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Monday, June 23, 2014

How interest rate rise affects Reits

Investors may be hit by lower distribution income and a fall in asset values, say BENJAMIN TAN and SHAUN CHIA
The Business Times - June 23, 2014

How interest rate rise affects Reits
SINGAPORE real estate investment trusts (SReits) have long been identified as an instrument providing decent returns for investors. As with investments in stocks, bonds and properties, SReits are not spared from the effects of the expected rise in interest rates in the market.

The price of SReits have been volatile over the past year, correcting about 20 per cent from highs last seen in May 2013 after the US Federal Reserve announced a scale-back of stimulus which in turn heightened the likelihood of higher interest rates.

SReits then bottomed out in February and have gained about 10 per cent as investors piled back into high yielding assets, the rise coming because of optimism that rates may not rise as quickly as thought.

For investors, understanding the impact of rising interest rates on their investments and what Reit managers have been doing to hedge against rate hikes as part of their capital management is crucial to evaluating Reits as an investment in one's portfolio.

A rise in interest rates can affect Reits in three ways:
* Rising rates increase the cost of debt financing,
* Rising rates cause an increase in expected dividend yield, and
* Higher rates also cause a decrease in the market valuation of the underlying properties.

First, rising rates can lead to higher interest payments on floating rate debt. This ultimately affects what the investor gets in terms of distributions.

As Reits finance their assets by debt, fluctuations in their borrowing rates would have a significant impact on distributable income to investors. On a per-unit basis, this is known as distributions per unit (DPU).

Distributable income is arrived at after deducting interest payments on debt and administrative costs, as well as taxes, from net property income. Sometimes, distributable income also includes a return of capital.

Though interest rates are likely to stay near zero in the short term, it is foreseeable that they will rise over the longer term as the US economy recovers.

Assuming that all other factors remain constant, an increase in financing costs will lead to a drop in distributable income.

To illustrate the impact, let us assume a Reit that has an outstanding debt of $300 million payable at a current floating interest rate of 3 per cent per annum and a net property income of $80 million.

After deducting annual financing costs of $9 million (3 per cent of $300 million) from net property income, and assuming no tax effects or other management expenses, distributable income will be $71 million.

However, if rates rise by one per cent, financing costs will rise to $12 million (4 per cent of $300 million) and distributable income will correspondingly fall to $68 million.

This results in a 4.2 per cent drop in DPU for unitholders.

Second, Reit investors expect a higher distribution yield when risk-free interest rates or government bond yields rise.

The expected distribution yield of Reits is largely determined by the spread above the yields of government bonds that are currently traded.

The average spread between SReit and 10-year government bonds has widened from 3.7 per cent in May 2013 to the current 4.2 per cent.

Given that the yield on a 10-year government bond is about 2.4 per cent, this means the collective basket of SReits trades at an average yield of about 6.6 per cent, compensating an additional 4.2 per cent to investors of SReits.

Capital losses
SReits, after all, are higher investment risks compared to triple A-rated Singapore government bonds.
The widening spread signals the increased risk profile of SReits, as investors require higher returns in order to be adequately compensated for bearing additional risk.

For potential investors, higher spreads are good news. They can invest at higher than expected distribution yields and get a better return on what they invested.

But higher spreads are unfavourable for existing investors who have invested when bond yields and average spreads were low.

As expected distribution yield rises, price falls, assuming DPU remains constant.

For example, a Reit that has an annual DPU of $0.05 yearly and a current share price of $1 has a current yield of 5 per cent.

If its expected distribution yield increases to 6 per cent, new investors will only buy the Reit if it can provide a 6 per cent return.

At a $0.05 DPU, a 6 per cent return can only be provided when the price is $0.83.

This means the Reit's share price is expected to decrease from $1 to $0.83 to reflect the change in expectation of a higher required distribution yield.

Investors may thus suffer capital losses on their investments in the event of an actual interest rate hike caused by an increase in expected distribution yield.

Third, higher rates will decrease the market valuation of underlying Reit properties.

