So instead I'll write a blogpost about one that is easy to manage.
I have noticed people get ILPs to get a 2-in-1 product for investing (though it is not very good at doing both to me, more for convenience). Some of my colleagues buy them, but I hope my friend who was being sold one doesn't buy it (Whole Life would be better).
So, have you ever heard of a product in Singapore that helps you accomplish a means of insurance, investing, retirement planning and tax planning all-in-one?
Yet has very little management required?
It is: CPF!
Now before you roll your eyes, let me at least show you the benefits (this is the short version, I summarised and provided links if you wanna read more).
No, if you say that this is a giant Ponzi scheme, and that you will not get your money back. Think about this. No Ponzi will limited your contributions in. CPF is part of the government wealth reserves, if it goes bankrupt, it means our government/country defaults. And if that happens, well, the economy is gonna be really screwed up. Don't talk about your CPF, maybe your jobs, etc, all gone. I mean it.
1. Insurance/Healthcare savings (for a rainy day)
It is the Medisave!
Medisave helps CPF members save for future medical expenses, especially as they grow older.
Medisave can be used for yourself or your immediate family members which include your spouse, children, parents and grandparents (must be either Singapore Citizens or Singapore Permanent Residents).
It grows at 4% p.a. currently, not bad isn't it?
There's actually many things you can use Medisave for (read it here), such as paying inpatient hospitalisation, hospitalisation stay, health screening or outpatient visits for chronic illnesses.
So you'll have money to help you with medical bills be it from you or your family members.
In addition, Medisave can be used to buy insurance, such as:
- Medical insurance or what people refer to as hospitalisation insurance
- You have two options:
- The latter is better in providing more coverage but if you want the bare minimum, Medishield Life will do.
- Life insurance (Dependents' Protection Scheme)
- If you do not bother with even buying your term life. Better than nothing, cheap too.
- Disability insurance (CareShield Life)
- Affordable severe disability insurance scheme to help with those on long term care.
2. Investing
My favourite part.
CPF has two other accounts. Ordinary (OA) and Special Account (SA).
OA gives a current yield of 2.5%, while the SA gives a current yield of 4%.
- First 60k combined amount in your CPF (OA and SA) gets an extra 1%, up to 20k in OA.
After the first 20k in the OA, you can invest with it, but I have outlined in one of my posts why you shouldn't.
If you don't know, CPF is very similar to a bond, and a AAA rating bond at that (I would go as far to say it might be better than majority of corporate bonds).
It is generally
- risk-free (unless Singapore defaults, but if it does, read above)
- predictable in yields too! (SGS bonds and SSB yields may fluctuate, fixed deposits interest rates pales in comparison).
- NO sales charges
- NO maintenance fees
Say you have $10k in SA, and assuming no contributions.
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| The Magic of Compounding |
It doubles even faster with the extra 1% as well as your monthly contribution from employment (which I have not factored in for simplicity).
You want double it even faster? Or better yield? (yes it looks long but that's how you invest. It is for the long term. Sure, some people are talented in trading, months and days, but it becomes hard getting it year and year. Most people can't do it. The best part is, you're doing it without doing anything :p)
Here are some ways to increase your returns without going all the fuss to "invest" =)
- Contribute to your SA via cash topups (it saves on tax too! But because it is gonna be a long time, make sure you put in excess money meant for long term savings)
- Make a OA to SA transfer (it increases the yield from 2.5% to 4%! Almost double :p But leave enough that you need to spend in the immediate future)
- Not buying a house via CPF (Ok this is a touchy topic but let me explain.)
- Ok, you know that CPF is actually a form of forced savings right?
- If you aren't too interested in investing, or your returns are whacky and maybe negative, this might be an option to help you with your retirement.
- Downpayment you can use the CPF (5% + 5%).
- After which, say you have been using $400 in CPF and $100 in cash for the installment for your flat, then maybe you set aside $400 for retirement savings/speculation (which may give you either sad yields or worse, speculating, negative returns and loss of sleep).
- So instead of paying using the CPF and maybe topping up cash for the house. Use PURELY Cash.
- The amount of money is the same more or less (you shouldn't be spending your retirement savings anyway. No, no mental accounting) and you get a risk free return! Awesome?
Yes I am intending to contribute to my SA (later this year) and I have done a OA to SA transfer too!
I also helped my mum transfer all her OA to SA too =)
My dad has been doing SA transfers throughout his life as well. =)
Side note: For those of you paying your house already via CPF, especially halfway or more, you could switch to a bank loan for the same interest, else just pay finish the house via CPF, then make annual transfers of the entire OA to SA to yield more interest. (The above method is more efficient though).
3. Retirement Planning
Did you know? For those aged 55 and above, first $30,000 in Special, Retirement or Medisave accounts can earn up to 6 per cent interest, that is, an extra 1% to give a tiny push.
The government has increased contribution slightly from employers from age 50 onwards (it seems small but that's when your salary is much more than you started).
Many people feel insecure that the Minimum Sum/Retirement Sum keeps increasing but that is to be expected as everything undergoes inflation, the MS is just there to match inflation.
But say, if you're not interested in investing and follow my suggestion of paying cash instead of using your CPF, the MS is not that hard to hit!
Here is an example:
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| Assumptions in the file below |
See? You can definitely hit it!
Even faster if you transfer all/most of them to the SA. =)
And when you get to age 65, you can get an life long annuity with a nice payout.
In fact, CPF LIFE is a very competitive annuity and quite a good retirement scheme compared to many parts of the world.
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For many, you can also optimise your returns during retirements by transferring your CPF money to help your spouse top up so that both of you have a nicer sum every month during retirement (less worries and headaches too =) ).
4. Tax Planning
Oops and did I mention that by contributing to your CPF SA/RA, you can get tax reliefs?
- Cash topup for yourself, up to 7k tax relief!
- For parents, parents-in-law, grandparents, grandparents-in-law, spouse and siblings, another 7k =)
Imagine, your annual take home is about 46k, 7k will drop you a bracket to the 3.5% tax rate instead of 7%!
You can contribute to Medisave can save on taxes too (for the Recipient only).
UPDATE (29/06/2015): CPF has confirmed that the 7k tax relief for your parents SA Cash Topup is eligible for each caregiver (i.e. me and my dad). It is not accumulative but rather up to 7k per person! But the recepient has to have an annual income of <4k or handicapped for the tax relief. It would really help your loved ones to have a better retirement while you get tax savings too! :D
UPDATE (22Oct2019): CPF has ended Eldershield and introduced CareShield Life as a better disability insurance. I have updated the link.
To finish it off:
BONUS:
Here's a rough excel template I made for calculating your interest yields in your CPF, you can have it here.
I hope I have managed to show you that CPF if used well is a good vehicle that is easy to manage, invest and retire with =)
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