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Sunday, March 3, 2019

What you need to know about CPF retirement sums, payouts

The CPF Maxwell Service Centre. Since January, the CPF Board has started offering the CPF Retirement Planning Service to all members who reach the payout eligibility age of 65 years. These face-to-face meetings are held at any of the five CPF service

Lorna Tan
Invest Editor/Senior Correspondent
MAR 3, 2019

When can payouts start? How long will they last? Here are the answers to these and more

The nest egg that members set aside in their Central Provident Fund (CPF) Retirement Account will be used to provide them with monthly payouts once they reach their payout eligibility age (PEA). This is 65 years old for those born from 1954 onwards.

Recently, some CPF members were confused about when they can start receiving their monthly payouts.

Manpower Minister Josephine Teo cleared the air in Parliament a fortnight ago when she said there has been no change in the policy: CPF members can continue to choose to start monthly payouts at their PEA, or defer them to any time between PEA and 70.

The Sunday Times highlights some things you need to know about CPF withdrawals, monthly payouts and the Retirement Sum Scheme.

Q WHEN CAN I WITHDRAW MY CPF?
A You can withdraw any savings above your Full Retirement Sum (FRS) from the age of 55. If you own a property, you can also choose to set aside the lower Basic Retirement Sum (BRS) and withdraw above that.

The amount that can be withdrawn excludes top-ups made under the Retirement Sum Topping-Up Scheme, interest earned and government grants.

Even if you don't have enough to set aside for the FRS, or the BRS with sufficient property charge or pledge in your Retirement Account (RA), you can still withdraw up to $5,000 from your Ordinary and Special accounts.

Q WHEN CAN I START RECEIVING CPF MONTHLY PAYOUTS?
A You can start receiving your payouts from age 65. This applies to members born in 1954 and after. Six months before your PEA, you will get a letter from the CPF Board inviting you to start your payouts.

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CASE SCENARIO
TOPPING UP RETIREMENT ACCOUNT IN RETIREMENT SUM SCHEME
This scenario illustrates how a top-up can increase the payout amount and extend the payout duration.

In this case, the member asks to increase his payments with a shorter payout duration.

Mr Daniel Lee (not his real name) turned 55 in July 2009 with $117,000 in his Retirement Account. With this amount, he can expect to receive about $1,000 a month for about 23 years when he reaches his payout eligibility age.

Last month, he made a top-up of $59,000 to meet the current Full Retirement Sum of $176,000. As a result, his monthly payouts and duration will be adjusted to around $1,200 for about 30 years.

However, Mr Lee wants to increase his monthly payout with a shorter duration. As a result, his monthly payouts and duration will be adjusted to about $1,400 for about 23 years.

Lorna Tan

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You can start your payouts by completing a hard-copy application form that comes with the letter; or by applying online; or by visiting a CPF service centre. If you do not start your payouts, the CPF Board will remind you through your yearly statement of account.

Q WHAT ABOUT MEMBERS WHO JOINED CPF LIFE BEFORE JULY 2015?
A These members' monthly payouts will start automatically when they reach their PEA, unless they instruct the CPF Board to defer payouts. This is because the option to defer CPF Life payouts was not available before July 2015.

Q WHAT IF I DON'T NEED MY PAYOUTS AT AGE 65?
A If you don't need your payouts at age 65, you can choose to start them any time between 65 and 70. The latest you can start your payouts is at age 70. The benefit of deferring your payouts is that you will earn more interest on your CPF savings.

For CPF Life members, every year of deferral results in up to 7 per cent higher payouts. So if you defer for five years, that's up to 35 per cent more.

Q HOW LONG WILL MY CPF PAYOUTS LAST?
A If you are on the Retirement Sum Scheme (RSS), you will receive monthly payouts from your RA until your RA savings are depleted.

If you are on CPF Life, you will receive monthly payouts for as long as you live.

