Category: Investment Stab

Answering 2 Common CPF “Complaints”

Some money experts have advised people to save in a bank account that they have no easy access to (i.e. no ATM cards) to reduce the probability of them spending that money.
But often people would come out with “justifications” like “I need a car for work”, “I need to renovate my home”, or the most common one, “I need to fund my child’s education”.

But these are not good reasons for you to dip into your retirement savings!
Yes, including your child’s education!
Your retirement is more important than their education.
On the same note, we may feel restricted by the idea that we cannot touch our retirement (CPF) money, but this is not just a Singapore thing.
Many retirement plans/pensions in other countries, as well as most insurance plans you buy, also do not allow you to withdraw any time you feel like it.
It is called “prudent retirement planning”.
But, like most people, we still question why we need to have such a high amount set aside in our CPF.
So today, we will be addressing the 2 common complaints Singaporeans have when it comes to their CPF.


Complaint 1: Why do I need to set aside a retirement sum?
The retirement sum is set aside so that you have a retirement egg nest to support you during your retirement.
By setting aside a sum of money and using that to subsequently join the CPF LIFE scheme, you ensure yourself of a steady stream of income every month for life.

If you do not have these savings in place, how would you support yourself during your retirement years?
Are you going to rely on your children? In that case, how would your children be able to plan for their retirement?
Having a lifelong income in retirement would reduce your dependence on your children and prevent them from becoming the next sandwich generation.

Can I Not Set Aside a Retirement Sum?
For starters, the retirement sums are reference points for the monthly payouts you can expect to receive from your payout eligibility age (which is currently at age 65).
If you are not able to meet the retirement sum, there is no need to top up with cash.
However, the more you set aside as your retirement sum, the higher your future monthly payouts will be.

If you do not wish to set aside the retirement sum in your Retirement Account, there are ways for you to do so.
As long as you can prove you have a steady stream of income every month for your retirement.
That stream of income can come from private annuity insurance plans or pension plans.
You may be fully or partially exempted, depending on the lifelong monthly payout amount from your private annuity or pension.
But you might want to consider this path carefully.

First of all, CPF pays really attractive interest of up to 6%, risk-free and hassle-free.
Even the base interest of 4% is still significantly higher than what banks offer for deposits.
Furthermore, the Singapore Government guarantees 100% of your CPF money.
In contrast, only $70,000 of your money with the banks are guaranteed by the Singapore Government via SDIC.
Lastly, on average, the interest CPF pays on your money is actually higher than what most private annuity insurance plans offer. CPF only loses to their private counterparts IF the private annuity’s non-guaranteed returns performed well that year.

Conclusion to Complaint 1
Regardless of whether you choose CPF LIFE, an annuity plan, or any other means, you still have to save up for your retirement.
Why not do it with CPF, which has higher interest rates that are much more consistent than the varying rates provided by private annuity insurance plans.


Complaint 2: I contribute so much (20%) of my monthly salary into CPF. Why am I getting only $1,000+ per month when I retire?
This is actually a math problem.

Current Structure:
The current Full Retirement Sum (FRS) is $181,000 for those turning 55 in 2020.
If you live till 85 years old, you will spend 21 years in retirement.
We derived the CPF LIFE Standard Plan monthly payout via the CPF LIFE Estimator for a member who turned 55 in Jul 2020 and has $181,000 in his/her RA.
We compared that against how much the member would get if they do not have CPF LIFE.

Without CPF Interest#
& calculating payouts

for 21 years

With CPF Interest#
& CPF LIFE##

(Standard Plan)

RA balance at
age 55
$181,000.00 $181,000.00
RA balance at
age 65
$181,000.00 $272,900.00*
Monthly payout
till 85
$718.25**
$1,425 – $1,573 (Male)
$1,326 – $1,468 (Female)
Monthly payout
after 85
$0.00
$1,425 – $1,573 (Male)
$1,326 – $1,468 (Female)

#4% p.a. base interest on RA/SA balance. 1% p.a. extra interest on the first $60,000. Another extra 1% p.a. interest on the first $30,000 for CPF members age 55 and above.
##All CPF LIFE plans’ payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
*Our own estimated value based on CPF interest rates and reverse engineering our own CPF statements to derive the most likely calculation method.
**$181,000 / (21 x 12) = $718.25

Without CPF interest or CPF LIFE, the $181,000 you have will only provide you with around $718 in monthly payouts for 21 years.
With CPF interest, this $181,000 you set aside will increase significantly to $272,900.

