The 500 dollar plan

As a mini round-up to a few of my recent articles, namely:-

• BTITR-Part2
• Annuity Plan
• Drip in new money (Part 3)

I decided to piece them together to produce a plan that may well be suitable for everyday people. If you still cannot figure out what the above 3 articles were about, here's a diagram that somewhat combines them together:
Here's what is in the $500-per-month-plan for a 35-year old male with a 30-year time frame:-
a) S$87 per month into a term insurance plan that provides $150,000 coverage for Death/TPD/Critical illness for 30 years;
b) S$213 per month into a "drip in money" strategy at 8.0%p.a target returns;
c) S$200 per month into a 25-year savings plan that converts into a perpetual annuity plan after age 65.

Rationale:-
a) Term insurance to cover this "project" in case the "money-making machine" (the 35-year old male subject) contracts critical illness;
b) S$213 x 12 = $2,556 may be channeled towards Supplementary Retirement Scheme (SRS) to further save on income taxes;
c) The purpose of the "perpetual annuity plan" is to provide an "anchor" into the predictability of the cashflow (after age 65).

The estimated monthly payout at retirement is S$1,029 per month til age 100 (and beyond), double the S$500-per-month "invested cost".

I have also included CPF LIFE and assumed the example (minimum $40,000) given in CPF's website. You can click here to estimate your monthly payout under the National LIFElong Income Scheme (CPF LIFE). CPF LIFE is a new scheme that will provide CPF members with a LIFElong income from age 65.

Other things that should not be overlooked:-
a) "As-Charged" Shield Plan;
b) Personal accidental plan. (for its low-cost-high-coverage feature)

BTITR-Part2

Buy Term Invest The Rest and reduce taxes (Part 2)

As a follow-up to BTITR, this is another example of someone who has a lower monthly budget.

Name: Mr M.
Age: 35
Non-smoker
Budget: $300 per month

Comparison:


BTITR achieves $43,732 more based on 5%p.a returns and $108,986 more based on 9%p.a returns.
On the other hand, BTITR pays $1,246 lesser than ILP to the agent in first year commission.

I would suggest Mr. M to do BTITR and contribute $2,556 (the investment component in "drip in new money": $213.00 x 12 months) and invest from his SRS account. By doing this, he saves about $112 in income taxes for the year, which is 1.25 months' worth of term insurance premium or half month's worth of his $213 investment amount.

This is something which insurance agents selling ILP will NOT (and probably NEVER) share with you.

Feel free to contact waynekohwg@gmail.com for details and clarifications.

Refresh SRS

As we reach the mid-point of the year, let's refresh on something that might have been forgotten:

The SRS (Supplementary Retirement Scheme) account.

Why SRS?
The most important 3 reasons:
1) Setting aside a retirement account that supplements the CPF retirement account (as the name suggests). Or call it "2nd CPF".
2) Setting aside a sum of money for hospitalization/ medical insurance cost in the post-retirement years.
3) Pay less taxes (while investing for above 2 reasons).

I have set up 4 charts for ease of use, organized primarily by income ranges:

a) S$20k to S$60k

click on image to enlarge

b) S$60k to S$90kclick on image to enlarge

c) S$90k to S$150k

click on image to enlarge

d) S$150k to S$200kclick on image to enlarge

Example:

click on image to enlarge

In the example, for a chargeable income of S$68k, the income tax payable is about $3.2k before SRS. After the contribution of S$11,475 (stipulated contribution cap), the payable income tax is reduced to about S$2.25k, a savings of $950.

Now, what can $950 do? Well,
- it's about 3 months' of petrol bills (assuming $316 per month)
- it's about 2 months' of life insurance premiums (assuming $475 per month)
- it's about up to 4 years' worth of a Shield Plan (Medical insurance) costing, depending on age.
- it's about 10 months' of HDB season parking cost.
- it's about the cost of a weekend trip to Hong Kong, from Singapore (maybe?)
and many more.....

If you have just gotten your income tax notice of assessment, which not consider start paying less taxes from here onwards?

What to invest SRS monies in:-
- Stocks (D.I.Y or managed)
- Unit trusts a.k.a mutual funds (D.I.Y or managed)
- Single premium life insurance products

For all previous articles on SRS: http://www.waynekoh.com/search/label/Supplementary%20Retirement%20Scheme%28SRS%29

Contact Wayne Koh for more queries:
waynekohwg@gmail.com | +65 8288.9005 | skype: waynekohweeguan

Post-Retirement Hospitalization and Surgical (Shield Plan) Insurance

This is a follow-up to my recent article:
http://www.waynekoh.com/2008/03/hospitalization-and-surgical-shield.html

After some "numbers crunching", I have got the figures plotted on a graph. The basic idea is to project a certain sum of money required to fund the Post-Retirement Hospitalization and Surgical (Shield Plan) Insurance cost. And the focus is on the cash portion only, i.e Plan rider and the portion beyond the current annual withdrawal of S$800.











