Tea with Vic: Transferring funds from OA to SA?

This is a guest blog that originated as an email from a reader, Vic, who would like to share his concerns with regards to the transfer of funds from OA to SA:

I was quite alarmed by the 34 year old who transferred all his funds in his OA to his SA.

 

a) transfer is not reversible. (Is he aware or are readers aware?)

 

b) by doing so, he has cut off a pool of funds for the purchase of housing in the future. I am not sure if that is a good idea since there are opportunities for housing investment. I assume that this man must be single at this point in time.

 

c) there is a limit to the amount of money that can be given out under CPF Life. So, any amount put in beyond minimum sum, at the Retirement Account (RA) level, you still get 4%. If you do not withdraw money at 55 years of age, the money is stuck there. This happened to my father who is 66 years old.*

He has $144,000 in the RA but can only be given $620 per month. He cannot withdraw the excess. At 4% per year, the interest from the $144,000 is $5,760 but, every year, he can only get $620 X 12 = $7,440.  Net reduction is only $1,680 per year! In spite of this, he is not allowed to withdraw since he skipped the chance at 55. Medisave is full and untouched.

 

Based on this, my father has to live at least 50 to 70 years more to fully benefit from his CPF retirement funds.

 

Some background:

 

1. My father has faithfully contributed the maximum CPF amount every year, partly as a means of tax reduction ever since he was a young man. He is a CPF believer!

 

2. He has withdrawn $800,000 for purchase of condo in 2006. Condo is fully paid up by his CPF funds.

 

Related post:

Tea with Klein: CPF, SRS, HDB Housing Loan.

 

* AK is a bit kaypoh and checked CPF's website on this.
Check it out at: Withdraw CPF savings at age 55.
And also: CPF Life.

So, what we want to do is to withdraw from our CPF account all that we are allowed to withdraw at age 55 and what is left is the required CPF minimum sum which currently stands at $148,000. This will be transferred into our Retirement Account (RA).

Using the CPF Life pay-out estimator provided, assuming that the annual value of our place of residence is less than or equal to $9,500 and that our annual assessable income is less than or equal to $27,000, we could get the following benefits from the Life Standard or Life Basic plans.

Looks good to me as a minimum safety net.

What do you think?

A car loan is different from a home loan (updated in June 2018).

Gone are the days when someone could walk into a car showroom, put down a $1 deposit and borrow the rest.




How many car buyers actually give the topic of car loan some serious, in-depth thought before signing on that dotted line? 

Most don't think much more than "How much is the interest rate?" and "How long can I borrow for?"

Unlike a home loan which is amortising in nature which means that the interest payment for each subsequent instalment is based on a reducing loan amount, a car loan's interest payment for the entire duration of the loan is based on the initial loan amount. 

A car loan isn't amortising in nature.






So, if a person were to buy a $100,000 car and if he were to take a loan for $50,000 at an interest rate of 2.5% per annum for a period of 5 years, he would be paying $1,250 x 5 = $6,250 in interest or $104.16 per month. 

Total monthly repayment: $937.49.

Now, if a car loan were to be amortising in nature, just like a housing loan, the total interest paid over a 5 year period would only be $3,242.20. 

Total monthly repayment: $887.37. 

This is more than 5% lower than $937.49!

Imagine the good old days when someone could have walked into a car showroom, paid $1 and borrowed the rest for a $100,000 car to be paid over a duration of 10 years.  

How much would the interest payment be assuming a rate of 2.5% per annum? 

$24,750! 

Monthly repayment: $1,031.25! 

How could this not be wealth destructive?





This is why, for years, I keep telling friends and family that if we want to buy a car and if we cannot afford to pay for the car without a loan, try to keep the loan quantum to a maximum of $20,000 and a repayment period of 3 years. 

Assuming the cost of debt is 2.5%, this would mean paying a total of $1,500 in interest payment which is what I personally find acceptable. 

Total monthly repayment over the next 3 years: $597.22.






So, if, for some reason, you are looking to buy a car now or sometime in the future, you might want to keep this in mind. 

Know how expensive a car loan actually is and try to limit its use to the absolute minimum.




