very far from this. Everyone starts from $0. Let the small actions and do up your checklist one by one in order to build the financial confidence. Everyone is different – it is the end goal that matters.

d. Depending on your circumstances, you can choose to invest your CPF OA money after the S$20k accumulation. Similar to cash, have a long term goal and build your portfolio. Good companies and investment ideas doesn’t come easy. You have to make sure what you invest is more calculated risk. There is a risk to everything.

My Tips:

Don’t be affected by market noise. My tip is to buy when there is a price drop if the investment moat for the company still makes sense. (but always do your own diligence) You can also have different pockets of funds so that when there are opportunities or if there is a correction, you can be ready to enter the market. The rule is to always stay invested.

Summary

In Summary, CPF is not the perfect solution but a supplement of your retirement goals. In this aspect, we are responsible for our own money and retirement. No one else will take care of your money as much as you will do.  Only you will know your own financial situation. The question is to ask to meet these financial goals is that if you can cut back on your lavish lifestyle or even saving more to add to your pool of funds. No one can coerce you to do what you do not wish to.

Disclaimer

This is not a sponsored post. This is purely my own opinion about CPF and retirement. If you like what you are seeing, do remember to check them out and do your diligence. There is no one size fits all investment strategy as usual

Do check out some of my referral codes for other services here at https://atomic-temporary-178675883.wpcomstaging.com/contact/ for the services.

The pictures were taken from CPF website for this article.

Bond/Debt

For an extended period now, the Marine, Oil & Gas industry is going through trying times for some time now. Going forward, it is going to be difficult to say what is next for them and many other industries

We know that bad times don’t last so are the bankers/relationship managers just out there to sell investment products for their own benefit? During good market cycles, when the company books are looking great, bonds are being issues to help provide the working capital for these companies. The moment the cash-flow stops, the banks stop lending or restructuring. Quite a tough and sad moment though.

Bond/Debt

I discussed about bonds/debts a few posts back and talked about public/private financing in the capital markets. What most companies did was to find some banks to finance their working capital with contracts and assumption of a stable cash flow and they would pay off interest to bondholders over a period of time. What the lead banks provided are in turn offered out to retail/institutional/HNWI to take on a portion of the bond. Most of the time, financing is offered in terms of Loanable Value.

An Example

Let’s use this example: I buy Bond S.Limited on point of purchase for the initial offering at Par Price (100.00). The bank who syndicate this capital raising and offer a portion to other parties so as to diversify the risk. When “Sophisticated” investors take on these investments I offer a 60% Loanable value.

It means that for every $1 worth of S.Limited bonds. The bank will be willing to finance you $0.60. All you need is $0.40 worth of cash. On each reinvestment amount, you get another 60% in loanable term.

a. When the real problem surface

When S.Limited announces that they may have issues repaying bondholders, then the same banks who finances the bond syndication would deemed these investments as not so valuable now and decides to tell you that you can’t lend anymore from the $0.60 previously as what they have valued the investment at so you have to make back the full amount in a few days’ time.

b. The real liquidity and Loanable value changes dynamically

I would think that this is as good as lenders telling the company that they will stop lending. To raise $0.60 from elsewhere isn’t really a problem for most people but how about $600,000 or $6,000,000 which I really doubt many of us have that kind of cash waiting around somewhere.

Sample Illustration

Mathematically,  it can be easily understood. (Not really isn’t it looking at this complicated piece of calculation table) This is basically a long form of maximising the full loanable amount and then re-investing them back into the same investments and over again:

Name of Security Cash for Investment Loanable Value Loan Amount Cash Used Balanced Cash Value of Portfolio (Nett of Loans)
S.Limited 6.00% 2025 1,000,000.00S$ 60% 600,000.00S$ 400,000.00S$ 600,000.00S$ 1,000,000.00S$
  600,000.00S$ 60% 360,000.00S$ 240,000.00S$ 360,000.00S$ 1,000,000.00S$
  360,000.00S$ 60% 216,000.00S$ 144,000.00S$ 216,000.00S$ 1,000,000.00S$
  216,000.00S$ 60% 129,600.00S$ 86,400.00S$ 129,600.00S$ 1,000,000.00S$
  129,600.00S$ 60% 77,760.00S$ 51,840.00S$ 77,760.00S$ 1,000,000.00S$
  77,760.00S$ 60% 46,656.00S$ 31,104.00S$ 46,656.00S$ 1,000,000.00S$
  46,656.00S$ 60% 27,993.60S$ 18,662.40S$ 27,993.60S$ 1,000,000.00S$
  27,993.60S$ 60% 16,796.16S$ 11,197.44S$ 16,796.16S$ 1,000,000.00S$
  16,796.16S$ 60% 10,077.70S$ 6,718.46S$ 10,077.70S$ 1,000,000.00S$
  10,077.70S$ 60% 6,046.62S$ 4,031.08S$ 6,046.62S$ 1,000,000.00S$
  6,046.62S$ 60% 3,627.97S$ 2,418.65S$ 3,627.97S$ 1,000,000.00S$
  3,627.97S$ 60% 2,176.78S$ 1,451.19S$ 2,176.78S$ 1,000,000.00S$
  2,176.78S$ 60% 1,306.07S$ 870.71S$ 1,306.07S$ 1,000,000.00S$
  1,306.07S$ 60% 783.64S$ 522.43S$ 783.64S$ 1,000,000.00S$
  783.64S$ 60% 470.18S$ 313.46S$ 470.18S$ 1,000,000.00S$
  470.18S$ 60% 282.11S$ 188.07S$ 282.11S$ 1,000,000.00S$
  282.11S$ 60% 169.27S$ 112.84S$ 169.27S$ 1,000,000.00S$
  169.27S$ 60% 101.56S$ 67.71S$ 101.56S$ 1,000,000.00S$
  101.56S$ 60% 60.94S$ 40.62S$ 60.94S$ 1,000,000.00S$
  60.94S$ 60% 36.56S$ 24.37S$ 36.56S$ 1,000,000.00S$
  36.56S$ 60% 21.94S$ 14.62S$ 21.94S$ 1,000,000.00S$
  21.94S$ 60% 13.16S$ 8.77S$ 13.16S$ 1,000,000.00S$
  13.16S$ 60% 7.90S$ 5.26S$ 7.90S$ 1,000,000.00S$
  7.90S$ 60% 4.74S$ 3.16S$ 4.74S$ 1,000,000.00S$
  4.74S$ 60% 2.84S$ 1.90S$ 2.84S$ 1,000,000.00S$
  2.84S$ 60% 1.71S$ 1.14S$ 1.71S$ 1,000,000.00S$
  1.71S$ 60% 1.02S$ 0.68S$ 1.02S$ 1,000,000.00S$
  1.02S$ 60% 0.61S$ 0.41S$ 0.61S$ 1,000,000.00S$
  0.61S$ 60% 0.37S$ 0.25S$ 0.37S$ 1,000,000.00S$
  0.37S$ 60% 0.22S$ 0.15S$ 0.22S$ 1,000,000.00S$
  0.22S$ 60% 0.13S$ 0.09S$ 0.13S$ 1,000,000.00S$
  0.13S$ 60% 0.08S$ 0.05S$ 0.08S$ 1,000,000.00S$
  0.08S$ 60% 0.05S$ 0.03S$ 0.05S$ 1,000,000.00S$
  0.05S$ 60% 0.03S$ 0.02S$ 0.03S$ 1,000,000.00S$
  0.03S$ 60% 0.02S$ 0.01S$ 0.02S$ 1,000,000.00S$
  0.02S$ 60% 0.01xS$ 0.01S$ 0.01xS$ 1,000,000.00S$
  2,499,999.97S$          

Total Amount / (1-Loanable value) = $1,000,000 / (1-60%) = $2,500,000

With $1, the bank can loan you up to $2.50 presumably that you reinvest them into the same bond.  Total investments become $3.50 (e.g. Nett of loans, $3.5 – $2.5 = $1). The Nett portfolio value still remains the same but that comes with plenty of risks:

1. You leave no buffer for any mark to market movement
2. You become concentrated into one single asset class and one company
3. Loans means you have to service the interests on a regular basis so with increase in interest rates, that brings your return lesser though you have taken more risks
4. In times of liquidity and crisis, most likely you will not be able to sell your holdings as fast
5. When you hit a margin call, you most likely have to top-up your cash balances as soon as possible or that would become a sell-out eventually at the current price.

On the flip side,

1. You maximize fully what leverage can bring you.
2. Yield is increased because of the leverage factor.
3. Returns will eventually increase with a higher risk taken.

What is your investment profile?

Again, it brings us back to basics again. That high risk taker with a long horizon? The conservative investor that is skeptical? I am not surprised that there are high risk takers who doesn’t mind this scheme. Then again, if you know the risks you are taking then take it like a man.

I’ve met and known people who are so egoist about their aggressive investments ideas. When shit his the fence, they do point the finger on others. Unfortunately, they know the risks that comes with. When it comes to money, humans behave differently.

Increasing Debt

There are businesses who keeps increasing their loan size at every maturity. When you look at the cash flow, they are paying out more than 100% from what they make. It is similar to spending more money than what you make. In this aspect, it seems like the company wanted to:

1. Keep investors happy that they are receiving the dividends
2. Ensure that their stock price on the exchange stays stable
3. Waiting out for the bad cycle to ride through and business to pick up again.

Extending Debt result

1. The money paid out have to be taken from somewhere and most of the time it is from a bond and restructured many times most likely
2. Anyone who digs deeper into the company details will know the state of their company
3. The cycle may not ever recover for the company to be relevant anymore

It is important to be thrifty and know how much you can afford to spend. Does looking rich or being rich matter more to you?