Source: Forever Financial Freedom
Most people aspire to achieve financial stability to enjoy their retirement with peace of mind. My dream is no different from others. Since I entered the workforce, I have been working towards achieving financial independence before the age of 35 and having an early retirement. The journey which I took has pushed me out of my comfort zones at times, and it’s tough.
Thankfully, my wife has been supportive of my decisions and goal.
When we had our first child in 2014, my wife had to quit her job to care for our son and deal with the household chores. This decision had a direct impact on our savings and lifestyle. It was not easy to manage the additional expenses with a single income.
We began to tweak our strategies. Unnecessary spending was reduced. We also started to save aggressively and managed to save about 40% of the income over time.
But savings alone will not be enough to achieve our goal.
The various investments I had made were relooked at to find ways to grow our income. For it to be sustainable, we need our income to grow at a rate of 8% per annum. I looked at the various options that were available and performed allocations based on prevailing market conditions.
These are some of the investment tools which I currently have on top of my current equity portfolio:
SPDR Straits Times Index ETF
The SPDR STI ETF was introduced in 2002 and is managed by State Street Global Advisors, while the Nikko AM STI ETF was introduced later in 2009 and is managed by Nikko Asset Management.
The main benefit of investing in the STI ETF is that the investor gets to gain exposure to the 30 blue chip constituents of the benchmark index through a single purchase at a very low cost.
Looking at the table below, STI generated annualised total returns of 9.2% from 2009 to the end of 2018. This is a very respectable return compared to the rest of its peers across the region.
However, the market cycle is unpredictable and may not be suitable for those with low-risk appetite.
Take 2018 for instance — the total annual return for STI was negative 6.6% while other similar investment funds fared worse.
Singapore Savings Bonds (SSB)
The Singapore Savings Bonds (SSB) is a special type of Singapore Government Securities that is suitable for individuals.
There are plenty of benefits in having the SSB in your portfolio.
Firstly, investing in the Savings Bonds is safe as they are fully backed by the Singapore Government, which has received the strongest “AAA” credit rating from International credit rating agencies.
Secondly, the SSB is flexible such that you can choose to exit in any given month with no penalties. This is especially useful as a tool to park our emergency funds, as we do not know when we might need to use them.
Thirdly, the SSB offers a step-up interest for longer term investment, up to a maximum of 10 years for each tranche of issuance. This means that you will receive slightly less interest at the start, but the interest offers a step-up over time that will increase your effective return.
This is also useful for someone who wants to strategise by constructing their portfolio using the bond ladder methodology with different maturities period.
One of the main disadvantages of SSB, in my opinion, is the relatively low returns it offers to investors with higher risk appetite. Since the likelihood of a payment default is virtually close to none, it offers a risk-free rate that closely matches the government bond securities, which might not be suitable to investors who are seeking higher returns to compound their wealth.
The minimum investment amount is S$500 and the maximum amount of SSB a person can hold is S$200,000.
CPF Retirement Sum Topping-Up Scheme (RSTU)
The CPF Retirement Sum Topping-Up Scheme (RSTU) allows CPF members to build up their retirement savings by topping up their own or loved ones’ Special Accounts (SA) if they are below age 55 or Retirement Accounts (RA) if they are aged 55 and above. They can do this via cash or CPF transfers.
There are 2 main advantages that I can relate to by doing this.
First, CPF savings in the SA and RA currently earn base interest rates of 4% per year. The first S$60,000 of a member’s combined CPF balances, of which up to S$20,000 comes from OA, will earn an extra 1% interest. An additional extra interest of 1% is paid on the first S$30,000 of combined CPF balances for all members aged 55 and above.
The second advantage is that you can enjoy tax relief up S$7,000 per calendar year by topping up your SA or RA with cash. If you are also making cash top-ups for your spouse, parents, parents-in-law, grandparents, grandparents-in-law and siblings, you can enjoy additional tax relief of up to S$7,000 per calendar year.
I did exactly that in Dec 2018, making a cash top-up of S$7,000 into my SA. A quick back-of-the-envelope calculation showed that I will be able to “save” about S$7,000 x 11.5% (my tax rate) = $805 right away, in addition to the 4% per annum interest that I will be earning subsequently.
For terms and conditions on tax relief, please refer to the section on the benefits of topping up here.
You can find out how to make a CPF transfer or cash top-up in this write-up here.
Voluntary Contribution (VC) To MediSave Account (MA) For Your Healthcare Needs
Apart from retirement and housing, our CPF savings also helps us meet our healthcare needs.
We may become more vulnerable to illness and other complications as we age, hence it is important to ensure we have adequate savings in our MA.
MediSave provides a safety net for our healthcare needs. We can use our MA savings to pay for our personal or immediate family’s hospitalisation, premiums of approved medical insurance schemes like MediShield Life or Integrated Shield Plan (IP), and a variety of other treatments, including day surgery and certain outpatient treatments.
My wife and I have chosen to make voluntary contributions to our MA to set aside savings for our family’s healthcare expenses when the need arises. We also enjoy tax relief* for voluntary contributions to our MA. (Any voluntary contributions above the CPF Annual Limit will be refunded to members without interest and will not be eligible for tax relief. Personal income tax relief cap of $80,000 applies.)
Having said that, there is a cap on how much we are able to contribute to our MA. Voluntary contribution to MA is subject to the CPF Annual Limit or Basic Healthcare Sum (BHS), whichever is lower. To find out the allowable contributions to your MA, you can use the e-cashier on the CPF website.
CPF Annual Limit
The CPF Annual Limit is the maximum amount of mandatory and voluntary contributions to all three CPF Accounts that a CPF member can receive in a calendar year. The current CPF Annual Limit is $37,740.
The Basic Healthcare Sum (BHS)
The Basic Healthcare Sum (BHS) is the estimated savings required for basic subsidised healthcare needs in old age. The BHS is adjusted yearly for members who are below 65, to keep pace with expected growth in MediSave use by the elderly. Once members reach the age of 65, their BHS will be fixed for the rest of their lives.
For 2019, the BHS has increased from $54,500 in the previous year to $57,200 this year. This means that if you have already hit the cap for your MA in the previous year, and your total contributions have not reached the CPF Annual Limit, you can voluntarily top up $2,700 (the difference between $57,000 and $54,500).
MA savings above your BHS (from subsequent working contributions or interest earned on MA savings) will be transferred to your SA or RA to increase your retirement savings. If you are below age 55 and have already saved the current Full Retirement Sum (FRS) in your SA, the interest earned on your MA top up monies will be transferred to your OA. If you are aged 55 and above and have your Basic Retirement Sum (BRS) or FRS in your RA, the interest earned on the amount you topped up to your MA will be transferred to your OA.
Currently, I have allocated a higher proportion of my savings to my equity portfolio because I think the valuation of the market is still attractive.
But I do realise that this trend will not go on indefinitely.
Equities as an asset have their own risks and are volatile in nature. Their value could drop drastically when the global economies are weak.
Because of that, I have chosen to allocate most of my emergency funds in the SSB, which will give me an effective interest rate of 1.9% per annum. Furthermore, it allows me greater flexibility in terms of liquidity should I need the money urgently.
For a longer horizon to build up my retirement fund, I have also chosen to top up my SA to enjoy attractive interest. At the same time, I get to benefit from tax relief.
We believe the steps we have taken so far are bearing fruits and that we are on the right track to achieve our financial independence.
All views expressed in this article are the independent opinions of the writer, and do not represent the views of the CPF Board.