Q HOW DO I KNOW IF I'M ON THE RSS OR CPF LIFE?
A If you were born before Jan 1, 1958, you will be on the RSS unless you have opted to join CPF Life.

If you were born between Jan 1, 1958 and April 30, 1961 and have at least $40,000 in your RA when you reach 55 years old; or at least $60,000 in your RA six months before you reach your PEA, you will be on CPF Life.

If you were born from May 1, 1961 onwards, and have at least $60,000 in your RA six months before you reach your payout eligibility age, you will be on CPF Life.

If you are on the RSS and would like to receive lifelong monthly payouts, you can join CPF Life any time before age 80.

RETIREMENT SUM SCHEME
The RSS - previously known as the Minimum Sum Scheme - provides members with a monthly payout until their RA balance is depleted. In the past, the payout duration was capped at 20 years. There have been changes to the RSS.

The CPF Board says: "Under RSS, the RSS monthly payouts can last up to 20 years, taking into account the base interest rate on RA savings, which is now 4 per cent per annum.

"To benefit members aged 55 and above, extra interest (EI) of 1 per cent per annum is paid on the first $60,000 and additional extra interest of 1 per cent per annum on the first $30,000 of your savings.

"The extra interest provided by the Government is used to extend the RSS payout beyond 20 years, with no reduction in payout amount."

The potential extension of the RSS payout duration beyond 20 years occurred when the EI was introduced in 2008. The duration is capped so that the payouts do not extend beyond 95 years old.

This age cap was introduced in July 1, 2017 to prevent the payout duration from being overly stretched while, at the same time, reducing the risk of RSS members outliving their RA savings.

Do note that while the payout duration is up to age 95, the actual duration for each RSS member will vary as it depends on the amount of RA savings he has.

For instance, for those who are able to top up their RA to the prevailing Full Retirement Sum, the payout duration may be extended beyond 20 years, up to an additional 10 years, capped at age 95. The minimum payout is $250 a month.

This extension of payouts is also in line with the increasing life expectancy of CPF members.

The CPF Board sends letters to members who will reach their PEA to inform them of their payout amount and payout duration. Members can start their monthly payouts any time after their PEA.

In the past, RSS members who did not activate their payouts could end up leaving their savings in their CPF accounts until their death.

Last year, the CPF Board decided to introduce a latest payout start age of 70. So even if a member does not instruct the board to start his monthly payouts, this will automatically commence at age 70.

Hence, for members turning age 70 from 2018 onwards, the board will automatically start their payouts at age 70 if they have deferred receiving their RSS payouts.

The automatic payout start age of 70 is similar to that for CPF Life and it simplifies the activation process for RSS members to receive payouts for retirement. With this automatic commencement, elderly members can enjoy a retirement income from their CPF savings with greater ease.

Do note that there is still a risk of CPF members running out of retirement income.

So for members who desire retirement payouts for as long as they live, they can consider opting into CPF Life before they turn 80.

REACHING OUT TO CPF MEMBERS
There are various touchpoints for the CPF Board to educate members about their options.

CPF RETIREMENT PLANNING SERVICE (CRPS)
Since January, the CPF Board has started offering the CRPS to all members who reach the PEA of 65 years. These face-to-face meetings are held at any of the five CPF service centres across Singapore. A CPF officer can provide personalised guidance to the member at the meeting.

The CRPS was first offered to members who were 12 months away from turning 55, about four years ago. There is also an online CRPS that allows members from age 54, to before they turn 55, to view their personalised info.

Madam Angela Lai, 64, attended a CRPS session recently to learn more about her CPF options upon reaching 65. As she was born before 1958, she is on the RSS unless she opts for CPF Life.

During the session, the CPF officer provided information on when she can start her monthly payouts and the differences between the three CPF Life plans - Basic, Standard and Escalating.

Madam Lai says she is likely to remain on the RSS. She has not decided if she wants to start her payouts at 65 or defer them for a couple of years so as to earn more interest in her RA.

