Should You Keep Your Savings In Your CPF Special Account?

While it’s possible to use your CPF Special Account as your retirement plan, you need to prepare for the following scenarios. In the Straits Times, we recently read about a Singaporean man who wants to accumulate a million dollars in CPF savings. Is it possible? Certainly, and we’d even say we know a few people who have done it. While it may sound like a great idea, you do have to make certain preparations if this is going to be your retirement plan.

 

What Does Getting a Million Dollars in Your CPF Entail?

In order to get a million dollars in your CPF, you need to max out your Special Account (SA). The CPF is composed of three portions: The Ordinary Account (OA), Special Account (SA), and your Medisave Account (MA). The OA is primarily used for providing housing, while SA is used for retirement. MA is used to pay for healthcare. The interest rate on your OA is 2.5 per cent, while the interest rates on SA and MA are four per cent. There is an extra one per cent interest upon reaching the first $60,000, combined across all three (and at least $20,000 in your OA). This means most Singaporeans, after a few years in the workforce, will have an interest rate of 3.5 per cent in OA, and five per cent in their SA and MA. In order to accumulate a million dollars in your CPF, the key is to move the lower interest OA money into your SA. Then, the compounding effect of five per cent per annum can build up your cash reserves faster. In addition, once you reach the Medisave Contribution Ceiling ($49,800 as of 2016), any excess will be put into your OA. Note that the amount of time this takes will differ, based on how much you earn. Singaporeans are required to contribute 20 per cent of their monthly pay to CPF, and their employers contribute an additional 16 per cent. In general, however, someone earning around S$3,000 a month, who starts working at 25 and constantly transfers money from OA to SA, could end up hitting the million dollar mark as early as age 54 to 57. It’s not a get-rich-quick method, but the reliable ones rarely are.

 

The Upsides of Putting More Money in Your Special Account

There are a number of upsides to relying on your SA to getting your  first million dollars. These are:

•    A reliable absolute return

•    An interest rate that beats inflation

•    Safety from creditors

 

1. A Reliable Absolute Return: If you were to use mutual funds or Exchange Traded Funds, your returns will usually fluctuate based on the index it’s pegged to. For example, if you buy a mutual fund pegged to the S&P 500, and the S&P 500 falls to negative 1.2 per cent returns, you would probably get negative 1.3 percent returns. If returns are a positive two per cent, you might get 1.9 per cent (it’s not exact to account for expense ratios). Now over a long term, all of this should even out. However, there’s always a chance that you’re one of those unfortunate investors who see more bad years than good ones. It’s not likely, but it could happen. The great thing about the CPF is that returns are absolute. If the SA interest rate is five percent, then you get five per cent – regardless of how well or how badly Singapore is doing. Coupled with the fact that it’s guaranteed by the Singapore government, this is one of the safest investments available to you.

 

2. An Interest Rate That Beats Inflation: For a retirement fund to be viable, it must grow at a pace that beats inflation. This is usually three per cent for Singapore and most developed countries (central banks take great efforts to keep inflation in this range, for reasons we won’t go into here). This means your retirement fund should be getting at least five per cent per annum, which your SA does. There are plenty of other investment options out there – but an insurance policy straggling around at four per cent, or Singapore Savings Bonds at between two to three per cent, don’t really cut it.

 

3. Safety From Creditors: Even if you go bankrupt, your creditors cannot take money from your CPF. This isn’t too big a deal for most people (most of us never reach that stage). But if you engage in risky activities, like being a stay-at-home Forex trader or a business owner, this is important.

 

The Downsides to Keeping Your Savings in Your Special Account

There are a number of issues you have to plan to face:

•    You have to pay for your housing the hard way

•    You’ll need banks for education loans

•    The situation may change in the long term

 

1. You’ll Have to Pay For Your Housing the Hard Way: When you take an HDB Concessionary Loan, you need to pay at least 10 per cent of the flat price. This can come from your CPF OA or your pocket. And since you have transferred everything from the OA to the SA, your pocket it is. A three-room flat costs around S$350,000. This means you should be prepared to fork out at least S$35,000 in cash somehow (it may be a little less after grants). If you are buying private housing or an Executive Condominium (EC), you will have to take a bank loan and put down 20 per cent. So a $700,000 EC would mean a cash payment of $140,000, if you have nothing in your CPF OA. In addition, many Singaporeans pay their mortgage through their CPF OA. This will, of course, not be an option for you if all the money has been transferred to your SA. You have to be very disciplined at money management, in order to make the significant down payment without CPF. And because you are paying the mortgage in cash, you will have to plan your monthly finances carefully. For bank loans, this entails knowing details like when to refinance, or how to pick between one and three-month interest rate periods with the most efficiency.

