Manage your leverage

[Musicwhiz]

Hi d.o.g.,

Thanks! Very well-illustrated and kudos to you for providing the numbers for CPF OA. Of course I am very aware that one cannot rely on CPF OA alone to retire - that statement made was more thrown out to see what kind of response I would get from fellow forumers. The strange thing is that outside of this forum, quite a few people I know (colleagues and peers) actually consider CPF as being sufficient to retire on!

So the key is of course to build up cash to grow your nest egg, and the only way to do this is to save aggressively without compromising some quality of life. Investing prudently will also ensure you get a decent return on your money (I am targetting 5-6% long-term). And of course, who can forget insurance as a form of protection against disability, TPD or CI as was discussed in detail on another thread?

[d.o.g.]

The strange thing is that outside of this forum, quite a few people I know (colleagues and peers) actually consider CPF as being sufficient to retire on!

Show them the numbers. If they understand the implications and still want to rely on CPF, then they have made their choice and must live with it. You can only do so much; beyond a certain point, people have to accept personal responsibility and deal with the consequences of their decisions.

[cif5000]

Assume both Investors A and B have monthly $2015 of CPF contribution,
Investor A - 30 years, 300k loan at 2.6% interest rate. Monthly payment = $1201
Investor B - 15 years, 300k loan at 2.6% interest rate. Monthly payment = $2015
For Investor A,
Assuming the investor invests the difference of $2015-$1201 = $814 with 5% return for 30 years,
The capital with investment gain at the end of 30 years is $54081.
For investor B,
Assuming the investor invests $2015 at 5% return from 15th to 30th year,
The capital with investment gain at the end of 15 years is $43480.
So, at the end of 30 years,
Both Investors A and B had repaid the loan but Investor A is ahead by $10600.

You got to multiply that (814 and 2015) by 12 to get the annual investment dollars. If we do that, then the difference between a 15-year and a 30-year loan is $127k advantage for the latter if the rate of return is 5%.

If one is totally hopeless and gets only 2.5% CPF return rate, his disadvantage is only $4k. With 3.5% for the first $20K, the disadvantage is less than $1k. These are really small amounts compared to the "liquidity" you get (oh yah, liquidity in CPF, oxymoron). The bottom line remains, do NOT rush to pay off the HDB loan. It makes no financial sense under the current interest rates.

I am ignoring the effect of inflation. If accounted, it should favor the longer loan period. I am also ignoring the way CPF accrue interest.

There are 2 more things related to this example.

1. The monthly repayment exceeds the maximum monthly OA contribution. Therefore, it is best to think of each Investor as the 2 family members.

2. If Investors are 2 family members, then their OAs should earn 3.5% on both accounts each on the first $20K (i.e. total $40k). In that case, even if the money is kept in CPF and earn CPF rates, the $1k disadvantage becomes an advantage. Therefore, I don't see ANY reasons at all, except emotional ones, to pay up quickly for the HDB flat.

[snowcap]

Agree in general. When inflation is 4-5% and CPF interest rate is 2.5-3.5% (for OA), then it makes sense to borrow. Which is in fact the situation today.

http://www.mas.gov.sg/en/News-and-Public...ments.aspx

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Add this all up, and we get $516,442 at age 65. Assuming the CPF interest matches inflation, you have $516,442 of real spending power. Life expectancy is probably about 80, so on average you get 15 years to spend $516k or $34k per year.

So actually, the assumption that CPF matches inflation is not true. Which makes it all the worse to rely only on CPF.

One way I'm using to fight inflation is to use my CPF-OA to buy REITs giving 6% yield. Unfortunately the dilutive rights issues during 09 period got in the way. SPH was also one of my "anchors" still giving me 6% without stupid rights issues. But the print business also on decline IMO.