She was informed by the CPF officer that under the RSS, if she starts her payouts at 65, her payout duration is likely to stretch till age 91. Should she start receiving her payouts at 70, the duration can stretch till age 95.

WORKING WITH AGENCIES
In addition, the Government will work with other agencies, such as the social service offices (SSOs), to reach out to CPF members, Mrs Teo said in Parliament recently.

"For example, where appropriate, staff at the SSOs will ask members who approach the SSOs for financial help whether they have activated their CPF payouts, and assist them to do so if they wish. We also will collaborate with the Silver Generation Office to communicate this issue to elderly members," she said.

CPF SERVICE CENTRES
CPF members are encouraged to make an e-appointment online to visit any of the five CPF service centres islandwide, or call its hotline on 1800-227-1188 to speak to an officer who will be able to help them.

Monday, February 18, 2019

Honey, let's talk about money

Money issues top the list of marriage grouses, so it makes sense for the conversation to start even before you get hitched.

Lorna Tan
Invest Editor/Senior Correspondent
The Sunday Times
FEB 17, 2019

It's an issue couples need to discuss, given differences in investment behaviour

Finance is a difficult subject for many couples to broach and it takes time before they feel comfortable discussing it.

Yet money issues top the list of marriage grouses, so it makes sense for the conversation to start even before you get hitched.

Any marriage preparation programme worth its salt would include a session on financial management where couples share their spending and saving habits, concerns and aspirations.

Studies show there are gender differences in investing behaviour. State Street research indicated that female investors tend to be more long-term and goal-oriented, less inclined to risk, not so overconfident and not as trusting. Women trade less frequently than men, for example, with 65 per cent of them trading at least quarterly versus 75 per cent of men.

Fewer trades mean lower costs, which may lead to the outperformance found in some studies.

Volatility is more bearable for men, with 58 per cent of them moving to a more conservative strategy after a loss of greater than 20 per cent, compared with 70 per cent of women, notes the State Street research.

Ms Evy Wee, head of financial planning and personal investing at DBS Bank, says that in the bank's experience, investment activity among women tends to be lower than that among men.

Visits made to the investments page of DBS' financial adviser, Your Financial GPS, also tend to be from men.

"This might not necessarily be driven by a lack of interest but time - an OECD (Organisation for Economic Cooperation and Development) global study has shown that women work nearly an hour longer than men every day when unpaid tasks are factored in," Ms Wee notes.

"The upside is that many recent studies have shown that when women do invest, they do tend to make more informed and calculated decisions, with male investors more inclined towards competitiveness."

Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), notes that less than a third of women in Singapore rate themselves as well informed on financial matters compared with almost half of the men surveyed in a 2018 HSBC study.

When it comes to household financial responsibility, women respondents (who have a partner) felt that they take a dominant role in day-to-day purchases like groceries while men take on greater responsibilities for investment decisions, including managing credit cards and paying household bills.

TIPS FOR WOMEN
BUDGET, INVEST AND JUST DO IT
Time is money, and procrastination is a thief of time. This takes on greater significance when it comes to the compounding power of money over time.

Ms Evy Wee, head of financial planning and personal investing at DBS Bank, suggests starting by budgeting, which is the key enabler for everything else. Once you know where your money goes, you can make adjustments to carve out a designated budget for saving and investing consistently.

"If in-depth research to 'spot the star product' is too arduous, tap options like a regular savings plan or invest in an exchange-traded fund that tracks one or more market indices to leverage the benefits of dollar-cost averaging and longer-term market cycles," she advises.

MASTER THE BASICS
Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), says many people, including women, lack the knowledge and confidence to invest. The best place to start is to master the basics.

"Differentiate between your needs and wants, identify your goals and prioritise them, and understand your risk appetite."

TAKE OWNERSHIP AND CONTROL
Mr Sam Phoen, co-founder of investment-management firm Wateram Capital, advises women to have their own investment plans and coordinate with their spouses on securing the family's financial future.

