This is the second of a three-part series on customised retirement planning solutions for people from different age groups. As retirement savings are a fundamental component in financial planning, recommendations include Central Provident Fund options.
Unlike most Singaporeans who rely on their retirement savings to fund their home purchases, Mr Jeffrey Png switched to using cash four years ago.
The director of outreach and partnership at the Central Provident Fund (CPF) Board believes in walking the talk. "I believe in making use of the good interest rates that CPF is currently providing. I am paying my mortgage with cash rather than using my CPF Ordinary Account savings, as the interest rate of 2.5 per cent is higher than my housing loan rate of 1.6 per cent," says Mr Png, 45.
He told The Sunday Times the payouts from the national annuity scheme CPF Life will form the foundation of the retirement income for him and his wife Wong Tze Wei, 37. "I have enough Special Account savings to meet the current Full Retirement Sum ($161,000), and I intend to top up to the Enhanced Retirement Sum (currently $241,500) when I am 55 years old."
"Beyond this, I am trying to build our other savings and investments to supplement the CPF Life payouts. We do not intend to depend on our children. Whatever they give us will be a bonus," says Mr Png.
He recalled a bad experience when he used $30,000 of his Special Account savings to invest in unit trusts in 2005. "I realised that the unit trusts were giving me lower returns compared with the 4 per cent to 5 per cent I would have gotten if I had left my Special Account untouched."
He decided to cut his losses. He liquidated his portfolio and returned the money to his CPF account in 2011.
Mr Png used cash and his Ordinary Account savings to buy unit trusts. His unit trust investments, using cash amounting to about $150,000, have broken even, while his investments using his Ordinary Account (about $140,000) reaped just 2.5 per cent returns, which matches the Ordinary Account risk-free interest rate. This means he would have got the same gains by leaving the savings alone.
Given the lacklustre investment performance, he wants to "rethink" his investment strategy. He is contemplating paying off his mortgage and buying an investment property for passive income.
The Pngs have two children, Amelie, six, and Oliver, three, and they live in an HDB executive apartment in Bishan.
Their financial objectives are to fund retirement and their children's tertiary education.
Mr Png has set aside about nine months of family monthly expenses in cash. Less than 10 per cent of his monthly income goes to paying the mortgage and he has a home protection scheme for his flat. He owns a second-hand Hyundai station wagon that he bought with cash.
The Pngs have $600,000 investable cash in total, assuming Mr Png liquidates his unit trusts investments valued at about $150,000. Their combined Ordinary Account money amounts to $400,000, of which $140,000 is invested in unit trusts. Their combined Special Account savings are $300,000.
In addition, Mr Png is prepared to set aside $2,000 to $3,000 a month for investments.
LOW-COST ANNUITY PRODUCT WITH RISK-FREE RETURN
Currently, the best annuity product in the market is CPF Life. It is low cost and gives a guaranteed risk-free return of4 per cent. Based on the prevailing Enhanced Retirement Sum(ERS) of $241,500 at age 55, the monthly payouts would be about $2,000 (current value) at age 65. ’’
MRCHRISTOPERTAN, Providend chief executive
He estimates he would require an inflation-adjusted equivalent of $6,000 a month for him and his wife at age 65 to retire comfortably. This is the same amount his family would require should he die. Conservatively, they would need at least $2,000 a month.
Besides unit trusts, Mr Png has education insurance plans - sufficient to cover their kids' local tertiary eduction - and fixed deposits.
He has a $1 million insurance plan to cover death and for income replacement, a $300,000 decreasing term insurance plan, as well as a critical illness cover of $300,000.
He regrets not buying health insurance earlier. He now has a pre-existing back condition (ankylosing spondylitis) that is excluded from his health plan.
FINANCIAL EXPERT CHRISTOPHER TAN
CPF Advisory Panel member and Providend chief executive Christopher Tan says: "With more than six months of their monthly expenses in cash, a 10 per cent debt-service ratio, and 20 years investment horizon, the Pngs' financial health is strong."
He worked out that Mr Png will need cover of about $2 million (via low-cost term insurance) to ensure an inflation-adjusted amount of $6,000 per month for the family until the younger child becomes independent (age 25), if something unfortunate were to happen to him.
In the event of being diagnosed with a disease that prevents him from working, Mr Tan recommends that Mr Png replaces up to three years of the family monthly expenses of $6,000. Currently, Mr Png has sufficient critical illness coverage at $300,000. However, he might want to consider an additional critical illness cover of $100,000, to pay for alternative medicine that may not be covered by a hospitalisation plan.