But, with CPF LIFE, males will get an estimated monthly payout of around $1,425-$1,573 for life while females will get a monthly payout of around $1,326-$1,468 for as long as you live!

With CPF LIFE, your monthly payout will never run out.
This is important as we are living longer – in fact, 1 in 2 Singaporeans aged 65 today is expected to live beyond 85 years of age.

Are you now partially convinced that CPF LIFE is a good scheme?
From this illustration, we hope you can also see that your payouts are determined by how much you have set aside as your Retirement Sum.

If You Earned A Median Income Your Whole Life:
Based on MOM’s statistics, the median income of Singapore residents in 2019 was $4,563 (including Employer CPF contribution).
Let’s say you just came out to work, and are getting the median salary, your CPF contribution and allocation would be as follows.

Assuming you started work at age 25 and your salary never increases, you would have contributed $109,278 in your SA by the time you are 55 years old.
For simplicity sake, we will ignore your accumulated OA and MA balances since, like most Singaporeans, you probably max out your OA to fund your home purchase (almost everyone I know maxes out their CPF OA to buy their house – it’s a stupid idea we will touch on in the future), and your MA is for medical purposes only. 
Hence let’s assume that you are only going to have your SA to fund your retirement.
We derived the CPF LIFE Standard Plan monthly payout via the CPF LIFE Estimator for members who turned 55 in Jul 2020 and have $109,278 in their RA.
With $109,278 for your retirement, that works out to about $433 a month. [$109,278 / (21 x 12 months)] 
But, with CPF LIFE, males will get an estimated monthly payout of around $911-$1,002 while females will get a monthly payout of $849-$936 for life!
Without CPF Interest#
& calculating payouts

for 21 years

With CPF Interest#
& CPF LIFE##

(Standard Plan)

RA balance at
age 55
$109,278.00 $109,278.00
RA balance at
age 65
$109,278.00 $168,800.00*
Monthly payout
till 85
$433.64**
$911 – $1,002 (Male) 
$849 – $936 (Female)
Monthly payout
after 85
$0.00
$911 – $1,002 (Male) 
$849 – $936 (Female)
#4% p.a. base interest on RA/SA balance. 1% p.a. extra interest on the first $60,000. Another extra 1% p.a. interest on the first $30,000 for CPF members age 55 and above.
##All CPF LIFE plans’ payouts may be adjusted to account for long-term changes in interest rates or life expectancy. Such adjustments (if any) are expected to be small and gradual.
*Our own estimated value based on CPF interest rates and reverse engineering our own CPF statements to derive the most likely calculation method.
**$109,278 / (21 x 12) = $433.64

Question: You only contributed a maximum of $448.48 per month into your SA, how do you expect to withdraw more than $1,000 per month during your retirement?
Hint: With CPF LIFE, you almost can! 

Conclusion to Complaint 2
Moral of the story: if you want a higher monthly payout, you need to have more in your retirement savings.
One way you can do that is by topping up your CPF account.
Also, the maths has shown that CPF LIFE is an excellent scheme for providing us with a steady stream of monthly income during our retirement years.

Side Note:
I am not sure if you noticed, but after you factor in that CPF interest, the monthly payout that you get when you retire is more than double as compared to without that interest.

Source: CPF

So if you think that 4% p.a. as a base interest is not a lot, you might want to think again. Because a 4% interest compounded over just 10 years, would already have doubled your CPF monthly payouts!


Recommended Read: If You Invested Right After DBS’s IPO

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Is CPF A Scam?

Is CPF a scam?
Yup, Yes, it is!

But it’s the people scamming the Government.
Okay, that’s an exaggeration.
But hey, now that we have baited you in, keep reading 😉.


1. What Kind of Scam is CPF?

It’s a huge financial scam!
The people are “scamming” the Government!
The people are “taking in too much” from the Government in their CPF accounts.

Source: GIPHY


Recommended Read: If You Invested Right After DBS’s IPO


2. Public Narrative on 

I  hear people say that the Singapore Government is using its people’s money in CPF to earn big investment returns while paying low interest to its people.

LOW INTEREST? 0.o
Interest ranging from 2.5% to 6% is considered low?