"Draw up investment and cash flow plans to ensure your current living expenses and retirement needs are adequately covered and robust enough to stand the test of time."

REFRAME HOW YOU THINK ABOUT INVESTMENT
It is easy to put off investing, so reframing your perception is important. Think of it as a first step to achieving your dreams, passions and new adventures. Make sure you make the most of it by planning ahead, suggests Mr Khanna.

INCREMENTAL RISKS, INCREMENTAL RETURNS
No pain, no gain, so the only way to make higher returns is to take on more risks. But many women would rather avoid the pain of negative drawdowns if they can, notes Mr Phoen.

"Anyone who promises higher returns without the need to take on more risks is not telling you the whole truth," he adds. "Ask, and understand the worst-case scenario. If you think you can stomach the losses in the worst case and the corresponding higher returns are fair, then consider investing.

"If you are a conservative investor, consider taking incremental risks in exchange for incremental returns. Most times, mildly risky investments are needed to ensure your returns are higher than your time deposit rate and inflation."

FROM MANAGING TO PLANNING
Managing your finances is not enough. You need to plan where you can save money and by how much, says Mr Khanna. "Use online tools such as saving calculators and budgeting apps to help identify the changes you need to make which will reduce your expenditure and redirect these funds towards savings for your future."

ASK THE EXPERTS
Mr Khanna's advice is to seek professional advice, especially if you are a novice in investing and financial planning.

"Having an independent and objective adviser to guide you will help you adopt the best approach. Don't be afraid to ask questions and get clarity before making decisions. Do approach a few professionals to obtain several opinions before making a decision," he adds.

TIPS FOR MEN
INVESTING IS NOT A COMPETITION
Ms Evy Wee, head of financial planning and personal investing at DBS Bank, reminds men that investing is not a competition with yourself, your peers or the market. So when you are investing, it is important to construct portfolios that are positioned for the long term, with a clear risk-return objective in mind.

When crises unfold, and they inevitably will, such a portfolio will be well poised to withstand big swings in the market. More importantly, it will help you stay focused and avoid any over-reactions.

Adopt a "core" and "satellite" approach to portfolio building where the core portfolio provides stability.

AVOID FOLLOWING A TREND
Don't buy a security or asset just because the price has rallied in the past, advises Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore). Instead, evaluate the suitability of the security or asset based on your own circumstances, especially its risk and reward trade-off.

AVOID OVER-CONCENTRATION
It is prudent to diversify your assets and ensure you have a good mix (and not necessarily an equal mix) of assets.

"Do not over-concentrate yourself in single securities or an asset class or invest in only those you are familiar with. A portfolio approach also helps to overcome loss aversion where an investor may be reluctant to invest in asset classes based on past experience. It is good to seek professional guidance for this process," says Mr Khanna.

EQUATING TRADING TO PROFIT
Mr Sam Phoen, co-founder of investment-management firm Wateram Capital, notes that to a certain extent, profit from trading appears macho to men.

"Many also love to share their success stories in trading, while keeping mum about their losses," he adds.

"Active trading may not mean higher profit, it depends on many things, no less your ability to beat the market. Temper your overconfidence, know that you might be wrong, don't trade for the thrill, trade only when you have strong convictions."

LONG TERM IS GOOD
The biggest advantage that long-term investing brings is compounding, says Mr Phoen.

"Instead of turning over your entire investment portfolio frequently to lock in profit, many times it might be more profitable to invest for the long term and let compounding work on making your money grow for you," he adds.

By investing for the long term, you avoid tracking the market daily and reacting to panic buying or selling. Overtrading is expensive and should be avoided, notes Mr Khanna.

REMEMBER TO REVIEW
Regular review of your investment portfolio ensures two things.

First, it stops you from the urge to check your portfolio every now and then and bearing the brunt of overtrading.

And it allows you to review your investment objectives and the suitability of the underlying investments, including assumptions that were made based on certain opinions or conditions that may not have materialised over time, advises Mr Khanna.