 

2. You’ll Need Banks For Education Loans: Your CPF OA can be used for education loans when applying for studies from a recognised institution (and yes, you do have to pay it back with interest!). If you have not completed your diploma or degree but intend to, you will have to turn to banks if your OA is empty. This is, of course, a less forgiving option. With the OA, you are simply using your own money, with an obligation to pay yourself back. Once you use a bank, you have a student loan that you have to be careful to repay. Failure to do so can greatly impact your credit score later.

 

3. The Situation May Change in the Long Term: This method, of course, assumes CPF rates stay the same. The situation may change 20 or 30 years down the road.

 

It’s Probably Better Than Trying to Invest Your CPF Money

You have the option to invest a portion of your CPF savings (see the CPF websites), in order to chase higher returns. Given that the SA already gives higher returns however, and is guaranteed, many Singaporeans would be better off transferring their money to their SA than trying to invest it.

 

 

(Singsaver.com.sg, Singapore's leading personal finance comparison platform, provides free and easily accessible resources such as its up-to-date credit card product page and the latest personal loan packages available in real-time.)

5 Ways Shopping At Malls In Singapore Beats Online Shopping

Shopping at malls in Singapore offers great experiences you can’t capture online. Online shopping. Once you’ve had a taste of the incredible bargains it can net you, how could you shop IRL ever again? Well, don’t pooh-pooh the good ol’ bricks-and-mortar shop just yet. With a little bit of legwork, you can save more than just money by going to town to pick up that brand-new toy. Here are the things we love most about going shopping at malls in Singapore.

 

The Freebies

Sure, you might receive the occasional department store flyer in the mail or see ads on Facebook alerting you limited-time offers on certain brands. What you may not always be alerted to are the freebies sales staff can sometimes throw in to sweeten the deal for you. For example, many cosmetics brands bundle attractive samples with their goods above a certain value. Or, you could get free accessories thrown in to make your new laptop even more useful. In many cases, this generosity is often the prerogative of the salesperson attending to you, which brings us to the next reason we love shopping IRL.

 

Human Interaction

There are times when shopping is best done in your PJs in the dead of night, searching diligently for deals and getting it just-so at your own pace. Other times, though, it’s really nice to have a human being explain things to you without you having to research until your eyes water. A good sales experience can be a great way to lift your mood after a long day — and you can’t really put a price on that. More importantly, that salesperson can explain technical details, and provide tips on maintenance of the item. This something you rarely encounter online, even if you might save some money by buying it over the Internet.

 

Surprise Sales

The feeling of satisfaction is even further enhanced if you happen to have chanced upon an unexpected price reduction on your item. Often, shoppers choosing between similar items are persuaded by the one that happens to be on offer. I mean, paying less is more, no? Thing is, you likely would not have known about the sale item if you hadn’t ventured into the store in the first place. And while you might be able to get the same thing online for less, there’s shipping costs plus the interminable wait time. It might make more sense to buy it at a mall in Singapore. Even without surprise sales, certain credit cards confer additional discounts and loyalty points for specific malls. This helps you save on everyday purchases made in-store. The new American Express CapitaCard, for example, rewards you with 3 STAR$ for every S$1 you spend at CapitaLand Malls. Once you’ve accumulated a nice collection of STAR$, you can trade them in for CapitaVouchers. 10,000 STAR$ gives you a S$10 voucher, while 50,000 STAR$ gets you a S$50 voucher. You also get free parking at CapitaLand Malls if you spent at least S$1,200 in a calendar month. Oh, and did we mention that you also get 50,000 STAR$ if you spend S$888 on the card for the first 6 months?

 

Authenticity

Of course, bargain hunting online is fun and amazing — that is, until you get scammed. Savvy shoppers will already know where to find legitimate deals online, but not all of us are so clever. That’s where the bricks-and-mortar shop is still useful. By vouching for the authenticity their wares, these retailers are eliminating one major worry you might have. If anything goes awry with your purchase, you could very well bring it back to them and get an on-the-spot exchange. Try doing that with an online shop.

 

Some Stuff Shouldn’t Be Bought Sight-Unseen

Finally, there’s this, too. I mean, how could you possibly buy furniture without testing it first? Or checking that it fits you or your décor? This is also true of electronic gadgets like hi-fi systems and TVs, which you really should try out before purchasing (no matter how good the reviews). A lot of things may look good on paper but is not actually compatible with you — which could turn out to be a major dampening. So, by all means, shop for good deals online. But don’t forget to get out there every now and then. You’ll be surprised by how shopping at malls can still be so satisfying.

 

 

( Singsaver.com.sg, Singapore's leading personal finance comparison platform, provides free and easily accessible resources such as its up-to-date credit card product page and the latest personal loan packages available in real-time.)

5 Questions You Were Too Embarrased To Ask About Mutual Funds

It’s okay if you don’t know what a mutual fund is. But you shouldn’t be too shy to ask questions before investing in one. It must be sales season in the finance industry. Visit any MRT station in Singapore, and you’re sure to come across a roadshow with a dozen financial advisors trying to sell you a product. Chances are, you’ve probably been approached with dozens of offers to invest in a mutual fund. Here are some questions you should ask before investing in a mutual fund, but feel too embarrassed to:

 

1. Wait, What is a Mutual Fund?

A mutual fund is a portfolio of assets, which many participants collectively pool their money to invest in. While mutual funds have many names and descriptions, these are the main qualities that they all share:

•    They are collective investments. These products are sold to hundreds or thousands of people, who pool their money to invest in it.