Source: GIPHY

Money in our CPF is kept risk-free and backed by the only few AAA credit rated countries left in the world.
There aren’t many countries in the world with that creditworthiness that’s paying interest rates of 4%.


3. Our Take

The Singapore Government is actually doing a kind deed by letting Singaporeans have CPF.

Before you rage quit and close this article, read on…

The narrative is the Government is locking our money away in CPF, not letting us withdraw it out fully so that they can invest the money and make big returns, all while paying us low interest.

The key thing we will be debunking here is ‘paying us low interest’.

We will use the Special, Retirement, and Medisave Account (SRMA) based interest rate of 4% as comparison and reference.

We will compare that against SG Govt 30-Year Bond yields since that is the bond that gives the highest return.

We are not using the 2.5% interest the Ordinary Account (OA) is giving because the OA has a lot more flexibility in how it can be used.
It is structured more like a shorter-term savings plan than a 30-Year kind.

The more appropriate comparison might be the 5-Year or 10-Year bond, which if you look at the chart below, we hope you can tell that the bonds’ interest rates are not anywhere close to 2% at all.


4. SG Government Bond Yields

This is the SG Govt 30-Year Bond yield for the past 8 years.
It has never passed 4%.

So if the Singapore  Government ever want to make bigger net investment returns, it can just issue more 30-Year Bonds at lower interest rates, invest it, and make more money.

It can achieve all these without

  1. Paying higher interest to Singaporeans 
  2. Listen to Singaporeans complain CPF is bad

Who loses if CPF stops paying high interest to its members?
The CPF members, aka Singaporeans.

Source: GIPHY
If you are thinking, “I don’t care about the interest. I want to get the investment returns that GIC is earning using our CPF money!”.
May I recommend the article below:

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


5. Conclusion

Singaporeans legit got a good deal in CPF – on the yield side at least.

The yield is good, just that unfortunately you can’t withdraw the money any time you want.
But hey, that’s the trade-off.

Just think of it as you bought an X-Year AAA-rated high yield bond that pays a compounding 4% interest every year.
And you can only redeem it at maturity – aka when you reach age 65 years old.


6. Side Note

We are not economists or politicians.
But interest rates are now at a record low.
It completely makes sense for our Government to raise long-term funds (30-Year bond) at current interest rates and invest them for the long-term.

Keyword being ‘invest‘ and not ‘spend‘.
Raise debt to invest in infrastructure or financial assets.
Not raise debt to distribute to citizens (that’s how Greece got into trouble).

But, our Finance Minister has already stated that the Govt will not borrow to fund expenditure.
You can see the exchange in the 2 links below.
Concerns raised over fiscal prudence and constraints
Parliament: Being prudent with finances a hallmark of Singapore system, says Heng Swee Keat

If the Government won’t, hopefully, Temasek Holdings will? 🙏


Recommended Read: CPF Account Effective Interest Rates

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Questions About CPF Home Protection Scheme (HPS)

Here are the answers to some common questions that people have on the CPF Home Protection Scheme (HPS).


1. Can I be exempted from paying the HPS?

If you have an insurance policy that is enough to cover your outstanding housing loan up to the full term of loan or age 65, you can apply for exemption from HPS.
You may apply to be exempted online via my CPF Online Services.
You will get a full premium refund into your CPF Ordinary Account (OA) if the exemption application is received and approved by the Board within one month from the issuance of the HPS cover.
Otherwise, a pro-rated refund will be given to your CPF OA upon the termination of your HPS cover.

The types of insurance policies, both conventional and investment-linked, that are acceptable are:
a) Whole Life
b) Term Life
c) Endowments
d) Life Riders (must be attached to a basic policy)
e) Mortgage Reducing Term Assurance (MRTA) / Decreasing Term Rider


Recommended Read: If You Invested Right After DBS’s IPO


2. How much am I paying for this protection?

Fortunately, there is a simple method for this.
You can visit the following link to obtain the premium of HPS: https://www.cpf.gov.sg/eSvc/Web/Schemes/HomeProtectionSchemePremium/HomeProtectionSchemePremiumLanding

If you are wondering how is the premium calculated, the premium is calculated based on the following factors:

– Outstanding housing loan on the flat
– Loan repayment period
– Type of loan (concessionary or market rate)
– Sex and age of the applicant

Premiums are generally higher for a higher share of coverage, larger loan amounts or longer repayment periods.