As future cashflows of the properties are subjected to a higher required rate of return due to the increased cost of financing, this will result in a lower valuation of the underlying property portfolio in Reits.

For example, a cashflow of $100 next year at a required return of 5 per cent will be worth $95.24 today and $94.34 at a required return of 6 per cent.

The lower market valuation of property assets can complicate a Reit's ability to obtain refinancing.
As Reits are financed by taking on leverage against the valuation of their properties, a decrease in market valuation will result in a rise in their debt to asset ratio.

This ratio measures the amount of leverage that Reits use to fund their acquisition of properties.
If a Reit was already borrowing close to its stipulated debt-asset limit of 35 per cent for non-rated Reits and 60 per cent for rated Reits, the decrease in valuation for their properties will push them above the borrowing limit.

Their ability to obtain debt financing to purchase new properties, for example, will be impaired as a result.

While the impact of an increase in interest rates may cast a pall over the performance of SReits in the long run, Reit managers have found ways to hedge the near-term impact of an expected rise in financing costs.

This is mainly done to ensure stability in the Reit's cashflows and to reduce its debt to asset ratio so that investors can continue to enjoy a high expected DPU in a well-managed Reit. Some methods include fixing interest rates for a large proportion of debt, increasing the length of debt maturity, and equity placements of new units to reduce debt.

First, some Reit managers have taken steps to hedge the interest rates on their debts through taking on fixed interest rate debt or using financial derivatives like interest rate collars and interest rate swaps to protect against an imminent rise in borrowing costs.

For instance, during Ascendas Reit's full- year results presentation in April, its manager said it targets to hedge 50 to 75 per cent of its interest rate exposure and has fixed the interest rate exposure of 65.3 per cent of its debt to mitigate the impact of rising interest rates.

Retail bonds
The overall weighted average cost of its borrowings at March 31, 2014, was 2.7 per cent, down from 3.3 per cent a year ago.

Ascendas Reit also provided investors with more information on how the rise in interest rates affects distributable income.

In a sensitivity analysis, the Reit manager estimated that for every 0.5 percentage point rise in interest rates, DPU will be reduced by 0.16 cents, or 1.1 per cent, for its financial year 2013/2014.

Second, rather than relying on short-term financing, Reits have taken long-term alternative funding options to meet their financing needs. They can negotiate for a longer-term loan. They can also issue medium-term notes or retail bonds to meet capital requirements and lock in the current low interest rates for an extended period of time.

Longer debt maturity can help ease the uncertainties related to refinancing debt given potentially volatile short-term interest rates.

For example, CapitaMall Trust recently issued $350 million worth of seven-year retail bonds at a relatively low interest rate of 3.08 per cent.

This helped increase the Reit's weighted average debt maturity from about 3.8 years to four years.
Finally, to help reduce the over-reliance on debt financing, some Reits have taken the route of raising capital through issuing new units instead of using debt as a primary financing source.

An example is the recent private placement of 218 million new units by Suntec Reit at the end of March. The new capital was raised primarily to repay existing debt.

Reits have certainly delivered significant returns for many long-term investors over the recent years.
While investors hunt for high-yielding instruments like Reits to grow their wealth, it would serve them well to keep in mind the likely change in the macro environment.

Investors should monitor the actions taken by the Reit managers to mitigate the risk resulting from rising interest rates in order to safeguard their investment.

Benjamin Tan Guo Hui is from Singapore Management University's School of Economics and Shaun Chia Qi Jing is from SMU's Lee Kong Chian School of Business. Both are final-year undergraduates and are student trainers in the Citi-SMU Financial Literacy Programme for Young Adults. Jointly launched by Citi Singapore and SMU in April 2012, the programme is Singapore's first structured financial literacy programme for young adults. It aims to equip those aged 17 to 30 with essential personal finance knowledge and skills to give them a firm foundation in managing their money, and a financial headstart early in their working lives

Friday, June 13, 2014

How to use your Netbook as a eBook Reader

photos credit to owner

For common EPUB, MOBI and PRC ebook formats, download and install the software fbreader from

This software is the only ebook reader that I know of that can rotate the text of the book by 90 degrees so that the netbook's screen now emulates the page of a book. However, it cannot handle HTM or PDF documents at the moment.