•    They are managed by a professional. The thousands of people who invest in the fund have no control over its day-to-day operations; these operations are placed in the hands of a paid fund manager(s). The fund manager is sometimes a computer.

•    Investors purchase “units” in the fund. In a mutual fund, you do not purchase specific stocks, bonds, or other such assets. Rather, you purchase “units”, which are priced according to the fund’s Net Asset Value (NAV). There may be rules in place, to

control when the investors can sell their units, and in what quantity.

•    A mutual fund always comes with a prospectus for the investor. This details what the fund is engaged in, along with reports about its various assets and past performance. Funds have an obligation to disclose information that would affect investor 

decisions via the prospectus.

 

2. Why are Mutual Funds Everywhere in Singapore?

There are many reasons why mutual funds are aggressively advertised right now. The first is that mutual funds make a lot of money, for the fund managers as well as the people selling them. Consider that a fund manager may make one per cent of the fund’s portfolio of managed assets, every year: that may not sound like much, but if the fund has assets totalling S$35 million, that’s S$350,000 a year. The second reason is that Singaporeans have begun to worry about retirement. 2015 and (so far) 2016 have proven to be difficult, with record numbers of layoffs and uncertainty in the global economy. In such an environment, more people worry about their financial future, and start to seek alternative solutions. Mutual funds are often presented as a supplement to retirement funds (like your CPF), or are positioned as a retirement product themselves. And many finance companies know that, in difficult times, people will show more interest in these products. When times are good, all of this fund stuff is boring and no one wants to listen.

 

3. So, I Think I Want to Invest in a Mutual Fund. Which One Should I Get?

We’re not in a position to give advice about what mutual fund to invest in. This decision entirely depends on your unique circumstances. But we will tell you not to buy the first mutual fund that is shown to you. Some funds may be able to give you a comparable rate of return, for a much lower Total Expense Ratio (TER). The TER is the amount you are paying for the marketing and management of the fund. So if the fund provides returns of five per cent but the TER is high at two per cent, your returns are actually just three per cent. You may, however, find another similar fund with five per cent returns, but in which the fee is just 1.5 per cent (thus securing returns of 3.5 per cent instead). As with any financial commitment, make sure you are getting the best deal, not just the most convenient. There are thousands of these funds on the market at any one time – make sure to compare your options. Do not assume the performance you see will be repeated. Bear in mind that fund managers move around a lot – the person who managed the fund and made it a success in 2010 may no longer be around, and the top manager it has today may be gone in three to five years. Aak to know the fund’s annualised returns over a 10 year period. This is a more realistic reflection of the fund’s performance.

 

4. How Do I Know If I’m Investing in a Legit Mutual Fund?

First, check to see if the product is regulated by the Monetary Authority of Singapore (MAS). Collective Investment Schemes (CIS) should be licensed by the MAS. Check their watch-list to ensure you are not investing in a blacklisted product. If you are in doubt, call or email the MAS helpline and make an enquiry. Do not agree to buy into unregulated mutual funds or unregulated investment products of any kind. Because you are often signing a contract when you buy-in, it can be difficult to hold the seller to account later (you agreed and signed on the dotted line!). If you have a current financial advisor or wealth manager, consult them before buying the product. Sometimes, a mutual fund contains assets that you have already invested in. For example, many Investment Linked Policies (ILPs) will hold blue chip assets, such as shares in DBS and Singtel. If you have such an ILP, and you buy into a mutual fund that invests in the same companies, you are basically buying the same thing twice. There’s no diversification in that. Likewise, some actively managed mutual funds may carry higher risk, as the manager attempts to outperform the market. This may not be idea for retirees. On the other hand, some mutual funds give consistent but low returns, which may not be ideal for young investors (the returns don’t keep pace with inflation). Seek expert help to determine if the fund matches your existing portfolio.

 

5. What Happens If I Change My Mind About My Mutual Fund?

For how long must your money remain in the fund? What if you need to pull your money out part-way? Many funds have rules about when you can sell your units, and to whom. There may be penalties involved in selling, or you simply may not be able to sell at all. These are all important considerations before you commit the money. Mutual funds are one of several tools that can supplement your retirement income. But used wrongly, it can have the opposite effect and damage your wealth instead. The simplest rule is that, when you are in doubt or unclear, don’t buy.
If you want to test that, explain the fund to someone else. If you cannot clearly describe it, you don’t know enough about it.

 

 

Singsaver.com.sg, Singapore's leading personal finance comparison platform, provides free and easily accessible resources such as its up-to-date credit card product page and the latest personal loan packages available in real-time.