3. What happens if I do not pay for HPS cover and it lapses?

Similar to all insurance policies, if you do not pay the premiums, the policy will simply lapse.
What will happen then?
When someone unfortunate happens to you, the burden of shouldering the HDB’s installment will be on your family.

If you don’t want that to happen, you can apply to be insured again under HPS.
However, the cost and eligibility will be re-assessed when you re-apply for HPS.


Want to know more about HPS, click HERE to learn more. 😉

Recommended Read: CPF Home Protection Scheme is a Lousy Scheme You Probably Own

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Cost of Firefighting in Singapore in 2019

If we live in a world where the Government does not provide free fire fighting service for everyone, how much are you willing to pay for a fire fighting subscription?

Before you continue reading, mentally give yourself a figure you find comfortable to pay for a fire fighting subscription service.

Basically, if you subscribed to it, you pay a monthly subscription fee.
When your house is on fire, firefighters will come and save you and your home.
If you are not subscribed, well you save money but if your house’s on fire, tough luck.


How Much Does Our SCDF Cost?

In 2019, SCDF cost an estimated $617.6 million, protecting a population of 5.71 million.
That works out to about $9 per month each person is contributing to SCDF.
Fire protection is cheaper than my Netflix subscription, sounds like a great deal 😉.

For a family of 4 however, one will be paying about $36 every month so that firefighters will come and save them when their house is on fire 🔥🚒👩‍🚒👨‍🚒.

Looking at that figure, is it higher or lower than what you had expected or were willing to pay for?

Now that we have the figure, let’s see if people are willing to pay for it.


Recommended Read: CPF Account Effective Interest Rates


Are You Willing To Pay For It?

We did a poll on our social media sites to see if our followers are willing to pay $9.00 per month per person for fire fighting services if it was not a public good.

A majority would still subscribe to a private fire fighting subscription service if it was not a public good – if it was $9.
Would you?

Don’t try the “I won’t but I’ll make sure my neighbours do”.
Because the firefighters would just spray the side of your house that’s nearer to your neighbour and leave the rest of your house to continue burning.


Conclusion

Firefighting is an essential public good that might be best kept as a non-private entity.
Just imagine a world where firefighters arrive at your house that’s on fire but did not choose to fight the fire because you did not pay the subscription 😱.
Instead, they are there to ensure the fire does not spread to your neighbour’s house because your neighbour subscribed to their services.

It would be interesting to see at which point would people go “you know what, this firefighting is costing too much. I’ll rather risk my house burning down than pay for a service I might never use”.

So, how much would you determine as “too expensive” and hence unsubscribe to it?
Let us know in the comments.


Sources

MFA FY2017 Budget
MFA FY2018 Budget
MFA FY2019 Budget
Singapore Population Data


Recommended Read: If You Invested Right After DBS’s IPO

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If you have a money related story about you or your relatives’ that you want to share, let us know in the comments below or email us at investmentstab@gmail.com.
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We hope you could help us fill in a short survey of 8 questions (4 of them are MCQs) so that we can help tailor our content to you.
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If You Invested Right After DBS’s IPO

DBS (D05.SI) is the largest bank by assets in Singapore and the Asia-Pacific.
Formerly known as The Development Bank of Singapore Limited, it was set up by the Singapore Government in 1968 to finance Singapore’s industrial activities.
It went public in that same year (1968) for an IPO price of SGD 1.00 per share*.

On 31 December 2019, it had a market capitalisation of USD 49.27 billion.


If You Invested in DBS at its IPO

An investment of $1,000 would have gotten you 1,000 DBS shares.
On 31 December 2019, your shares would be worth $25,880 (excluding dividends).
Over 52 years, the shares grew at a compounding rate of 6.5% per year
The returns would be even better if we factor in dividends.


Recommended Read: CPF Account Effective Interest Rates


If You Invested in DBS on 2 Jan 2000

However, we weren’t able to find any historical price data about DBS after it IPO-ed.
We were only able to find data on DBS from the year 2000 onwards.
So we will do another comparison again from the year 2000 as the starting date.

If you invested $1,000 in DBS on 2 Jan 2000, you would have received 40 shares of DBS stock (based on the closing price of $25.00 per share).

On 31 December 2019, your shares would be worth $1,035.20 (based on the closing price of $25.88 per share) and you would have collected $481.60 in dividends over the 20 years.

That’s an annualised total return of 2.5% per year.

