Time to play THE GAME (1)

The CPF annuities article is a sidetrack as this is something I felt quite strongly about. Public policies should always be reviewed and evaluated so as to know that they are really able to stand up to the initial test of public response.

Well, recently I met up with some of my friends, some of whom had already graduated from university and started working for a year or so. Somehow, our discussion came into the topic of savings. What caught my concern was they mentioned that after a year or so of work, they had not really stashed up much savings. Now, my aim here is not to scorn at others but really, one of the reason for that could be the obligation to repay their study loan incurred for tertiary education. That works out to take approximately 4 to 5 years for an average person to repay his/her study loan. Considering that the common starting pay among fresh graduates is not very high, they might still have bank accounts savings at rather low levels, after working for 4 to 5 years.
[The above estimation is based on for the majority of students, who might not be from extremely well-off families, which can put them to studies without them taking up a loan.]

So now, we have people who might be about 26, 28 years of age and having nothing much to their name, except for a college degree. As time comes, they may decide to settle down, buy a house, and... They are saddled with another new loan (again), a mortgage loan!! This time, this loan is bigger than ever, bigger than their study loan. TA DA!!!!! Here we have, an average working adult, ensnared in debt, working hard trying to repay their debt. This housing loan may well take even more years to clear off.

I am not trying to say, strictly not to incur any debts at all. The current system of credit and loan enables people to immensely increase their purchase power. This plays an important role in expanding the economy and money supply. Imagine, that without the system of credit and loan, it would take ages for a person just to save and pay for a house [but come to think of it, without the availability of loan, prices of houses would not have risen to this value too?].

Asset	Liability
current valuation of 'your' house	outstanding amount left for the loan

In accounting terms

Yes, in accounting terms, 'your' house could be an ASSET, if the "current valuation of 'your' house" is higher than the "outstanding amount left for the loan". The point here could be, not to incur home mortgages too big that the interest payment alone would be unbearable, not to mention repayment of the principal sum. It is important to know how much of your monthly loan servicing goes to paying interest to your bank, and how much goes to repaying the principal sum. For many, a home loan might be a very big and long term commitment. So it is essential to consider carefully and work out the fine details.

I feel a compelling need to tackle the following issue. In accounting terms, the house is an asset… However, a personal house is highly illiquid, i.e. it takes quite some time for the whole procedure of sale, and everybody needs a shelter above their head. Would one readily sell their house and claim the cash proceeds as their asset, ending up without a shelter above their head? In addition, your abode also takes money out of your pocket every month for interest payment. Some can claim that houses always rise in value. Home values may rise over the long term (really long term, measured by the decades).

- But, can anyone guarantee that within the time frame of every person buying then selling the house, the value of the house will rise?

- What if a person bought a house during a house-buying frenzy at a very high price, then when the frenzy subsides, only to find that the price drops?

- How long will it take to come back up to its previous peak price?

- What about heavy interest payment while waiting for the price to rebound? (Opportunity cost)

CPF annuities

When policy makers plan for certain policies, they may have well intentions in mind. However, as these policies may have a great impact on the lives of the general population, it is apt for us to critically evaluate them and appraise their effectiveness.

The CPF savings which were due to be withdrawn at the age of 65, is expected to be paid out over 20 years, till the age of 85. In expectation of longer life expectancy of the citizens, policy makers announced that at a later date, it would be compulsory for CPF members to purchase annuities with their CPF savings when they 'officially' retire at the age of approximately 65. This is to "ensure that members have a source of income when their CPF savings run out" and the premium for it would be a "reasonable amount". But of course, there are many other factors to consider when contemplating such a plan. This includes population 'life expectancy distribution', i.e. the percentages of the population that would live till each age bracket.

In an initial newspaper report estimate, it might cost approximately 8000 to 9000 dollars in premium at age 65, to obtain a monthly payout of about 200 to 300 dollars from age 85, for life. However, we should not only look at the nominal values alone. Assuming in year 2007, a CPF member is 65 years old, and the $250 (approximate) payout he would receive at year 2027 would have a lower present value (PV) as compared to $250 of year 2007.

Year	Year number since payout starts	Present Value (PV) of annuity payout ($)
2027	1	138.42
2028	2	134.39
2029	3	130.47
2030	4	126.67
2031	5	122.98
······	······	······
······	······	······
2037	10	106.09
2038	11	103.00
2039	12	100.00
2040	13	097.09
······	······	······
······	······	······

Assuming an inflation rate of 3% per annum. As an example, the present value of payout at year 2027 is calculated as follows:
PV = $250 / (1.03)^20 = $138.42

[By my calculations, it takes approximately 5 years 6 months of payout to ‘breakeven’, taking into consideration the effect of inflation of 3%]

In this table, my purpose is to illustrate that due to the effect of inflation, the present value of payouts in the future is set to be declining throughout the years. This is definitely not encouraging as this leads to a decreasing purchasing power of the payout. In addition, to be realistic, not every potential annuity holder may live long enough to 'breakeven' on their annuity premium.