(Click on image to enlarge)

Using an example of John, 35-year-old; the projected "6585" cost (excluding Medisave) is about S$115,000 when John turns 65 in 30 years' time .
To get S$115,000 at age 65, John needs to invest about $90 per month into a "Drip in new money" portfolio that generates 8% p.a (taking into account sales charges of 2.5% max).
This $90 per month may also be part of John's SRS plan to benefit from the deferred tax incentive system. See http://www.waynekoh.com/search/label/Supplementary%20Retirement%20Scheme%28SRS%29

Income tax and SRS

Click to enlarge

Did some income tax calculation and developed this chart as a result, something which I think would be good to share.

Some numbers, in particular, the SRS contribution amount for chart above:-

For chargeable income above $31,475, the SRS contribution amount is $11,475 (cap)

For chargeable income within the range of $20,001 - $31,474.90, the SRS contribution amount is in the range of $1 -$11,474.90 respectively.

For more writings on SRS, please see http://www.waynekoh.com/search/label/Supplementary-Retirement-Scheme-SRS

Hospitalization and Surgical (Shield Plan) Insurance

As a continuation to my earlier "As-charged" article, I went on to develop a spreadsheet that is capable of calculating the possible costs of financing a Shield Plan (example of calculation here is for Private Hospital Ward A) that would be needed by someone age 65 now and presumably live til age 85.

The estimated cost (CPF Medisave) would be about $16,800 for most Shield plans (this is so as MOH has capped the annual withdrawal limit at $800). The net present value @4% would be about $11,672.

On the cash portion, the estimated average cost would be $87,629 (cost of shield plan rider and the excess portion which is non-CPF-Medisave-payable). The net present value @4% would be $50,344.

So there appears to be an imbalance in the above equation. In the example above, CPF Medisave can only finance about 16% of the total Shield plan cost. I am wondering if the Ministry of Health can look into easing the $800 cap limit to a level that not only achieves a balance between the CPF Medisave and out-of-pocket cash, but also in the process, help Singaporeans to utilize the CPF-Medisave for the Shield plan that will divert risk of possibly higher medical costs (in the future) to insurance companies.

My next article will be targeted at ways to prepare funding for Shield Plan (65 to 85 years old).
Stay tuned.

Figuring S$1.0 million (backward and forward)

In a recent AC Nielsen survey, it was discovered that majority of the Singaporeans in the survey "feel they need over S$1MM to retire comfortably". To add on, I feel that the 'S$1MM' should not include the value of the primary housing (i.e for most Singaporeans, it is their HDB flat) that one owns, as it is an illiquid investment and cannot be monetized readily.

Indeed, I did my own sums and have the same conclusion as well. There are many ways and methods, such as setting up your own business, savings, investing and so on to achieve this retirement sum. Nonetheless, it is good to know the figures as a guide first of all.

Here is a table that shows the relation between $1.0 million and the % (returns or inflation %) over the number of years (10-30 years).For example, if an investor is confident and comfortable with achieving 7%-8% returns year after year, and he or she has 20 years' time frame, the net investible amount he or she needs to have at the beginning of the next 20 years is about S$200k-S$250k (reading directly from chart above- marked yellow color).

On the contrary, if a person has $1.0 million now and keeps his or her money (under the pillow) without investing, then inflation will 'chew' away the principal sum slowly. For example, assuming inflation is 3% per annum, the $1.0 million sum will be worth only slight more than $400k in 30 years' time. (Refer to chart above- marked red color)

“Invest in inflation. It's the only thing going up.”
-----Will Rogers (American entertainer, famous for his pithy and homespun humour, 1879-1935)

Listen to investment ideas from experts - FREE

I have been an "addict" to this thing called podcast since Q4-2007.

I first started with using iTunes -- http://www.apple.com/itunes/ -- and these are some of the channels I subscribe to:-

(A) Investment-related topics: Bloomberg, Business Week (Market reports, Cover Stories), Fidelity Investment Insight, Fidelity Personal Finance, Mckinsey on Finance, Money Girl's Quick Tips, Money Talk Fool.co.uk, PIMCO Investment Outlook, UBS Economics, Vanguard Plain Talk on Investing.

