Read? Turning 55 - and enjoying financial freedom
.... Some of the happiest middle-aged people I have encountered are those who have planned creatively for other options later in life... But it is the way they manage their finances that intrigues me. Rather than continue to accumulate assets, their chief priority is to preserve whatever they possess and allow the magic of compounding to grow their assets.
Reflecting on their experience, one major decision now that I have reached the threshold of autumn myself is to change the manner I invest in order to enhance my financial well-being. What simplifies matters is that I have no outstanding loan to pay off, so the objective is to ensure that capital preservation takes precedence over merely aiming for a high investment return.
In the end, I find that the Central Provident Fund is the best option in offering me financial security while giving a level of return I am comfortable with, unless inflation takes off in a big way.
As I turned 55 this year, a sum of $161,000 - the so-called Full Retirement Sum - was transferred from my CPF Special Account to the newly created CPF Retirement Account. After this sum has been set aside for my basic retirement needs, I can choose to take out whatever remaining balances I have in my CPF Ordinary and Special Accounts if I want to.
I also took up the option to top up my Retirement Account by $80,500 to raise the sum there to $241,500, which is the Enhanced Retirement Sum (ERS) this year. The carrot in doing so is to get an attractive risk-free return of 4 per cent on the additional money that I put in.
Assuming that the ERS is raised by about 3 per cent a year, that will enable me to make further top-ups to my Retirement Account by that quantum every year for the next 10 years. It will enable the sum in it to escalate to almost $500,000, including accrued interest, by the time I turn 65.
That, I thought, was the end of the story where beefing up my financial security using CPF is concerned.
Then I found out that I could put money into my CPF Ordinary Account by making a partial or full refund of the CPF savings which I had withdrawn to buy my home, as well as the accrued interest on the withdrawn sum, even though I haven't sold the property.
That opened up an entirely new ball-game for me. If I find myself with surplus cash, should I keep it in the bank where the best fixed deposit rate I currently enjoy is 1.4 per cent, or use it to repay CPF in order to enjoy the much higher 2.5 per cent interest that I can get in my Ordinary Account?
There is another attraction: Since I am past 55 and I have already set aside the Full Retirement Sum in the Retirement Account, I have the flexibility to withdraw the money any time if I need it. This effectively turns my CPF Ordinary account into a high-yield savings account.
Of course, the best option would be to continue to keep the money liquid in a bank if there is a possibility of interest rates going up sharply after Mr Donald Trump takes office as US president. This is because Singdollar interest rates closely track US interest rates.
But I have an awful hunch that interest rates will continue to stay low for a long time, as the ageing population and declining birth rates across the developed world combine to depress economic growth and consumer spending.
This is despite any short-term boost to interest rates from the fiscal stimulus in the form of big tax cuts and huge infrastructural spending promised by Mr Trump when he takes office.
In that case, I may be better off just keeping any excess cash I have in the CPF Ordinary Account. Even at a relatively paltry interest rate of 2.5 per cent, the money in it would have grown by almost 30 per cent in 10 years after compounding.
So, in the end, for better or worse, I find myself writing out another cheque to CPF - this time to refund part of the CPF savings which I had withdrawn to buy my home.
One interesting upshot is that after doing all these various adjustments to my finances, I feel liberated financially as I get ready to enjoy the autumn of my years. Like the gorgeous fall colours I saw in Arashiyama, the best season in life may lie in my autumnal years.
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