For PDF ebook format, download and install the Adobe Reader XI from It has an option for rotating the screen.

There you have it. By downloading and installing these two softwares, you can turn your netbook into a ebook reader.


Sunday, June 8, 2014

$1m gone in one year

The Straits Times
Published on Jun 08, 2014

$1m gone in one year: Widow of killed Changi Airport worker is now broke

Two years ago, after her husband was killed in a freak accident while working at Changi Airport's Budget Terminal, she received nearly $1 million in insurance payouts and donations from the public.
Today, that money is all gone.

Madam Pusparani Mohan, 34, is now looking for work in Singapore to support her four young children back in Johor Baru.

"I made a mistake. People knew I had so much money and they all came to me. I am so stupid. I never buy house and finished all the money meant for my children," Madam Pusparani told The Sunday Times from her home in Skudai.

She gave some of it away to relatives when she returned to her hometown in Kedah, then spent a portion of it on a holiday in Genting Highlands with her family. She also lost a chunk of it to a bad business investment - all in the span of a year.

"Now I don't have enough for my children's future."

On March 17, 2012, her husband, Mr Chandra Mogan Panjanathan, 34, was operating a floor-scrubbing machine outside the terminal when he was hit by a taxi hijacked by a Chinese national.

The driver is now serving his jail sentence of two years and one month for voluntarily causing hurt in committing robbery.

Donations poured in after the tragic accident was reported in the media. Many sympathised with Madam Pusparani, who was also working as a cleaning supervisor at the airport, for having to raise four children by herself.

The Malaysian couple's youngest daughter was barely three months old then. Today, their children are aged two, seven, 10 and 11.

Changi Airport Group (CAG) helped to collect donations after it received calls from members of the public wanting to help. Madam Pusparani said she is not clear how much was collected, but thinks it could be about $800,000. She also received over $100,000 in insurance payouts, she said.

"The CAG financial adviser advised me to divide the money between myself and my four children. After allocating $200,000 to each of my four children, I was left with $150,000," she said.

She took that $150,000 home to Johor Baru, quitting her job in Singapore, to take care of her children.

A CAG spokesman told The Sunday Times the CAG had arranged for a family counsellor for Madam Pusparani and had also engaged a financial services adviser to help her with the money she received, including setting up an annuity plan for her children.

"I was told not to touch my children's money as it was meant for their future," she said, adding that the financial adviser also suggested she could use the remaining money to set up a small business in Malaysia.

But the money proved too much for Madam Pusparani to manage on her own.

She said she first had to pay off debts of $50,000 - the couple, who made $2,000 a month jointly, had borrowed money from friends to make ends meet.

Then, she decided to invest the remaining $100,000 in her brother's transport business in Kuala Lumpur, thinking it would give her a stable income.

"But I was told the money was only enough to buy one lorry and we needed three lorries. So, I withdrew half of my children's money, which was about $400,000, to buy two more lorries."

Madam Pusparani said CAG was unaware of the withdrawal as the money was kept in an account under her name.

"I was thinking I could put the money back later," said Madam Pusparani, her voice shaking.

The business did make money in the first three months, said Madam Pusparani, who has a Sijil Pelajaran Malaysia, the equivalent of an O-level certificate, and who took up accounting as she wanted to manage the business herself.

But in the fourth month, the widow was told that the company was losing money. She said she fell out with her brother eventually and did not recover any of her investment.

Her younger brother, Mr Magan Mohan, 32, a technician, said she blamed the family for encouraging her to invest in the business. Mr Magan said his elder brother's business has since folded.

"Some people think my sister gambled away the money, but she never gambles or drinks. She just got into the wrong business."

In January last year, Madam Pusparani took out the rest of the money meant for her children.
She had no choice, she said.

"I never work, but I have to eat. I also need to take care of my parents. I was living with them and I had to pay for the monthly rental which was about RM1,000. My baby is still young and needs money for milk and pampers," said Madam Pusparani, agitatedly.