TIPS FOR BOTH MEN AND WOMEN
UNDERSTAND THE PRODUCT
Almost all investments have risks, and most investments are not principal-protected. Avoid products you don't understand and which promise you high returns. Risks aren't bad, but taking risks you don't understand is to be avoided at all costs.

"Read widely, listen to market news regularly, like Money FM 89.3, ask your bankers to explain more, and verify with friends who are well versed in investments before you take the plunge," says Mr Sam Phoen, co-founder of investment-management firm Wateram Capital.

USE FACTUAL INFORMATION
Many money-matter decisions are based on our behavioural biases. Most investors tend to make investment decisions derived from individual feelings, perceptions, past experiences, information from peers, or just out of greed or fear.

One way to counter this, says Mr Deepak Khanna, head of wealth development at HSBC Bank (Singapore), is to try to distinguish opinions from facts.

"Take into consideration both positive and negative facts for securities or assets that you hold or plan to invest in. If you are basing your decision on an opinion - for example, a research report which contains investment views - make it a point to understand the assumptions behind the views."

If the assumption doesn't materialise - say an asset class view is based on a gross domestic product forecast that turned out to be off the mark - make it a point to review your portfolio and take timely action, he adds.

INVEST RIGHT FOR YOUR PERSONALITY
There is no one-size-fits-all investment portfolio. The key is to know what your investment personality is like and construct a portfolio that fits your personality, says Mr Phoen, who wrote the book Personality-Driven Portfolio: Invest Right For Your Style.

For example, if you are a long-term investor, please ignore "short-term hot tips" that you may receive, because they are just not suitable for your style and most times you won't be quick enough to get out with a profit. Don't adapt yourself to your investments; adapt your investments to suit you, he says.

DIVERSIFY YOUR INVESTMENTS AND REVIEW REGULARLY
Diversify your investments by allocating into a balanced portfolio of cash (including an emergency fund) and investments that will allow you to achieve your goals (with a mix of equities and bonds), with a view on currencies to invest in.

"Since career income will be generated over only a limited number of years while expenses are a lifelong affair, it is important to save regularly and stay invested despite the markets' ups and downs," says Mr Khanna. "Review your portfolio at least once a year and rebalance it according to changes to your investment goals and risk tolerance."

UNDERSTAND PROTECTION NEEDS
It is important to review the level of protection cover you need in order to be financially independent, especially on the death or disability of key income-earning family members. Protection coverage should also be sufficient to cover medical costs and long-term medical care, adds Mr Khanna.

Monday, February 4, 2019

Current decline near end, going by past downturns

Teh Hooi Ling
3 Feb 2019

Average duration, market bottom valuation of previous slumps close to those of ongoing dip

Cash outperformed equities last year. It is not uncommon for investors to start doubting the wisdom of staying invested in equities after a prolonged market downturn.

As of December last year, the downturn we faced had lasted for 11 months. How long do stock market retreats generally last in Asia?

Let's look at the MSCI Asia Pacific ex-Japan Index starting from 1987 to get some clues. Over the last 30 years or so, there were seven major market declines, including the one last year. From this perspective, negative market returns are not so uncommon - one every 51 months, or one every 4.25 years.

This is in fact how markets work. When the going is good, investors bid up prices. A lot of news will be seen as positive for the markets. Prices will eventually rise to a level that is not backed by fundamentals.

It is usually at this time that unexpected news or development will trigger a fall. Investors with profits will start to take their money off the table, exacerbating the decline. More news will emerge to compound the bearish sentiments.

Just as prices overshoot on the way up, they too tend to overshoot on the way down. However, at some point, the market will realise that stock prices have fallen to too low a level vis-a-vis prices in the actual physical marketplace and the stock market will start to recover. And the cycle goes on.

The table shows the downturns - their severity, duration, valuation at the time of decline, when they hit bottom, and the subsequent recovery. The table is arranged based on the severity of the market drawdown.

There are a few points to note from the table.