Highly Recommended (if you have time for just ONE):
"Money Talk Fool.co.uk, seriously good with money"

Reason: It offers education, information and HUMOUR, so which means you will not fall asleep while listening to it. David Kuo, the host, is one funny guy with much investing knowledge to share. The guest speakers too offer investment insights, ideas and humour. By far, the 17Jan2008 episode is THE BEST! The guest speaker on 17Jan2008 episode, Justin Urquhart Stewart not only shares his ideas, but tells his stories with jokes that even the usual "chief joker" David is so tickled by his jokes. And, they spoke about MacDonald's "Mc-chilli" and Singapore.
Download it here (File size: 22.6MB) or click here for the main page.

It is podcasted every Thursday (UK time). Past episodes can also be downloaded one shot as MP3 files and listened to at own pace. I listen to them (repeatedly) whenever I am driving or on the MRT, and jogging.

Note: The IRA or ISA that is frequently mentioned in the podcasts is the equivalent of SRS in Singapore terms.

(B) Lifestyle-related topics: What car? Video podcast, Autocar magazine, Berry Bros & Rudd Wine podcast.

(C) Self-improvement topics: Advanced Selling Podcast.

About two weeks ago, I chanced upon www.nokiaexperience.com.sg and found the podacsting application for my Nokia E51. Now I can download some of the usual channels and new channels straight into my E51.
And, as a result, I now stop buying car magazines from news stand. Another money-saving idea!
(See my other money-saving article here)

MMF rtn vs Bank deposit rates

MMF means Money Market Fund.

This is not something new and have been propagated several times over. A $1000 savings in bank deposit rates have yielded 0.25% ($2.50) in interest for whole of 2007 (See table 1 below). The same $1000 savings, if invested in Money Market Fund (example: Phillip Money Market Fund) , would have returned about 2.26% ($22.60) for whole of 2007. What's more, there's no account opening fees, no min monthly amount to maintain and no upfront sales charge for the invested amount, but on the flipside, there's no ATM for the Money Market Fund. Withdrawal can only be done online.

Key difference between MMF & Bank deposit: Money made from bank deposit is called "interest" while money made from MMF is called "capital gain".

Planning for SRS YA2008 can go hand-in-hand with MMF.
See http://www.waynekoh.com/2008/01/pace-your-srs.html

Table 1
======
Interest Rates of Banks and Finance Companies (Monthly)
Jan 2007 to Jan 2008

Period Bank Fixed Deposits 3 Months Bank Fixed Deposits 6 Months Bank Fixed Deposits 12 Months Banks Saving Deposits Finance Companies Savings Deposits 2007 Jan 0.57 0.67 0.87 0.25 0.33 Feb 0.57 0.67 0.87 0.25 0.33 Mar 0.56 0.67 0.87 0.25 0.33 Apr 0.53 0.64 0.85 0.25 0.33 May 0.52 0.62 0.83 0.25 0.33 Jun 0.51 0.62 0.83 0.25 0.33 Jul 0.51 0.62 0.84 0.25 0.33 Aug 0.52 0.63 0.84 0.25 0.33 Sep 0.53 0.64 0.85 0.25 0.33 Oct 0.51 0.62 0.84 0.25 0.33 Nov 0.51 0.62 0.83 0.25 0.33 Dec 0.51 0.62 0.83 0.25 --

Source: www.mas.gov.sg financial databases

"Retirement means death, don't stop working" not applicable to all people

I agree with MM Lee's words that everyone should strive to work for life, and would like to add that everyone shoud strive to work for life in a work/ job/ career (whatever you call it) that one loves and enjoys. However, I do not agree fully with MM Lee's speech (transcript published on StraitsTimes.com) as this involves more than just whether one can retire and yet supposedly work (happily) in post-retirement years and not out of a "no-money-no-choice-but-to-work" situation.

I see Singapore's ageing problems as a serious one. This is not something new. I see the retiring workforce of tomorrow to be broadly segmented into two main groups: (1) retirees in the "brains group" and (2) retirees in the "hands group". I would associate "brains group" to the positions of management and C-level positions and the bulk of menial job/ positions (for example, cleaners) as the "hands group".

For people within the "brains group", it is their years of management experience and wisdom (or we just call it "brain power") that make them valuable and thus able to further contribute back to the organization they supposedly retired from not long ago. Two good examples are MM Lee and SM Goh. They still carry on their work as if they never retired. Retirees from this band are still highly valued for their "brain juices" and hence organizations are willing to pay for the value.

