SG Investor Hub Blog

April 2020 Rants

1. Do not F*** around with oil if you have no idea how the oil markets and SPECIFICALLY, the oil investment vehicle works.Negative oil prices sounds cute and fun to talk about, but it is not really actionable unless you big brain big pp and you know wh…

Negative Crude Oil Futures

A negative price on crude oil futures prices. I remember reading texts how in the past oil can get to very low prices but I have never experienced this in my lifetime. Well, this period I get to see some historical stuff. Allow me to indulge in some photo-taking. Within a day, the price of […]

The post Negative Crude Oil Futures appeared first on Investment Moats.

If GIC uses my CPF money to invest and makes 9%, why am I only getting 6%?

If GIC uses my CPF money to invest and makes 9% a year, why am I only paid a maximum of 6% a year?

First off, let’s start with how our CPF monies flow to GIC.

  1. We work and contribute a portion of our salary to our CPF accounts.
  2. The money in our CPF accounts is invested in the Special Singapore Government Securities (SSGS). 
  3. The funds in SSGS are pooled together with other SG Govt securities, proceeds from land sales, and budget surplus, all deposited with the Monetary Authority of Singapore (MAS).
  4. MAS then invests the bulk of this money into GIC.
Icon made by Freepik and Nikita Golubev from www.flaticon.com

SSGS is the securities that your CPF account are invested in and pays you that fixed CPF interest.
They are guaranteed by the Singapore Government.
So your CPF interest is actually paid to you by the Singapore Government.
So your CPF monies are not affected by GIC’s investment performance (aka volatility).

Because of the unique structure of layering MAS (aka SG Government) between GIC and SSGS, it removes volatility.
Think of it this way; banks take your deposits and lend out to borrowers (people and corporates).
Regardless of whether the borrowers repay or don’t repay their loans to the bank, the bank will still pay you the interest on your deposits.
The value of your deposits with the bank will not drop in value.

In this sense, CPF works almost the same way as a bank.
Except banks play the role of CPF, MAS, and GIC, all in one.

Icon made by Freepik and Surang from www.flaticon.com

Scenario A: GIC Returns > CPF Interest
Initially, you had $200,000 retirement savings in CPF.
In 2020, GIC funds performed well; hence your retirement savings got a boost to $240,000 (+20%).
On 1st Jan 2021, you reached your CPF payout age, and the sum was transferred to CPF LIFE to provide you with a monthly payout for the rest of your life.
With $240,000, the monthly CPF LIFE payout you will be getting is as per below.


Compared this to the current fixed interest rate of up to 6% p.a., your 2021 Retirement Sum will be $208,900, and the payout will be as per below.

Comparing the 2 results, you can tell that there is almost a $150 difference in the monthly payout. Suddenly the fixed interest rate provided by CPF does not seem very attractive, and we should all be demanding for the full returns from GIC, correct?

But what if the situation below occurs?

Scenario B: Sovereign Fund Returns < CPF Interest
Initially, you had $200,000 retirement savings in CPF.
In 2020, GIC funds performed badly due to COVID 19.
Hence your retirement savings lost 25% of its value, and you ended up with $150,000 in your CPF by the end of 2020.
Yes, stock markets do drop that much, just look at the chart below that shows the S&P 500 over the past 40 years.
It fell severely in the 2008 Financial Crisis, as well as during other periods of crises.

On 1st Jan 2021, you reached your CPF payout age, and $150,000 was transferred to CPF LIFE to provide you with a monthly payout for the rest of your life.
With $150,000, the monthly CPF LIFE payout you will be getting is as per below.

Compared this to the current fixed interest rate of up to 6%, your 2009 Retirement Sum will be $208,900, and the payout will be as per below.

Suddenly, because of volatility in the asset markets, the monthly payout you would receive from your CPF LIFE drops by almost $250 per month.

Conclusion
As the saying goes, “higher returns = higher risks”.
If you want the higher returns, you have to be able to withstand the higher risk; aka higher volatility.

But I doubt anyone would want to risk losing a huge portion of their retirement savings when they are close to retirement.
This was what happened to America during the 2008 Financial Crisis.
Many people who were near their retirement age were suddenly unable to retire as their retirement savings dropped by half or more because of the stock market crash.

Imagine you are 64 years old, and suddenly you have to start finding jobs in an economy that is in ruin because half your retirement egg nest was gone.
That is extremely scary.

So the current CPF interest framework is still an ideal one for preparing us for our retirement, ensuring that our savings would go only one direction: UP

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3 ways Starbucks will take advantage of Luckin Coffee’s RMB2.2 billion scandal

Luckin Coffee’s shares took a 75% plunge on 2 April 2020 and it certainly wasn’t a late April Fool’s prank as it was revealed that Luckin’s COO Liu Jian had allegedly faked RMB2.2 billion worth of sales from the second quarter of 2019 to the fourth quarter of 2019. The Chinese company’s aim was to […]

The post 3 ways Starbucks will take advantage of Luckin Coffee’s RMB2.2 billion scandal appeared first on The Fifth Person.