One, the higher the market valuations, the more severe the decline.

The three most stomach-churning declines over the last 30 years happened in October 2007 (global financial crisis), July 1997 (Asian financial crisis) and December 1999 (bursting of dot.com bubble).

In the global financial crisis, the market plunged by 62 per cent. For the Asian crisis, it fell by 57 per cent, and for the dot.com bubble burst, by 46 per cent. Of the three, market valuation was the highest in October 2007, just before signs of cracks started to emerge in the sub-prime housing markets in the United States.

At that time, the stock prices of the major index stocks in Asia were trading at 3.5 times the value of their net tangible assets, and three times the value of all their assets, including intangibles like goodwill or brand names.

Just as prices overshoot on the way up, they too tend to overshoot on the way down. However, at some point, the market will realise that stock prices have fallen to too low a level vis-a-vis prices in the actual physical marketplace and the stock market will start to recover. And the cycle goes on.

Say, a company owns a building valued at $100 million, and it has cash, inventory and other assets worth another $50 million. However, it has bank borrowings and other liabilities totalling $50 million. Thus its net assets amount to $100 million.

In October 2007, such a company was valued at $350 million, that is, 3.5 times its net tangible assets or book value. Assume again that this company has $17 million of goodwill, which is an intangible asset, on its books.

This company's total net book value would be $117 million. Since it is valued at $350 million on the stock market, its shares are trading at three times its book value ($350 million/$117 million).

Various studies have shown that stock price compared to a company's book value is a good indicator of value. Stocks that are trading at prices significantly higher than the book value are deemed expensive, and generally yield low returns for investors, and vice versa.

The price-to-book value or PB multiples for the other two market peaks in July 1997 and in December 1999 were 2 times and 2.1 times respectively. In other words, investors were paying $2 for companies with assets valued at $1.

Meanwhile, for the remaining four market peaks - in April 2015, April 2011, May 2002 and January 2018 - the PB multiples then were slightly lower, ranging from 1.6 to 1.8 times. Because they fell from a lower peak, the declines were also less drastic - at an average of about 22 per cent.

The second point to note from the table is that in each of the previous six downturns, the bottom was established when the PB hit one to 1.5 times, with the average being 1.3 times.

The third point is, downturns can last from as short as five months, to as long as 21 months, from December 1999 to September 2001. The long bear market in 1999 till 2001 was slightly unusual in that it endured two major jolts - the bursting of the dot.com bubble and the Sept 11 terrorist attacks in the US. The average duration of the previous six market declines, excluding the one last year, is 13 months.

The fourth point to note is that the higher the market valuation when the crash happened, the longer it takes for the market to revisit the last peak.

For the global and Asian financial crises and the dot.com bubble burst, the market took an average of 72 months or six years to recoup all the losses. For the other three declines from less lofty heights, the recovery time was about 20 months, or just over 11/2 years.

Fifth, market downturns or crash to the bottom on average took less than a third the time the market took to recover to the pre-crash level.

In other words, it took an average 3.5 times as long for the market to regain its previous peak than the time it took to plunge from peak to trough. This again attests to the saying that markets take the lift down, but take the escalator up.

Finally, the last but not the least point to note is: Returns after a market crash, from levels when PB is between 1 and 1.5 times, are sumptuous. The average is 79 per cent. But if we take the downturns that are more similar to what we are going through now, the average returns from the bottom is 28 per cent over the next 11 months.

Can the study of the past downturns suggest to us a road map on what to expect for the current market decline we are experiencing?

Well, if past cycles are anything to go by, we should be nearing the bottom of the current decline. We have experienced 11 months of the markets going south.

The average for the past six downturns was 13 months. The market PB as of end-December last year was 1.4 times. The average market bottom valuation in the previous six downturns was 1.3 times. If indeed we hit bottom soon, then the returns from current levels could be quite attractive.

• The writer is the portfolio manager of a no-management fee fund, Inclusif Value Fund (www.inclusif.com.sg).