Not that great especially when we compared it against the Dollar Cost Average (DCA) returns we will get from investing in DBS.

Want to know how much returns you would get if you invested in DBS’s via DCA over a 20-year period?
Check it out here: Save in CPF or Invest in DBS?


*DBS IPO Price

We inferred DBS IPO price from the following excerpt found on DBS’s 50th-anniversary document.

Recommended Read: Breaking Down “2 in 3 working Singaporeans do not have savings to last them beyond 6 months”

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Breaking Down "2 in 3 working Singaporeans do not have savings to last them beyond 6 months"

We are going to break down the whole survey released by OCBC recently that caused quite a hoo-ha in Singapore.
Instead of looking at the Straits Times article, we will be looking straight at the source: the OCBC Survey.


Survey Demographics

The survey was conducted mid-May, 1.5 months into the Circuit Breaker period.


Reducing Investments

“40% saying they (the respondents) intend to reduce their investments.”

The survey didn’t go into detail why the respondents were reducing their investments (could be to buy a new car, pay for child’s education, etc.).
But, 54% of the respondents did say they were worried about their portfolio, so it is safe to assume they probably are reducing their investments because they are worried their portfolio value might drop.

Everyone has different cashflow and financial needs to meet, hence it is normal to reduce their portfolio.
However, if one is reducing their portfolio to get cash to pay for their daily expenses during crises (like now), then maybe it is not such a great idea yet for that person to be investing.

Before investing, one would want to have at least 6 months of salary tuck aside as emergency savings.
If you don’t have that, don’t even start investing.

The purpose of that emergency savings is so that one can have at least 6 months of leeway to figure out what’s the next step without selling their portfolio at low prices.
If one sells during crises, the probability of suffering a loss is really high.


Stopping/Reducing Funds for Retirement

“27% of those with financial plans said they have stopped setting aside or even reduced their funds for retirement. 
A third (32%) of the sandwiched generation – those between the ages of 40 and 54 and many of whom must take care of both young children and ageing parents – said they have cut down on such funds. 
In stark contrast, 23% of those in their 20s with a retirement plan have put aside more money for this goal during this time of uncertainty.”

I can vaguely hear online commenters shouting:
“If I can’t even survive today, what for save for the future!”

Actually, if you can, now might be one of the best time to plan for your retirement.
Assets like stocks are selling cheap (low).
Stock market mantra: buy low, sell high.
If you don’t invest now, then when are you going to invest?


Reducing Their Savings

“55% of those surveyed said they have reduced their savings with 22% saying the reduction is more than 20%.”

“Only 30% can sustain themselves for more than 6 months if they were to lose their job now. 18% of them have enough savings to cover only up to one month of expenses.”

If we take a worst-case scenario, Circuit breaker took into effect on April.
From April to mid-May (the survey period) is 1.5 months.
We assume that everyone lost their job and are relying on their income to sustain themselves.
1.5 months of savings used to survive April to mid-May + 1 month of savings left = 2.5 months of savings at the beginning of April.
Basically, about 18% of the respondents had set aside less than 2.5 months of their monthly salary as emergency savings.

Just saying, the usual recommended emergency savings amount is at least 6 months of salary.

The good news is, the majority (between 53% to 88%) of the respondents seems to adhere to the 6 months guideline.

Moral of the story: save at least 6 months of your salary as emergency savings next time!


Recommended Read: CPF Account Effective Interest Rates


Not Having Enough Insurance

“41% are worried if they have enough insurance coverage with 47% of Singaporeans aged between 40 and 54 the most concerned.”

The worse scenario is terminating your insurance because you cannot afford the premiums.
Because it will be more expensive/harder for you to buy the same amount of coverage in the future when you can afford it.

If you bought life insurance when you are young and terminate now.
The next time you want to buy life insurance again, you would have aged and your health would not be as great as when you were younger.
The premiums are probably going to be much more expensive.

If possible, keep paying your premiums or simply defer the premiums until a later date.
In case you do not know, you can actually defer your premium payments (Yes, Gahmen approve liao).
Talk to your insurance agent about it, defer instead of terminate.


Conclusion

Lesson 1:
Save at least 6 months of your salary as emergency savings.

Lesson 2:
Defer your insurance premium payments instead of terminating.

Lesson 3:
Invest for the long-term and for retirement.
Especially if you can afford to and when stocks are relatively cheap.

