Den of The Lion Investor

During Budget 2008, the government announced a number of changes to the Supplementary Retirement Scheme (SRS) to make it more attractive. These changes take place from 1st October 2008.

If you are not aware what SRS is, it is basically a voluntary scheme started in 2001 to help people save on their income tax. Contributions to the SRS are eligible for tax relief and only 50% of the withdrawals from SRS are taxable at retirement.

For more information on the SRS, you can refer to the booklet below:

SRS Booklet

Anyway, the main changes to the SRS are as follows:

• Employers can now contribute to their employee’s SRS account.
• There is no longer a need for proof of earned income to be able to contribute to SRS.
• SRS members can contribute beyond the prevailing statutory retirement age, up to the point of their first penalty-free withdrawal. The SRS monies can be withdrawn over 10 years from the date of their first penalty-free withdrawal. Withdrawals will be penalty-free only if they take place after the statutory retirement age that was prevailing at the time of the first contribution.

A FAQ of the changes to the SRS can be found below:

FAQ on Budget 2008 SRS Changes

In addition, for members who are already 62 or above on 1st October 2008, MOF will provide a one-off transitional concession (until the end of this year) so that they can take advantage of the new rules.

If you fall into that category and have made penalty-free withdrawals and/or closed your account before 1 October 2008, but wish to continue to contribute to the SRS, you may do so as long as you make a new SRS contribution between 1 October 08 and 31 December 2008.

Thereafter, you can withdraw your SRS monies anytime, and your 10-year withdrawal period will begin when you make your first penalty-free withdrawal. However, once you start withdrawing, you will no longer be able to contribute again. If this sounds confusing, you can refer to this illustration:

Illustration of SRS Transitional Concession

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Currently, home owners aged 55 and above who have pledged their property to meet the Minimum Sum requirement have to pay back to CPF the amount they have pledged (with interest) when they sell their property.

From 1st Jan 2009, there will be a change in this rule. Instead of returning just the amount indicated above, they will have to return an amount up to their Minimum Sum requirement. However, if they have withdrawn less CPF money than the shortfall in their Minimum Sum, they will only need to refund what they have withdrawn, including interest (currently at 2.5% p.a.)

This rule change will not affect those who turned 55 before 1st July 1995, or those under the age of 55.

For more details and examples of this rule, you can read this news release by the CPF board.

Changes to CPF Refund Upon Sale of Property by Members Aged 55 and Above

In the current financial climate, companies find it harder and harder to obtain credit. Refinancing of existing debt is also done at a higher cost.

Ironically, access to capital has never been easier for consumers. Banks continue to promote credit cards and credit lines relentlessly. My phone rings regularly with a promotion from XX bank for YY card, or an offer from ZZ bank for a balance transfer.

A credit card, if used carelessly, can cause one to overspend beyond his means. The ultra-high interest rates can also cause one’s debt to grow out of control. The same applies for lines of credit.

On the other hand, a credit card (if used carefully) allows one to get free credit and cash rebate for his purchases.

Here are some tips to bear in mind when it comes to using credit cards and lines of credit:

1. Pay off all outstanding balance before the due date specified on every statement to avoid being charged any interest for your credit card purchases. Don’t just pay the minimum balance. If you only pay the minimum balance every month, the culmulative interest that you pay would be very high.
2. Use your credit card whenever you can when making payment to chalk up credit card points or cash rebates. Make sure point one is followed.
3. Do take up interest free installment plans if they are available to enjoy the free credit. However, don’t spend beyond what you would have spent if there were no installment plans.
4. Always ask the bank for fee waivers when it comes to annual fees.
5. There is no harm in applying for new credit cards in order to get the free gifts. Just make sure the other points are adhered to.
6. If you have an outstanding rolling balance at prevailing interest rates on your credit card or credit lines, consider taking a balance transfer at promotional rates to reduce the interest. Always compare the offers between the different banks before you decide which one to take up.
7. Apply for credit line facilities while you qualify. You never know when they might come in handy. Just don’t draw on them for unnecessarily.
8. If you want to make sure of the free checks provided by the credit lines, the way to do it without incurring any interest is to deposit money into the account first before you issue the check.

Should you use credit lines for investments? It’s definitely not recommended for 99% of the people. Many people have also lost a fortune from the use of margin facilities provided by brokerage firms.

Having said that, sometimes there might be exceptions.

For example, I was once offered a 6-month cash advance at an interest rate of only 1.99% p.a. At that time, money market funds were earning close to 3% p.a. It was a no brainer for me to draw out money from the cash advance facility and put it into the money market fund. 

For a 6-month period, the profits works out to be an absolute return of 0.5% on the cash I drawn out. This might not be much but remember the cash is free.

Some people might think this is too much of a hassle and only worth doing if the amount is huge. Yes and no.

Yes, it’s worth doing if the amount is huge.

No, you should still do it even if the amount is small. Why? Managing and allocating capital is a skill. While the skill needed to allocate $1000 might be different from that required to manage $1,000,000, there will be similarities in the mindset and mathematical skills required.

I believe that one should start small, cultivate the correct habits and mindset, and grow in knowledge and skill along with the portfolio. If you do not even know how to manage $1000, what makes you think you can manage $1,000,000 when it is given to you?

Furthermore, it’s always better to make mistakes with $1000 than to make them with $1,000,000.

We often read stories about how winners of big lottery prizes often return to where they were financially after a few years. They didn’t have the ability to manage the money, and promptly spent or lost them all within a short time.