"My expenses came up to RM5,000 to RM6,000. Where do I find the money?"

That last $400,000 she withdrew lasted her five months.

By May last year, she was broke.

"I also don't know how I finished (using) the money," she said.

A friend got her a job as an accounts clerk in Johor Baru, earning RM2,000 (S$780) a month.

Today, her employer pays her rent for an old, double-storey terraced house, which her family of five live in. A huge portrait of the late Mr Chandra is the only thing adorning the empty living area. Her children's shoes are torn and worn out; so too are their schoolbags.

The family sleeps on two old mattresses in one of three rooms on the second storey. Clothes are piled up on the floor as they cannot afford a cupboard to keep them in.

"I cannot survive with RM2,000 a month. I am thinking of going to work in Singapore. But I feel ashamed," said Madam Pusparani tearfully.

"I don't know how to explain to the people who donated money to me and my children."

Saturday, June 7, 2014

Democracy of deeds and voices

Published on Jun 07, 2014

To reverse the tide of negativity, it's essential to give people a voice so they feel heard. This way, they can take action to improve society and feel they truly make a difference.

By David Chan, For The Straits Times

A NEGATIVE climate appears to loom large in Singapore, judging from some online and offline comments on the Government, public institutions, public service providers and foreigners.

Public expressions of negative emotions need not always be a bad thing. They reflect people's concerns, aspirations, goals and experiences. They can and have helped policymakers identify problems, revisit priorities and formulate solutions.

But the natural expression of negative emotions over an issue is not the same as having what is termed a "negativity mindset".

Such a mindset is developed and strengthened over time, by repeated, unresolved negative experiences and emotions. It can be fuelled further by misinformation and misinterpretation.

Once formed, negativity comes fast and strong. And yet, turn the tide we must, for the well-being of Singaporeans and the future of Singapore.

But first, we need to understand the nature of such a mindset.

A negativity mindset
A NEGATIVITY mindset is a predisposition to regard a person or group unfavourably based on who the person or group is, rather than on what they say or do.

The target can be a politician or a political party. It can also be an advocacy group or a segment of the population such as the online community of a website.

A negativity mindset can occur in anyone, regardless of educational background, socioeconomic status, political belief or moral position. Citizens, advocacy groups and policymakers - no one is immune to developing a negativity mindset.

A person with a negativity mindset focuses only on the negative attributes of the target. These might be true negatives, but they could also be neutral or positive points reinterpreted as negatives.
There is little or no reflection on the target's position, the issue or the context.

Is the interpretation supported by facts? Is the reasoning valid? Are the values and principles underlying the position desirable and acceptable?

These questions do not arise or are not taken seriously.

The fixation is on the identity of the target - who the person is and which group the person belongs to - and the alleged self-serving intentions of the target.

The fixation drives reasoning and reactions towards a predetermined negative conclusion - never mind the facts.

The negativity mindset is basically a self-reinforcing confirmatory bias. It is a tendency to seek out, interpret and remember information that confirms existing beliefs, positions or actions which highlight negative attributes of the target.

A negativity mindset can develop subtly but quickly when negative emotions or experiences accumulate. It can also spread quickly and influence other people's perceptions. This often occurs when people share common experiences or see themselves as being in similar situations.

Constructive discussion is difficult when one or both parties have a negativity mindset. Finding solutions to problems becomes unlikely.

Studies show that people with a negativity mindset are less likely to be happy, maintain quality social relationships or become effective leaders. They are also less likely to succeed in effecting positive change to the status quo.

In short, a negativity mindset hurts both the person who holds it and the target.

Other people could be affected as well. It produces new problems instead of generating solutions. This means it is often self-defeating.

How does one deal with a negativity mindset?
If it results from ignorance or misinformation, one can present relevant facts, clarify and reason.
When made promptly and honestly, such responses can reduce the likelihood of a negativity mindset developing.

But facts and rational arguments alone will not be enough. Positive attitudes need to be developed.