On the other hand, we have the retirees from the "hands group", whom have no years of management experience and wisdom (or "brain power") to shout about, and to make it worse, their physical capabilities are far less valueable (not to mention, tradeable) than their younger counterparts who are willing to get lower pays. Unless these retirees lower their salary expectations, employers see no economic sense to re-employ them. Even if they do, the pay is hugely discounted.

For me, I choose never to retire as I look forward to my work/ job/ career (whatever you call it) every single day. I would like to encourage every Singaporean to take responsibility for their financial well-being and stride nicely into the golden years with the choice to retire at own's will and yet choose to work in post-retirement years at own's will as well. And not facing a "no-money-no-choice-but-to-work" situation.

To conclude, I would like to end by adding Jim Fox's quote: "Find a job you love and you'll never have to work a day in your life.” and "retire early" (while getting paid).

Pace your SRS

Just like running a race, it is good to know how far you have run versus how much time you have got left to complete the race.

The "race" distance: Contribution cap

• The SRS contribution cap for a Singaporean or a SPR is SGD11,475, calculated as 15% x 17 x SGD4,500 CPF monthly salary ceiling.


• The SRS contribution cap for a foreigner is SGD26,775, calculated as 35% x 17 x SGD4,500 CPF monthly salary ceiling.

Example of how to "pace your SRS" savings:-
1) Profile: Singaporean & SPR with monthly salary SGD3000

Suggestion: keep aside min 10% (max SGD1,043.18) of SGD3,000 = SGD300 into "money market fund"; In Nov 2008, calculate your esimated income for entire year of 2008 including Dec 2008, and calculate your YA2008 taxes using IRAS's spreadsheet calculator. (link to be given after IRAS has it uploaded)

It will probably look like this:

2) Profile: Foreigner with monthly salary SGD6000

Suggestion: keep aside min 15% (max SGD2,434.09) of SGD6,000 = SGD900 into "money market fund"; In Nov 2008, calculate your esimated income for entire year of 2008 including Dec 2008, and calculate your YA2008 taxes using IRAS's spreadsheet calculator. (link to be given after IRAS has it uploaded)

It will probably look like this:

Email me for details. :-)

..............Extract from www.mof.gov.sg..............
Q2: Is MOF conducting educational sessions on the scheme?

A: The SRS is for the private sector to drive. As financial institutions market SRS products to the public, they will also familiarise the public with SRS. MOF will not be involved.

..............Extract from www.mof.gov.sg..............

Start planning to pay less taxes for YA2008 NOW!

First, let's exammine the benefits of SRS:-
a) Tax deferment until retirement (tax-free); if you feel that your personal income tax is "too high", then consider setting up a SRS to defer these taxes.
Refer to my previous blog for details:
http://www.waynekoh.com/2007/12/zerolise-or-reduce-your-tax-using-srs.html

b) See it as a "2nd CPF", in these days and probably into the future years, retirement amount required would be higher; Let's say you need SGD1.0 mil for a **comfortable retirement (most people below 40 years as of now), and CPF minimum sum scheme only caters for SGD120k, you would be potentially facing a 88% shortage in your reitrement years if you rely solely on CPF for retirement. Can you drink 88% less coffee or can you eat 88% less during retirement years? But really, do you want to have 88% less?
**comfortable means same standard of living as compared to pre-retirement days.

c) Combining (a)+(b)= Pay less taxes and compound your 2nd CPF
A sum of SGD6000 contributed annually into SRS will get the following sums at the following compounding return rates:-

Email me for the calculation spreadsheet.

In the year 2008, it may be wise to start planning your srs right from the beginning. The biggest "enemy" is of course, procrastination.

..............Extract from www.mof.gov.sg..............
Q2: Is MOF conducting educational sessions on the scheme?

A: The SRS is for the private sector to drive. As financial institutions market SRS products to the public, they will also familiarise the public with SRS. MOF will not be involved.

..............Extract from www.mof.gov.sg..............

Last few days to qualify for SRS!

The year 2007 is coming to an end soon. If you have been paying income tax and want to defer the taxes, consider SRS.
More details:-
1) http://www.geocities.com/waynekohweeguan/whypaytax.pdf
2) http://app.mof.gov.sg/faq/index.asp
..............Extract from www.mof.gov.sg..............
Q2: Is MOF conducting educational sessions on the scheme?

A: The SRS is for the private sector to drive. As financial institutions market SRS products to the public, they will also familiarise the public with SRS. MOF will not be involved.

..............Extract from www.mof.gov.sg..............