CPF Strategy when turning 55

This blogpost is for me to record my thoughts on CPF so that I have some notes to refer to when I start approaching 55.

I have had not the opportunity to think about reaching CPF withdrawal age at 55 as I have some time left to go. However Budget 2024 with the 2 major CPF changes, and the financial blogosphere posting their analysis about CPF, I took this opportunity to have a think about this.

Removal of CPF-SA

Sad but sort of expected.

ERS changes from 3x to 4x BRS

Before budget 2024, I only had a vague idea of what all these terms meant, and also, how they related to CPF Life. Now I have a slightly better picture but not sure if my knowledge is 100% yet.

CPF Life is sort of some type of longevity insurance (website says it is insurance not investment) and everyone can signup. Those that are healthier and have longer life expectancy will be expected to get more benefit from CPF Life, while those that die early are donating their CPF monies to fund the payments to members with above average lifespans. 

CPF Life on first glance seems attractive to me since I do try to live a healthy lifestyle. I go for regular blood tests and just manage to keep my total cholesterol below 200 and BMI between 24.0-25.0. Triglycerides are optimal for me. Thanks to circuit-breaker and WFH, I have also developed a regular gym-swim routine during WFH days. Genetically, no family history of heart disease or cancer (so far).

According to the CPF website, setting aside ERS, choosing the Standard plan, and deferring payments for 10 years will net you $3,330 per month. Internet chatter seems to think that this is a good deal. The lure of regular passive income is just so attractive. There are also comments to the effect that if you get dementia and get cheated of your money, at least you still have CPF Life payments to support you.

If I live past 80 (I think there's a reasonable chance), the risk of dementia is there, but this means I am setting aside a lump sum at age 55 in order to make arrangements for a possibility that could happen 25 years later, thats a lifetime (to someone who is 24 years old)! Based on parents and grandparents experience, I will likely be pretty mentally alert between 65-75, and shouldn't I be asking if I can generate more return if instead of setting aside ERS, I just set aside FRS and invest the rest?

Nevertheless, the idea of a 'protected' income stream is indeed appealing. I am leaning towards setting aside FRS though I am also thinking about ERS if I manage to keep myself in good health at age 55. (Cholesterol under 200, 5km run in 30min - i.e. still able to average 10km/h at age 55), since good health puts me in a good position to benefit more from CPF Life. 

Another consideration is how much more my passive income grows. For example, if I reach 30k passive income, I might view ERS as the better choice to insure against catastrophic loss of my passive income versus using the difference between FRS and ERS to reinvest to get a few percentage points more return.

99% of CPF members have less than 4xBRS (i.e. the new ERS) in their CPF-SA when they turn 55

This seems accurate. I am an above average income earner and I should be close to 1m in CPF by age 55 (including CPFIS investments) but my CPF-SA is still under 4xBRS. I did do some CPF-OA to CPF-SA transfers when I was younger - not huge transfers but I did transfer small amounts regularly to CPF-SA but I'm not sure when I hit the limit and could not top-up anymore. 

 

IWDA $100 in 2024?

 

I am happy to buy ETFs which they are cheap, and they were still cheap as early as late 2022: BuyafterCrash: Strategy: Sep 2022

One glance at the latest prices for IWDA, an MSCI ETF, will show the prices have risen quite a bit since 2022. In fact, I would say fair odds to reach $100 this year. IWDA is currently 70% US stocks so one wonders whether it is useful as a global ETF. After all, the expense ratio of a pure US ETF is lower than IWDA. In contrast, Vanguard World is 'only' 61.6% USA.

However, I am terrible at buying ETFs when they are expensive. I see that my average buying price is so much lower than current prices and I conclude that its too expensive. This is not necessarily the correct way to invest.

I suppose that's why we have the idea of regular dollar-cost averaging to remove the psychological aspect of investing. Like I mentioned a couple of posts earlier, I had sunk US$15k into global ETFs and this week, I have put in $3k more for a total of US$18k YTD. My idea is to bring forward my buying, and start waiting once it goes above a certain price level. Using IWDA (which tracks MSCI World) as a barometer, I would say we are not far off and I would want to take a break from buying World ETFs when IWDA goes 2% higher and crosses $95.

I may also consider buying only the Global Dividend ETFs VHYD and WQDV because they have less of the "Magnificent 7" versus the regular Global ETFs. The assumption being that if market corrects, the Magnificent 7 will correct more than other stocks.

 

Safely Ignoring the Withdrawal Rate

With a lot being said about Safe Withdrawal Rates, I had to think about why it played no part in my thinking about FIRE. As I've mentioned before, as long as passive income > current standard of living, that's FI to me. To be safe, I can add a 20% buffer in case there is a 20% drop of income like during COVID (but since I didn't travel, my expenditure was much lower as well).

My current passive income is above the lean FIRE level as it pays for a lot of discretionary items and not just survival expenses. So for my type of FIRE, all I need to do each year is to make sure I don't spend more than my passive income that year (if I spend less, it means there is some money saved to be spent during a bad year).

The following graphic represents my "approach". The percentages do not reflect my current situation as my 'margin of safety' has gone beyond 20% since I am still in the accumulation stage. The numbers are meant to show that passive income is used to pay for different types of expenses, some are discretionary, some are essential, and some are in-between.

I fully appreciate that retrenchment/ ill health may cause people to involuntarily stop work. In which case learning how to calculate SWR is important, not for FIRE, but for 'survival'. Voluntarily quitting your job with only just enough money for bare survival is not something people should aspire to. 

Investmentmoats linked to a chart showing the dividend volatility of the S&P500. What is interesting is that the drawdowns were "short and sharp" like COVID in 2020 when my passive income dropped by 20% and promptly recovered the following year.

The dividend drop in GFC was not as bad as it seemed because there was price deflation. During GFC, COE prices dropped (unlike COVID19) and you could get a parallel imported Mercedes C180 for $135k and property prices were soft because of lack of liquidity (I bought my current condo just after the GFC). Whereas now COE alone will set you back $100k+++

Links

Can You Live On Dividends From Your Portfolio? - A Wealth of Common Sense

What is the Safe Withdrawal Rate for CPF LIFE, Income from Rental Property and Dividend Stocks? - Reader Question | Investment Moats

Strategy: Feb 2024

 After a review of Macro factors relating to the economy and the markets (amateur level analysis), I have concluded that 2024 is likely to be a green year for world markets. The economy has done pretty well despite the multiple interest rate increases as shown by US jobs data and business in general. From here on, interest rates do need to drop to revert to the mean and it is a matter of time that they do so. Industrial production (and arms/ammunition manufacturing) should remain strong.

Therefore, I feel that my 2024 strategy would be to continue to accumulate World /US ETFs rather than to build up a warchest by buying T-bills. I have set a target in terms of how much I will invest in World/US ETFs each month and track the target. 

As I feel that the US market is a little bit overpriced, I might not be able to reach my target as I may be tempted to buy other stocks that seem "cheaper", but its still good to track, to see how far off from my target I end up. So far, YTD, I have bought US$15k worth of US & World ETFs. However, if S&P500 continues to rise, its going to be psychologically difficult for me to continue buying, as I like buying 'cheap stocks' However, I have also learnt to never underestimate the power of the S&P500 😅  

Dividends Collected: Jan 2024

 

The year usually starts off quietly with not many dividends being paid