Fostering positivity
ONE way to do this is to involve people in volunteer and community work.

Giving time, money and other assistance not only benefits the recipient but also leads to positive outcomes for the giver. When people give, they derive a sense of personal meaning from helping others. They also appreciate their own circumstances more as they learn of the situations facing the less fortunate.

The interaction between the givers and the recipients also produces positive social relationships that will benefit the community in many ways.

Another way to foster positive attitudes is to involve people in identifying problems and generating solutions. This means giving people a real voice to express comments and ideas.

A real voice means there must be genuine listening and openness to the possibility of change on the part of the listeners.

But people should also be accountable for what they say, and put forward their views responsibly and reasonably.

An effective leader regards such views as important inputs when diagnosing problems and generating solutions. They are not regarded as mere noise or hurdles that must be cleared in decision-making.

If people do not have a voice or they conclude that their voices are not being heard, it produces angst and leads to a polarisation of attitudes. Negative attitudes will therefore develop.

But when active participants have a voice, and the issues are discussed openly, constructive action follows.

Voices and actions do not have to contradict. They can complement and reinforce one another, since experiences from helping others often motivate people to speak up, and having a real voice can lead them to take action to improve society.

An evolving democracy
MUCH has been said recently about Singapore being a "problem-solving democracy" and how it should be - in the words of the late S. Rajaratnam, one of the nation's pioneer leaders - a "democracy of deeds, and not words".

Deeds are actions to improve society. But voices are not merely words that speak softer than actions. Together, voices and actions solve problems. So to me, to be a problem-solving democracy, Singapore should be a "democracy of deeds and voices".

The combination of deeds and voices will lead to real improvements in society and people's quality of life - not just for the people who are helped but also for those who step forward to give voice and take action. This will help build goodwill and trust between all the parties involved.

As involvement in deeds and voices expands, democracy in Singapore will mature when people are able to make decisions in more areas of their lives and then implement those decisions.

In this way, people will take ownership of the decisions. They will feel responsible for seeing those decisions implemented, and will be more willing to help solve any problems that might arise.

People will move away from a "blame mentality" to a problem-solving mindset. They will appreciate that while things cannot be perfect, they can be improved. They will effect positive change.

Psychological capital
OVER time, people-centric involvement in deeds and voices will help foster a positivity mindset.
A sense of self-efficacy - confidence that they can change things to improve Singapore and the lives of Singaporeans - develops. So does a sense of optimism as people see that things can and will get better in future.

People will also have hope. Seeing that they have a real opportunity to achieve their aspirations, they will set challenging but achievable goals and strive to reach those goals.

Resilience will develop when people experience for themselves that it is possible to recover from adversity, cope with changes and adapt to new demands brought about by uncertain situations.
Self-efficacy, optimism, hope and resilience contribute to a positivity mindset that has a "can do" spirit and a "will do" attitude. To foster this positivity mindset among Singaporeans is to build psychological capital in Singapore.

Tackling negativity mindsets requires looking at objective factors such as infrastructure issues that might contribute to the formation of these mindsets. So it is important to review and improve policies and their execution, as well as improve public communication and engagement.

But getting policies right is only one dimension of tackling negativity. It is also important to get the psychology right by fostering a positivity mindset.

Positivity is not fluffy thinking or ignorant bliss. It is a core resource that enables Singaporeans and Singapore to adapt and change for the better.

It is a positive force multiplier that broadens and builds. Positivity opens hearts and minds, and it solves problems.

The writer is director of the Behavioural Sciences Institute, a Lee Kuan Yew Fellow and Professor of Psychology at the Singapore Management University.

Sunday, June 1, 2014

Which to go for - CPF Life Basic or Standard plan?

The Sunday Times
Goh Eng Yeow

Many of my friends in their 50s are facing a major concern - whether they have saved enough to last them through retirement.

For my parents' generation, the norm for a married couple was to raise a large family which would, in turn, look after them when they grow old. But times have changed, and many of us either have small families or stay single so we have to be financially secure to ensure our money does not run out.
But getting to our objective of financial wellness needs a careful strategy.

