see https://tanbinvest.dreamhosters.com/wp-admin/post.php?post=32094&action=edit
This analysis applies to any amount I transfer to wife’s CPF-SA.
If between 55 and 65 I were to top up $100k to RA to earn 4% interest, that amount is locked in and can’t be spent on “anything”, but is there anything to need that $100k? If nothing, then who cares? After 65 I would start receiving CPF-life payout from that $100k.
— U.S. home purchase or property investment?
— college funding?
— Medical cost?
— cumulative repair costs in U.S., which tend to be much higher than SG
— The NNIA concept .. Non-work incomes can come from gov, pension/annuities, adult children, inheritance, cut-loss sales,,, NNIA is about income from productive assets.
However, negative incomes (i.e. expenses) are more overlooked and deserve more attention than the positive income. Better list the expenses on top.
Jolt: Whether you like it or not, the reality is, the expenses are the rent you pay to hold the “cash-cows” generating the payout.
An income stream from an asset may require periodic “work” such as maintenance. I guess it could be a BBB or RRRR type… see ##pff complexities]old age . IFF the workload is too demanding, then it would not be nonwork income. Eg: managing a “hotel” of rental properties.
— Components of (usually monthly or quarterly) nonwork net income from asset:
I will not spend too much time explaining my justifications..
— j4: complexity .. confusions, mis-information
— j4: liquidity … severe constraints
— j4: high compound interest in SA/RA + payout rate in CPF-life
Zooming into cpf-life, I would say this payout rate is one of the 3 pillars [1] of my retirement planning from 65 onward.
[1] The others include career longevity, health and healthcare.
— j4: high credit rating … The safest long-term investment
I won’t describe in details. CPF-life (and SA/RA) as securities are safer than properties, stocks, gold
Your principal amount (say, 275k) is private to you, and never shared. The balance doesn’t rise after you start drawing so it depletes over decades towards zero. This balance is basically the bequest amount, which becomes zero after the “depletion year”.
In contrast, The interest amount (generated on the balance) is pooled into a shared pool.
Not sure how much difference exists compared to commercial annuity products, but I won’t bother with them.
A CPF officer told me that in one of the payout schemes, only part of your RA balance goes into CPF-life initially, so the rest continues to earn 4%. However, things could change. I advocate detachment, impermanence…
I think at 65, the monthly payout amount is fixed.
However, in Sep 2020 CPF center officer told me that to keep the entire annuity scheme sustainable, the payout rate could change for two reasons
— 1) mortality — If relatively few members contribute their account interest to the pool, but too many people are drawing (part of) their payout from this pool, then payout could drop
I think this is related to the global problem of “dwindling population of younger contributors to support growing population of nonagenarian retirees.” If mortality rate continues to drop, one solution is to increase retirement age, but many people may not want to work, so payout rate may go down.
— 2) interest rate — government may need to gradually adjust the interest rate from the current 4% (with additional on first 30k and 2nd 30k) if global yield changes.
For example, if global yield drops very very low, but RA is still accruing at 7% then the insurer (CPF-board) can’t keep up.
— How about local inflation?
I didn’t ask but I think this is NOT a reason to adjust the payout amount.
Look at the citizen’s confidence level in cpfLife vs SSA
One specific reason I won’t give up Singapore citizenship is CPF, something comparable to Social Security. At age 55 I will have put aside a nest egg (perhaps 200-400k) and use it to buy an annuity plan backed by the Singapore government. It will pay out as long as I live.
In contrast, SSA doesn’t give me the confidence that they would be able to keep up with payment. With CPF, my money is never spent on someone else but SSA uses part of my money to pay low-income, disabled and other families who take more payout than they contribute. That’s the basic principle of welfare state.
— depletion of SSA reserve .. Even worse, every calendar year, the SSA pays out more than it receives. in contrast, my CPF money is always mine so it won’t pay out more than I contribute, until we consider “pooled interests”. Known as CPFLife, it is exactly like a regular annuity plan from any insurer, so the risk of “running out of money” is widely known to be small, otherwise the insurer would increase the premium and reduce the payout for new customers.
Social Security’s retirement benefits trust fund is projected to deplete reserves in 2033, leaving it reliant on current-year tax receipts covering 79% of scheduled benefits.
— other features of SSA
The Social Security tax applied to both employees and employers is 6.2% of an employee’s paycheck — or 12.4% in total. (Self-employed individuals pay the entire 12.4% themselves.)
When you contribute to Social Security, the money doesn’t go to a specific fund allocated to you: Workers are paying into a system that pays for _current_ retirees’ (not your) benefits. For every dollar you pay in, 85 cents goes towards the Social Security trust fund.
The other 15 cents goes to a separate fund that pays benefits to people with disabilities and their families. In Singapore, separate systems exists such as risk-pooling CareShield.
Unlike CPF, Payroll tax contributions are not reserved for future payouts to the particular taxpayer. In other words, the payroll taxes you contribute to the Social Security system aren’t set aside to pay your benefits when you become eligible. They fund payouts for current beneficiaries or are saved into the reserves i.e. the trust fund.
Tax .. social security is a “tax on the rich” while cpf is a compulsory savings scheme.