While this plan has good intentions in mind, there are its limitations. It is glad that the policy makers are currently working hard to review the fine details of the plan and continually fine-tuning it.

What are all these for?

It saddens me to flip the papers everyday, to find articles describing about the plight of some people who are left behind in terms of employment, financial ability and such. The usual stories would be about people who are not highly-educated, relatively older, being out-competed by younger, lower-cost and industrious workers from countries like China, India etc. While this situation maybe true, it may not be the whole truth yet. I feel that, if not addressed, this problem (or challenges) may be further extended to include the higher-skilled workers in the Singaporean economy in time to come.

There are definitely many highly-skilled individuals from these upcoming developing countries, equipped with knowledge in the many fields such as the sciences, engineering, IT and finance. It can be seen in some local companies and universities that this group of people is already taking up notable positions in their organization. This phenomenon can only be further catalyzed by the effects of globalization. Better inter-countries transportation and communication means can only serve to facilitate this.

It is futile to fight the macro level phenomenon of globalization. It can only intensify in both breadth and depth, i.e. in all aspects of life and society. Attempts to fight and protect local interests with measures like trade tariffs, foreign labour restrictions will only make one's country less competitive and efficient as compared to the rest of the world. Right here, I am not suggesting to assign any blame to anyone for the challenges brought about by the effects of globalization. Changes are always part of the grand scheme of things. The human race has evolved throughout its existence, through stone, copper, bronze, iron, agrarian, industrial, space, digital, nano ages etc. Adapting to changes are part and parcel to the continual survival of a society as a whole.

Unfortunate are those who are technically restricted to move ahead financially, either due to language illiteracy or physical disabilities. Comparatively greater effort have to be put in to overcome such obstacles. As for those with the technical means, it is definitely within their capacity to get ahead financially from their current situation.

And so...

I have begun on a personal quest to discover about my financial future and what lies ahead. As an initial step, I am trying to read both widely and in-depth about this big thing "finance". There is often this strange phenomenon about knowledge. That is, the more I read, the more I do not know, i.e. came to realize that that there is an increasing amount of known unknowns.

But I am not ready to back away from this overwhelming amount of knowledge from this whole new world which I have just stumbled upon, and its potential. It would be too great of a loss. I know it is just not me to compromise with taking the "easy way" of succumbing to society's influence and just following the conventional way of working in life. I am not willing to just "take it as that" and live my life aimlessly. Along the way, there are always be people whom I call "discouragers" who will say things like "you don't have enough capital to do this", "oh, this is risky", "I prefer to work for a big company". To them, I prefer to respect their opinions and leave them alone. To me, it is always better to maintain and not sour relationships with your friends.

There is always this quote from one of Donald Trump's book which I like very much, and it keeps me going when I thought of taking things the easy way:

"If you are going to be thinking anyway, why not think big?"

And so, I have decided to press on, to continually increase my financial literacy, knowledge. To increase my content (knowledge) alone would not suffice. In addition, I would also need to continually expand my context.

Humble Beginnings

It is fairly odd that the blog of a 23-year-old is intertwined with the word "finance". This is probably a fuzzy word, a vague word, an obfuscated word, an obscured word which many people tend to shut out of their mind once it attempts to get into their minds (me included, initially). Probably like many others, I used to have the conventional mindset of studying hard, attain good results, get a 'good' job that pays well. Subsequently, hope to get promoted, get pay raise, get promoted, get pay raise. This goes on and on and on. When the time reaches, then retire happily ever after.

I am occasionally a dreamer and I think of things that occasionally link far off. Then comes one fine day in mid-2006, my mind starts to wander. "Wait a minute... Is this really what I want for myself in life? Up till this point of time in life, I seem to be like a leaf that fell into the river, drifting wherever the river flow takes me. " The society's influence has indeed been very strong.

My mind began to seek answers, to think beyond what is usually accepted as the norm in the society. "Will there really be enough financial resources for one to actually retire upon? Say at the age of 65?" I did a quick visualization of numbers in my mind, some rough calculations. It occurred to me that, it is a little queer for one to work hard all his/her life, then ultimately having to retire and live upon a sum of money each month, which would not really match his/her current standard of living and lifestyle. "When one works hard the whole life then retire, shouldn't one be at least still maintaining the current standard of living? Isn't it quite pitiful if it isn’t true?"