The cornerstone of any retirement planning should start with the savings we are accumulating in our Central Provident Fund (CPF) accounts. That at least ensures that we can still pay our monthly grocery and electricity bills when we are old and not working, if we have already paid for the roof over our heads.

Then how comfortable we want to make our retirement will depend on the other aspects of our financial planning such as squirrelling money away into a Supplementary Retirement Scheme (SRS) account or even buying a house for investment in the hope that property prices will keep going up.

Take a Singaporean who reaches 55. As a CPF member, he must set aside a Minimum Sum in his Retirement account from money in his CPF Ordinary and Special accounts. From next month, the Minimum Sum will be $155,000. Currently, about half of them meet this requirement.

Once he reaches 65, he will get a fixed monthly payout for about 20 years from the savings set aside in his CPF Retirement account. Between 55 and 65, the money in his Retirement account will enjoy an interest rate of up to 5 per cent per annum - which is far higher than what the banks are offering for fixed deposits.

But what happens if our Singaporean lives past 85 and the money runs out? It is not a hypothetical question as people are living longer. My parents are in their 80s and I have a 104-year-old aunt in Hong Kong.

Since last year, it has been compulsory for Singaporeans and permanent residents who turn 55 to be part of the CPF Lifelong Income for the Elderly (Life). Yet most of them are ignorant about its details. CPF Life offers two plans - Standard and Basic.

The Standard plan is essentially a traditional annuity scheme. People taking up this option will use the entire sum in their Retirement accounts to buy the annuity. They will get a monthly payout for the rest of their lives once they reach 65.

Wage-earners may like to opt for this plan since they are used to getting their salaries credited into their bank accounts every month. This ensures that when they retire and hit 65, the salaries they are used to getting will be partly replaced by the monthly CPF Life payout.

Calculations from the CPF Life Payout estimator show that a male Singaporean who turns 55 from next month and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the Standard plan. For a woman, the monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer.

Indeed, the norm for most of the 400,000 people who retire in Britain every year is to buy an annuity similar to CPF Life Standard.

One merit about CPF Life is that it is run by the Government. That removes the big worry of retirees as to whether their insurer is financially strong enough to withstand the next global financial crisis in order to keep making the monthly payouts.

But buying an annuity is a relatively new concept here and there are people who gripe about why they should have to buy one when it takes Herculean efforts to live past the age of 85.

One issue raised by a friend is the possibility of "mortality cross subsidy", whereby those unfortunate enough to die early effectively subsidise those who live longer than the average.

My reply is that the purpose of buying an annuity is to achieve some income certainty when we are old. Trusting our investments entirely to achieve that goal is too much like relying on the roll of the dice, given the regularity with which financial crises have been occurring.

Still, I am glad that CPF Life has another choice - the Basic plan - which gives a lower monthly payout and a higher bequest. Essentially, it works like a deferred annuity - an insurance product that is very popular in the United States.

Under this plan, a CPF member will have premiums deducted from his Retirement account to pay for the deferred annuity whose payouts will only start when he reaches 90. After he turns 65, what he gets is a monthly payout from his CPF Retirement account.

In essence, the CPF Life Basic works like an insurance plan for those with longevity concerns but who may have other sources of income. If he lives past 90, he will get a payout - and he does not have to worry about subsidising people who live longer than the average.

I believe that the Basic plan will appeal to the financially literate and to the self-employed who may not have much CPF savings.

That, in a nutshell, sums up CPF Life: The Stan-dard plan offers an annuity scheme similar to what retirees in Britain opt for. The Basic plan is commonly adopted by US retirees. Choose wisely.


Background story
Starting point
The cornerstone of any retirement planning should start with the savings we are accumulating in our CPF accounts. That at least ensures that we can still pay our monthly grocery and electricity bills when we are old and not working, if we have already paid for the roof over our heads.

Forget high living with CPF Life payouts

The Sunday Times
Jonathan Kwok

There was quite a reaction from my friends after the Central Provident Fund (CPF) recently raised its Minimum Sum yet again.