If Mr Png upgrades his insurance accordingly, he will be sufficiently covered and his ability to take risk will be high, added Mr Tan.
USING CASH (INSTEAD OF CPF) TO PAY FOR HOUSE
Mr Tan notes that while it appears prudent that Mr Png is using cash to pay his mortgage instead of CPF because CPF offers higher interest rates, this makes sense only if he does not intend to invest his cash.
"Jeffrey needs to look at his overall investment strategy so that he can best decide on whether he should use his cash or CPF to pay his mortgage. If he is prepared to take on more risks to achieve a higher expected returns, he might want to use cash to invest and his CPF to pay his mortgage," says Mr Tan.
Or Mr Png can consider his CPF as the "safer" portion of his overall investment portfolio, and use his cash to pay for both mortgage and investments. Ultimately, it is about balancing risk and returns before deciding on the best asset allocation.
USING CPF LIFE AS FOUNDATION OF RETIREMENT INCOME
Mr Tan says it is a "good strategy" to use CPF Life as the foundation for a retirement income stream as there must be an annuity component in every retiree's portfolio.
An annuity serves a dual purpose of providing a steady stream of income regardless of the situation in the financial markets and hedges against longevity risk.
"Currently, the best annuity product in the market is CPF Life. It is low cost and gives a guaranteed risk-free return of 4 per cent. Based on the prevailing Enhanced Retirement Sum (ERS) of $241,500 at age 55, the monthly payouts would be about $2,000 (current value) at age 65," says Mr Tan.
In 10 years, when Mr Png is 55, the ERS is estimated to be about $325,000 which provides a monthly payout of about $3,612 or the current equivalent of about $2,000, when he turns 65. Based on the Pngs' combined Special Account balances of $300,000, Mr Tan says they would have no problem reaching $325,000 in their combined balances in 10 years.
He adds: "In fact, it is likely that they would have more. As such, Jeffrey and Tze Wei should not invest their Special Account monies but consider them as the safe portion of their overall investment portfolio and also the portion which will help them accumulate the premium needed to buy their CPF Life later."
INVESTING TOWARDS RETIREMENT
To achieve their retirement goal of about $6,000 per month in future dollars ($10,837) at age 65 for the next 25 years, as well as leave behind $1 million for extra cash if they live beyond age 90 and a bequest for their loved ones, Mr Tan estimates they would need a nest-egg of $2.033 million.
This was worked out using Providend's proprietary RetireWell System to calculate how much money both of them will have to accumulate at age 65. The RetireWell approach at retirement works on the following grounds:
1. Have a portion of your nest-egg pay a reliable income stream for life that is near risk-free;
2. Money needed over the immediate five years in retirement should not be invested;
3. Money not needed over the immediate five years is invested progressively from low to higher risk, with the holding period for each increasing with higher levels of risk.
So at retirement, the retiree places his accumulated nest-egg in several retirement income segments or "buckets", each with a different growth potential due to varying asset allocations and time horizons. Each bucket is meant to provide income over progressive five-year periods.
The income bucket pays an annuity for life - the reliable income stream portion. The first bucket holds cash and near-cash assets for immediate income needs. The five other buckets are invested in portfolios of different asset allocations with varying risk-return characteristics over different time periods.
As each bucket nears the end of its investment horizon, the proceeds are transferred to bucket one (cash or near cash assets) for withdrawal.
TO ACHIEVE RETIREMENT GOAL
To achieve his nest-egg goal of about $2 million at age 65, Mr Png could restructure his unit trust portfolio ($290,000) and invest his cash of $450,000 in a balanced portfolio of exchange-traded funds with an expected conservative annual return of 5 per cent over the next 20 years, says Mr Tan. This is suitable for the Pngs' risk appetite to stay invested for the long term.
Furthermore, Mr Png has an additional $260,000 in his Ordinary Account as well as $2,000 to $3,000 per month to invest in a property if he wants.
The CPF Board will be holding a series of complimentary talks on retirement planning by financial experts alongside the CPF Retirement Planning Roadshow at Suntec City on Aug 27 and 28. Mr Soh Chin Heng, deputy chief executive officer (services) of CPF Board, and Mr Christopher Tan, chief executive officer of Providend, will be speaking at the first session at 11am on Aug 27. It will be moderated by Invest Editor Lorna Tan. Please register for the talks at cpf.gov.sg/bigRchat
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