Debt, in the hands of a good master, can serve you well. Use it wisely.

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Last Sunday, I saw an advertisement in the Sunday Times by the CPF board. Inside this CPF advertisement, the CPF board tells us that we can earn more interest by transferring funds from our Ordinary Account (OA) to the Special Account (SA).

It was mentioned that the SA earns an interest rate that is 1.5% higher than the OA.

Before you decide to do that, do bear in mind the following points:

1. The transfer is irreversible, so you won’t be able to tap the funds for housing and other purposes in the future.
2. Monies in the SA have limited investment options compared to those in the OA. Only selected unit trusts are available and you can’t invest in shares.
3. The OA is pegged to a weighted average of savings deposit and 1 year fixed deposit rates, subject to the CPF guaranteed floor rate of 2.5%..
4. In the past, the rate of SA is pegged to OA+1.5%. Now, the SA rate is pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. The average yield of the 10YSGS over one year, from 1 June 2007 to 31 May 2008, plus 1% works out to be 3.65%.
5. The Government will maintain the 4% floor rate for two years (from 1 Jan 08) if the 10YSGS yield plus 1% is below 4%. After two years, the 2.5% floor rate will apply.

What this means is that it is possible for SA to give less than 4% p.a. interest. Here’s the historical yield for the 10YSGS:

• 1998 - 4.48%
• 1999 - 4.56%
• 2000 - 4.09%
• 2001 - 3.97%
• 2002 - 2.55%
• 2003 - 3.75%
• 2004 - 2.58%
• 2005 - 3.21%
• 2006 - 3.05%
• 2007 - 2.68%
• 2008 - 3.17%

Based on the rates, you would have received 3.55%, 3.58% and 3.68% interest in years 2002, 2004 and 2007 respectively. That is just 1% higher than the 2.5% you would have earned in the OA.

Personally, if I have excess funds in the OA and I am many years from retirement, I would rather invest it than move it to the SA since there is a good chance the investment will return more than 3-5%.

On the other hand, a person who is very close to 55 and has excess funds in his or her OA (that he or she doesn’t intend to use) can consider the transfer option for a portion of the funds.

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I have to apologise for the lack of regular updates in my site recently. I have been trying to get my “engine” started ever since I came back from Australia and my recent illness has done nothing to help the situation. I have also been having more hours of sleep these few days compared to the past.

If you know of any method to “kick my butt“, please do so.

On a more serious note, coming up with interesting and relevant things to write about can sometimes be a challenge. If you have any ideas on what you like me to write about, I would welcome your suggestions.

Today’s topic will be of particular interest to anyone starting out with investing but with limited capital.

Some of us might be fixated with the returns we can achieve on their investments. We spend time comparing the returns we can get on the particular class of investments we are interested in. For example:

• When placing a fixed deposit, we compare the rates at all the banks and choose the one with the highest interest.
• When buying a unit trust, we look at the historical performance.
• When buying a dividend stock, we look at the current (and projected) yields.

Certainly, such comparisons are a good practice and should be done to maximise the returns you get on your investments.

However, what most people don’t realise that there are two components to accumulating wealth: Investing your savings AND managing your expenses.

The latter is often neglected.

When I talk about managing your expenses, I’m not talking about big ticket expenditures of a few thousand dollars and above. I’m refering more to your everyday expenses.

Suppose you manage to save $50/month as a result of being more conscious about the things you spend on. $1.67/day might seem like a small amount but it works out to a $600 savings per year. Again, $600 might not seem a huge amount but let’s try to see things in another perspective:

• If you have a savings account earning 0.1% p.a, you need $600,000 to earn $600 in interest.
• If you have a fixed deposit earning 1% p.a, you need $60,000 to earn $600 in interest.
• If you have stocks making 10% p.a, you need $6000 to make $600.

If you can put aside $1.67/day for savings, it is like creating a $60,000 virtual fixed deposit investment. It might take you a long time to accumulate $60,000 but the same effects can be duplicated by the simple act of setting aside $1.67 a day. This is something that everyone of us can achieve.

What if you can save $500/month? That will be the equivalent of having a $600,000 fixed deposit working for you.

Wealth accumulation is the fastest when you can get a good return on investments and at the same time increasing your investment capital as much as you can.

This concept is even more important if you have a limited investment capital. Let’s say you only have $10,000 as investment capital.

Person A gets a 4% return of $400 by buying a long term bond.

Person B gets a 10% return of $1000 by investing in stocks.

To get the 10% return, person B might need to do a lot more work than person A. Yet the absolute return in the first year is only $600. If person A can afford to spend $50 less a month and put it into his investment fund, he would be in the same financial position as person B after one year.

A $2400 ($200/month) savings adds 24% to the $10,000 investment portfolio.

A $3600 ($300/month) savings adds 36% to the $10,000 investment portfolio.

A $6000 ($500/month) savings adds 60% to the $10,000 investment portfolio.

When the investment capital is small, the amount of money you can add on to your portfolio will play a greater role in the growth of the portfolio than the investment returns you achieve.

For a person who has just started working and is planning for his retirement, managing his expenses is a critical aspect not to be ignored. Spending on a big ticket item (like a car) will slow down significantly the growth of his investment portfolio.

Having said that, I’m not advocating saving every single penny you have. Life is about having the correct balance and everyone will have different needs depending on his circumstances.

Live the lifestyle you want, but make sure that it is within your financial means and you are able to still achieve your long term financial goals.

“If you fail to plan, you plan to fail.”

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