We may still be decades away from retirement, but there was still some irritation over the idea that part of our money will be parked in some account that we can access only after various conditions are met.

The latest change announced last month raised the Minimum Sum to $155,000 from July 1, up from $148,000. This is the amount that has to be left in our account at age 55, so it means we can withdraw less.

I was the voice of moderation, as I pointed out the rationale behind the change.
The Minimum Sum has had to go up often in recent years for two reasons, I explained: People are living longer and things are getting more expensive.

No escaping from these realities.
The Minimum Sum is used to buy an annuity, called the CPF Life, which provides monthly payouts from retirement until you die.

A higher Minimum Sum means CPF Life payouts can increase to keep pace with inflation.
In fact, my concern is almost opposite from that of some of my peers who worry about money being locked away in the CPF account.

I am less angsty about not being able to use my money whenever I want to. Rather, I tell people that we should be worrying that the payouts from CPF Life will be too low for us to maintain our current lifestyles after we retire.

This system is meant to meet the needs of a lower-middle income retiree. So you will need to save and invest separately if you aspire to live a better life, taking an occasional holiday and eating at restaurants, for example.

I did some back-of-the-envelope calculations to get a quick gauge of how much a couple will need for their retirement. It turns out, you and your partner may need about $500,000 to $800,000 in stocks to provide enough dividends to supplement CPF Life payouts.

Savings and Investment Plan
First and foremost, we need to find out how much an above-average income family spends.

I took data from the Statistics Department's most recent household expenditure survey, which was released in December 2009.

The top-earning 20 to 40 per cent of households spent $4,532 per month, the report said.
I'll assume that our hypothetical go-getting couple fall in this range and do not want their living standards to drop after retirement.

But these figures presumably capture households at a time when they are raising children, who would have grown up by the time the couple retire.

So I assumed expenditure could be cut by one-quarter to $3,399.

How much of this can be covered by CPF Life?
A Singaporean man who turns 55 this year and has the CPF Minimum Sum of $155,000 will get a monthly payout ranging between $1,200 and $1,350 if he opts for the standard plan, said the CPF Life Payout estimator.

A woman's monthly payout will roughly vary from $1,100 to $1,250 as she is expected to live longer. The payouts will start when they turn 65.

Taking the lower sums, a husband-and-wife team will get only $2,300 per month from CPF Life, leaving them with a $1,099 deficit from their $3,399 expenditure. That works out to a shortfall of $13,188 per year.

If our hypothetical couple fail to make up the shortfall, they will need to cancel their hotel high teas and forget about travelling further than Johor Baru.

But surely our couple deserve better after slogging for decades in the rat race?

Fear not, a solution is present if they start saving and investing early in life.

I centred my calculations on using shares to meet retirement needs, though you can probably achieve the goal via an investment property. Assuming a dividend yield of 4 per cent, a $329,700 portfolio of stocks will be able to generate dividends of $13,188 per year. This amount will be able to meet our couple's shortfall.

Inflation with no drawdown
This simple calculation discounts inflation, however. As time goes by, things will surely get more expensive and you will need more money to maintain your lifestyle.

A 3 per cent inflation rate over 30 years will lead to annual combined expenditures eventually ballooning to $99,003 for our couple. If CPF Life payouts go up in line with inflation, this would eventually come to $66,992 per year for our couple.

But the shortfall for the couple's desired lifestyle would also have widened, and they would need a combined portfolio of a whopping $800,269 to generate enough dividends for that.

Inflation with drawdown
The previous scenario assumed that the couple would use only dividends from their shares and leave the entire capital to their beneficiaries after they die.

But one way to reduce the required amount is if they are willing to draw down on their stock capital after retirement. So their yearly payouts will consist of both dividends and a drawdown on capital.
After 25 years of retirement, they will have zero shares left but they would have needed a smaller amount to start their retirement with - $520,082.

The lesson from all these calculations is that it makes good financial sense to start preparing for retirement early. Without top-ups from your own investments, CPF Life will be able to provide only a basic lifestyle.