Related posts:
1. Car dealers unhappy with LTA.
2. Lease cars, don't buy. (more calculations)
3. Cooling measures for cars.
4. Cooling measures for cars spurned.
5. A new car for $75,000? (depressing!)

We are not perfect but we can improve our lives.

Hi AK,

I am also pessimistic, actually. The thing I realised these couple of months is in life things can be unfair or by a stroke luck fate deals a bad set of cards or bad things happen because of my incompetence.

However, whatever situation one is in, the cliche of being optimistic that's sold by people may not be too practical. What's practical I find is to be able to do something even a small little thing to be better off. Because I believe little things do add up. Of course, sometimes trying to improve can backfire or backslide but it's just part of life. No one is immune to failure lest they do nothing at all.

When I go out, I do see people working in jobs they cannot extricate themselves from and bosses that exploit people. I mean if they could they would have changed jobs or found a way to have a higher salary. So, not all people are fortunate enough to move into a better situation. I think they call it social mobility.

On the part of feeling very pessimistic, I can understand that. Take, for example, the guy that works at the train station control or the driver or technician or maybe even the engineer. 

Faced with stagnating wages and rising costs and the worst part is the company they work for has long ago categorized them into the lowest ranks in the company. Their advancement may not be existent. So, there is not much hope if u look at it. 

Who is going to help them? 

So, when they start thinking about retirement or old age it can look very bleak for our current generation. The government may look rich but they have other issues to think about as well. The countries around the world may not be as friendly as they seem to be.

But through proper planning and use of excess funds, however little, or to restructure the way their resources are being used or allocated, I believe people can improve their lives. The problem is, I feel, nobody told them how to do it. So, since no ideas were planted, nothing can grow.

So, I think if the SGX changes the board lot size to 1 share come next year, it can really help people who don't have much. Finally, they can own blue chips and, hopefully, reduce their risks. 

People would just have to pay a one time charge with Standard Chartered that's only 0.2% with no minimum fee.  At the very least, they can grow with the economy. 

Even people who don't know anything about stocks, they can just create their own index rather than depend on the ETF which has additional expense or blue chip share building program which I feel is restrictive.

A peeve I have with the STI ETF is that it is hard to sell. I bought the Nikko once and took a long time to get rid of my 100 shares and the pricing wasn't good. So, I gave up on that and just went to buy the blue chip instead. U know in some blogs people sing praises of it but I am not sure if they actually tried to sell it. 

I personally feel there's a bit of untruths to the STI ETF. When they took the 8% y-o-y growth, they were measuring the years where there was a nice increasing slope. However, if one bought at other periods, the return just doesn't look that good.

The flip side of the coin is people, by nature, want quick solutions. 

If I tell people u know u get 1.5% extra or u can save 100 dollars in tax every year, nobody is really going to take notice. But they are very interested in TOTO and 4D and making a quick buck in the financial markets, university graduates included. 

It is only after a long time, through some event happening, that some of the lucky ones will start to work on their lives and the extremely lucky ones meet someone who would hold their hands.

My reply:

....

Till today, I tell people that my ideas are simple but to really see them through might not be easy. I also tell people that I have been lucky and, in life, we always need a bit of luck, investments included. Sometimes, things do go wrong, like you said, and it could well be due to my incompetence too. No one I know has had a life that is smooth sailing always.

I do share your concerns and I do want to help people, especially those of able body and mind who think that it is impossible ever to be financially free. This has been a driving force behind many of my blog posts.

For sure, every little bit adds up. We just need discipline and time for results to show. Problem, like you said, is that people cannot seem to wait.

When I tell people that 4% is a whole lot more than 2.5%, they usually tell me that it is only 1.5% more. I would tell them that they are wrong. It is actually 60% more! It is simple that way but they could not see it. Some saw it and their eyes lit up but some just chose to be fatalistic and ignore the revelation.

I like it when you say how people can improve their lives and I always say that everyone's life could be and should be better.

.....

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
– Warren Buffett

Read Klein's earlier emails to me:
Tea with Klein: CPF, SRS and HDB housing loan.

Related post:
Take your time to pay down your HDB housing loan.