— health benefits
As to hospitalization insurance, IMHO the CPF-backed medisave/medishield is generally superior to the medicaid/medicare system. My main argument is again about pooling. The CPF medisave account is completely segregated by account. The shield plans are like hospitalization insurance from private insurers, but subsidized heavily by government. There’s no concern that poor families would “take” the money I contributed to a pool. In the medicare system, the rich and healthy tax payers contribute more to the pool than they withdraw, while the poor and sick members contribute less than they withdraw, according to my friend Sudhir (Mummaneni). Sudhir said even more significantly, some percentage of the population is so sick that they use up a high portion of the medicare pool.
See https://www.theatlantic.com/business/archive/2012/01/5-of-americans-made-up-50-of-us-health-care-spending/251402/ and google “chronically ill medicare”. According to U.S. Department of Health and Human Services
Q: Is this disportionate distribution normal pattern across all insurance companies? Note U.S. system is based primarily on private insurance. I guess similar stats exist in private[1] hospitalization insurance schemes thanks to the defining feature of the insurance model.
[1] cpf medishield is similar, but public.
After the 2021 new year, I told Tanko about my 2 “high bars” (later becoming acid tests[1]) to pre-qualify[3] an investment asset
Note I spend quite a lot of time clarifying my principles 1) to give my “advisors” a less ambiguous description of my investment principles and 2) to help myself catch my own inconsistencies, irrationality, prejudices, illogical thinking…
[1] After I acquire the asset, I would use my 2 criteria as acid tests. BGC fails AcidTest1
[3] obviously I have other due diligence checks such as currency risk, affordability, concentration risk, liquidity
— [s=my soft spot].. In short, I look for the “killer combo” of steady passive income + confidence for long-term capital protection/preservation … A high bar. Any asset that qualify are rare gems.
This is my irrational soft spot, where I demand neither HIGH income or FULL protection.
— pre-qualified assets
Note — Like my healthy_longevity focus, any useful criteria need to prove its enduring strength and resilience against popular, mainstream herd-mentality. Therefore, it’s important to examine how my criteria disqualify some popular asset classes.
— khm rEstate as case study
When I assess the Flatiron vs the Peak#4 opportunities, I realize that among all assets, these commercial rEstate appeal to ME (not sure about other investors). Do I romanticize the 10Y GRR? Possibly, so I caution myself about 1) credit risk 2) market risk 3) what after 10Y
Shop units (offices, hotels..) are the first asset class to meet the above criteria. Now I feel dividend cash-cow stocks are somewhat similar. To understand this asset class, we must compare it to those hot tech stocks:
— basic plan (declining payout but more to loved ones) beats standard scheme
With Basic, only about 12-15% of the snap65@cpfRA balance is initially transferred to the annuity, while the remaining 85% continues to earn 4% in RA.
The CPF-life estimator supports three modes —
You get an Aha when you add up the bequest + cumPayout projections. IFF you live beyond 89 does the Standard beat the Basic in the add-up comparison.
I see online discussions that Jul 2021 has introduced a new version so you may not be able to see the same graphs. Can ask CPF board about the old estimator.
I think monthly payout declines under Basic, only after, not before “combined CPF balances eventually fall below $60,000”. I think cpf calculator will show around age 90.
— escalating payout? unpopular and /disadvantageous/. I don’t worry about running out of income in my 90s
— delayed payout? not worthwhile according to officer Teo
https://lifefinance.com.sg/cpf-life-should-i-defer-the-payouts-to-age-70/ .. agrees.
I’m 99% confident that the actual interest accrual on my CPF money is either 2.5% or 4%, except the additiona 1% on the first $x portion. The return is predictible and guaranteed, without any time-variable element as in commercial annuity/endowment policies.
If we have doubts over banks and insurers long term rate of return and their guaranteed interest payout, then why is the CPF interest rate so much more /dependable/ and beyond-doubt?
— “backed by the government”
U.S. treasuries are backed by the full faith of the federal government, which can borrow from international investors (via new bond issues) to meet existing obligations. SG is different.
Your and my CPF money is actually invested (GIC as AMgr) in risky long-term assets. The capital and interest guarantee is backed by SG government, not due to bond issuance (a form of money-printing) but due to superior long-term investment returns achieved by GIC. About 6%+ annualized … see other blogposts.
If long-term return is below 4% but SG government relies on bond issuance, then we are borrowing from the future, and the system becomes unsustainable.
As an interesting comparison, U.S. municipal bonds are backed by local governments, which can and did default. Therefore, these issuers lack the credit rating of national governments.
Q: in a multi-year down turn, how confidently can the CPFB (cpf board) meet its obligation to its members? Answer below is based on MOF | Is our CPF money safe? Can the Government pay all its debt obligations? esp. Q28.
A: SG Government bears the risk of GIC’s investment returns over any particular period falling below the interest rates GIC is committed to pay on SSGS. Investment returns can fluctuate widely, depending on global market cycles and shocks. This is, for example, what happened during the Global Financial Crisis (GFC) and its aftermath. The GIC experienced losses in investment value during the GFC, and low average returns for five years, before recovering (see GIC’s annual report).
— Q: Why can’t the CPFB leave the cpf members’ aggregate balance in some passive account and pay out the annual interest amount?
That way, the CPFB would run a deficit every year. The interest paid to members must come from some productive asset, which must have income to sustain the payout. This is the sustainability argument.
The optimization argument .. The cpf balance is not going to be withdrawn any time soon, so it should be deployed for long-term growth assets, rather than sitting idle.
— in 2024, there was rumor that goverment has difficulty generating 4 ppa return on a huge balance of CPF SA/RA/MA, so they will close the cpfSA after you turn 55.