All sources from OCBC


Recommended Read: Must I Top-Up Cash To Pay Back My CPF Accrued Interest If I Sell My House?

Hey You!

If you have a money related story about you or your relatives’ that you want to share, let us know in the comments below or email us at investmentstab@gmail.com.
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Dear Reader!
As we progress towards the next phase of our journey, we would like to find out what would make you like us even more.
We hope you could help us fill in a short survey of 8 questions (4 of them are MCQs) so that we can help tailor our content to you.
Survey

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Must I Top Up Cash To Pay Back My CPF Accrued Interest If I Sell My House?

“Do I need to top up cash to pay back my CPF accrued interest if my profits from selling my house are less than the accrued interest?”
The answer is, NO, as long as you sell your home at or above current market value.
Illustrations are below


Scenario 1: 
Accrued Interest ($20k) > Profits from Selling of House ($15k)

  • Profits will ALL be used to cover the accrued interest.
  • Any accrued interest not repaid by the profits will continue to accrue interest ($5k will continue to accumulate interest).
  • You DO NOT NEED to TOP UP CASH to cover the difference ($5k) unless you wish to.

Recommended Read: What Happens After I Join A CPF LIFE Plan?


Scenario 2: 
Accrued Interest ($20k) = Profits from Selling House ($20k)

  • Profits will ALL be used to cover the accrued interest.
  • No cash profit will be given to you.

Scenario 3: 
Accrued Interest ($20k) < Profits from Selling House ($30k)

  • Profits will be used to cover the accrued interest.
  • Excess profits will be given to you in cash ($10k).

Selling Property Below Current Market Valuation
If the property is sold below the current market valuation, the seller(s) will be required to repay the shortfall in cash.

Example:
Property current market valuation: $450k
Sellers sold the property at: $390k
Sellers’ CPF Principal + Accrued Interest: $400k

Because the property is sold at below current market valuation, the sellers are liable to repay the full $400k back into their CPF account.
The sellers will have to top up $10k in cash to cover the shortfall.
However, if the sellers have difficulty coming up with cash to cover the shortfall, they may write to CPF to request for a waiver – subject to approval.


Recommended Read: CPF Account Effective Interest Rates

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The Best Month To Invest In STI Is…

We are using the SPDR STI ETF (ES3.SI) as a benchmark for STI.


Data

Return = (closing price – opening price) / opening price

Return = (closing price – opening price + dividend paid) / opening price


Recommended Read: CPF Account Effective Interest Rates


Analysis: Best Month
The best month is……….. APRIL!
Over the past 13 cycles, STI experienced only 2 non-positive Aprils, with the worse being only -1%.

The second best month is……….. March!
Over the past 13 cycles, STI experienced 3 negative Marches.

Guess we just missed the best time to get in and invest in STI. 😉

In addition, with or without factoring dividend returns does not seem to affect the top 2 months of best return.
Though it did make Februaries’ return looks a lot better.


Analysis: Worse Month
Without factoring dividend return, the worse month is……….. AUGUST!
Followed by February and May.

Factoring in dividend return, the worse month is……….. May!
Followed by Jue and August.

Seems like the best time to avoid STI is August and May.
Guess the old saying ‘Sell in May and go away’ does apply to Singapore markets.


Disclaimer:
Do not make any investment decisions based upon materials found on this website.
Investment Stab is not a registered investment advisor, broker-dealer, and is not qualified to give financial advice.
Investors are reminded to do their own due diligence and invest according to their risk appetite.


Recommended Read: Why I Will Not Invest In Companies Like SMRT

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CPF Account Effective Interest Rates

Is it always good to have a lot of money in your CPF?
Maybe, maybe not!

As the amount of money in your CPF account increases, the amount of interest you get from CPF increases.
However, the effective interest rates you are getting from CPF also decreases.

What is Effective Interest Rates?
Effective Interest Rates (EIR) is the total interest you are paid on the total amount of money you have.
Eg: Total CPF Interest for the year divided by your total CPF balance (express in percentage).

For money in your Special, Medisave & Retirement Account (SMRA),
a) each account will earn a 4% interest on its money
b) first $60,000 will earn an extra 1% interest
c) those age 55 & above will earn an extra 1% interest on the first $30,000

Below is how the interest curve will look like


Before age 55

The first $60,000 in your CPF will earn an interest of 5% (excluding Ordinary Account)
The rest of the money in your CPF SMRA will earn 4% interest.
Because the first $60,000 is earning an extra 1%, your effective interest rate on your CPF will always be above 4%.
However, the effective rate will keep decreasing to close to 4% as your SMRA grows larger.


Recommended Read: What Happens After I Join A CPF LIFE Plan?


After Age 55

The first $30,000 in your CPF will earn an interest of 6% (excluding OA)
The next $30,000 in your CPF will earn an interest of 5% (excluding OA)
The rest of the money in your CPF SMRA will earn 4% interest.
Because the first $30,000 is earning an extra 2% while the next $30,000 is earning an extra 1%, your effective interest rate on your CPF will always be above 4%.
However, the effective rate will keep decreasing to close to 4% as your SMRA grows larger.


CPF Ordinary Account Bonus Interest
PS: It is actually more complex than this because there is an Ordinary Account section that also earns this extra 1%.
We are unable to however show the graphical relationship because adding in OA would make the whole picture harder to understand

So we included an image from CPF below to make it clearer 😉.

Source: CPF


Recommended Read: Why You Should Hate Whole Life Insurance

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Why I Will Not Invest In Companies Like SMRT

Source: Wikimedia

Why We Chose SMRT For Analysis?
It is delisted, so this can’t and won’t be a stock recommendation, but just an analysis of the business.
But, this is just an example.
Take note more of the characteristics listed instead of the company itself.

SMRT FY2019 Results
SMRT has been privatised by Temasek Holdings since 2016, but they still publish their earning results on their website.

Source: SMRT


Why Not To Invest?

1. High Capital Expenditure
Trains, buses, and cabs; they are expensive.
SMRT needs to buy these assets in order to run its business.
It then needs to invest consistently to maintain these assets at operational capacity.
High capital expenditure (CapEx) means less money (free cash flow) for investors.

Let’s compare 2 companies, 1 with low CapEx and 1 with high CapEx.
For every $100 each company retains as profit, it needs to set aside a portion of the money to replace its assets some years later, eg; replace a machine 10 years after it is bought.
Some companies like SMRT may need to set aside more profits each year to cover future CapEx.
Some companies like mobile app companies, can aside less profits each year to cover future CapEx.
After all, a server definitely cost less than a whole bus.

It is always better to invest in a company that needs to re-invest less of its profits in order to continue its normal operation.
Because what it does not need to re-invest back into its business, it can be paid out to shareholders as dividends or share buybacks.
If it can re-invest the profits into expanding its business, then that’s okay too.

Recommended Read: Why You Should Hate Whole Life Insurance

2. Public Good
You hear outcries when public when companies like SMRT makes record-high profits.
Because people think public transport is a need, and should not make extremely high profits.
It is precisely because of this “outcry” that companies like SMRT cannot charge higher prices (even though they are a duopoly with SBS) or be allowed to make extremely high profits.
You don’t see people complaining Apple should lower their prices just because they made record profit.
But you definitely hear people complaining SMRT should lower transport fares when they make record profits.

3. Limited Growth
In addition to ‘Public Good’ being a ‘growth limitation’, SMRT is also not a natural huge growth company.

Geographical Restrictions
Given a city-state of 5.5 million people, there’s a limit to how much higher growth can be.

An average person won’t take more train or bus rides more than necessary.

But an average person can definitely buy an app or two on the App Store or Play Store, and more when new apps come along.

Scalability
To ferry additional 100 passengers, SMRT probably needs to buy 1 more bus (linear scale).
But, for a mobile app to add another 100 users, it just needs to buy another server, which is a lot faster than buying a bus (exponential scale).


Conclusion
We are not saying to condemn all companies that possess the characteristics we listed above.
But it might be best to avoid these companies?
At least Warren Buffett (the world’s greatest investor) did.
He focused on investing companies with low CapEx in addition to a bunch of other criteria like consistent growing earnings, low debts, etc..
Maybe you should too?


Disclaimer:
Do not make any investment decisions based upon materials found on this website.
Investment Stab is not a registered investment advisor, broker-dealer, and is not qualified to give financial advice.
Investors are reminded to do their own due diligence and invest according to their risk appetite.


Recommended Read: What Happens After I Join A CPF LIFE Plan?

Hey You!

If you have a money related story about you or your relatives’ that you want to share, let us know in the comments below or email us at investmentstab@gmail.com.
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Dear Reader!
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