Retirement Funding Optimization

[malcontent]

I’m creating a new thread for a topic that seems to have a lot of interest. One area of concern is around claiming strategies for government pensions… and this is equally relevant to both overseas and the local pension (CPF LIFE) where you can get permanently higher payments for life if you delay the start of payments, or take lower payments earlier and invest them.

I believe that the key to making an early claiming strategy pay off (in terms of greater total financial benefit in total over a lifetime, including what your beneficiaries get) you need to have great discipline and great risk tolerance, which is not common for most of members of the public.

However, since payments under CPF LIFE increase even more modestly in exchange for waiting, this may make it even more attractive to claim earlier than other government pensions like social security. I’d be interested to hear other’s thoughts on this.

[PNGMK]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

[malcontent]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

Two years is a short runway, that’s a strong point in favor of contributing now. I think the key is… what tax rate (after the 50% concession) do you expect to pay on the way out?

[PNGMK]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

Two years is a short runway, that’s a strong point in favor of contributing now. I think the key is… what tax rate (after the 50% concession) do you expect to pay on the way out?

Zero or almost zero. However the upside on the cash in hand is much higher than 7%. I decided not to put it in.

[malcontent]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

Two years is a short runway, that’s a strong point in favor of contributing now. I think the key is… what tax rate (after the 50% concession) do you expect to pay on the way out?

Zero or almost zero. However the upside on the cash in hand is much higher than 7%. I decided not to put it in.

Assuming the estimate of 0% tax is rock solid, I’d probably do it… otherwise don’t bother.

Keep in mind, that’s 7% guaranteed, plus whatever return you’d get on your investment inside SRS.

I’m currently sitting on 44% ROI in my SRS, excluding dividends. I’ve been dutifully dollar cost averaging into the S&P 500 (ticker S27 on the SGX) from 2020 until now.

[smoulder]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

What I did this year was to liquidate some CSPX investment (bought using cash over the years), transferred the proceeds over to my SRS and then bought an S&P 500 index fund through Endowus. So tax saving was done without changing what I'm invested in and I didn't touch my cash on hand. Obviously the only difference now is that my investment is not as liquid.

[malcontent]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

What I did this year was to liquidate some CSPX investment (bought using cash over the years), transferred the proceeds over to my SRS and then bought an S&P 500 index fund through Endowus. So tax saving was done without changing what I'm invested in and I didn't touch my cash on hand. Obviously the only difference now is that my investment is not as liquid.

London traded CSPX is generally the lowest-cost and most tax effective way for a Singapore based (non-US) investor to get S&P500 exposure with cash (non-SRS).

For Endowus, I assume you are in Blackrock’s synthetic S&P500 index? I guess Endowus will charge a fee for access. In the past I’ve seen 0.3% from similar outfits. Do share if you know.

[NYY1]

...
However, since payments under CPF LIFE increase even more modestly in exchange for waiting, this may make it even more attractive to claim earlier than other government pensions like social security. I’d be interested to hear other’s thoughts on this.

I compared claiming at 65 vs 70 for the Standard Plan with a balance equal to next year's ERS (at age 55). Assuming the payments are invested, I get the following:
-The average increase in payments is about 6.0% for each year of waiting.
-You need to go out to Year 20 (just before age 85) until you have collected more from waiting (start at age 70). This is a nominal break-even and does not account for time value or reduced purchasing power. Of course, from this point forward you will collect more each year from waiting (and will collect more in total).
-Due to the bequest, claiming at 65 produces a worse result if you do not live very long. At an 8% asset/investment return, you need to make it to Year 11 to be better off (6% = Year 14, 10% = Year 9). From there onwards, claiming at 65 results in better outcomes (FV of payments after being invested) out to age 100 (I stopped the table here).
-If you live to 100, the equivalent annual return from waiting is about 4.6%.

If anyone has done similar calculations, it would be good to compare outcomes.

[NYY1]

Copying the following article over for reference.

Here is a writing that talks about why the 8% increase in benefits (for each year of waiting) is not equivalent to an 8% rate of return (read the Background and A Distraction sections)*.

The rest of the writing has a bunch of calculations and statements about when various scenarios are better (not saying I agree or disagree with any of these).

https://www.financialplanningassociatio ... efits-OPEN

*I think another way to look at this is 1/0.7 = 1.43. If you delay payments for five years, you will get 43% more for each year that you are alive. However, you will never collect 43% more in total due to the five payments you did not collect (you may also collect less if you die early).

[NYY1]

Copying the following article over for reference.

Here is another article (same source) that compares ending wealth when claiming early vs. claiming late.

The article's conclusion is that waiting is generally better. However, there are two factors/assumptions worth noting.

#1. The maximum stock allocation they assume is 75%. If one really doesn't need the money and can push the stock weight closer to 100%, the results from claiming early will likely improve.

#2. The article uses a horizon of age 95 to evaluate the results. Conditional life expectancy at 62 is probably more like low to mid-80s (of course, it will vary by person).

If you look at Table 4 or Table 5, the 50th percentile wealth in the 75% stock allocation at age 85 is greater for claiming at 62 (than it is for claiming at 67 or 70). Again, presumably a 100% stock allocation will further favour claiming early.

In general, I believe the numerical results are similar to those in the article referenced above; if one lives a very long time, waiting is better. In contrast, a better result is probably obtained (on average) for horizons that cover how long most people will live (although this comes with variance).

https://www.financialplanningassociatio ... value-OPEN

[NYY1]

To be clear, everyone's decision is going to depend on a number of factors (I am not advocating anyone do this or that). In some cases, waiting / higher payments may be better. On the other hand, I think there are situations were collecting early results in a higher expected value (PV or future value if you invest the payments), although this is not certain and comes with variance.

Still, I think there are some factors that are not always well understood or appreciated, and once these are taken into consideration, a different conclusion may be reached.

#1. A X% increase in payments for each year of waiting is not equal to a X% annual rate of return.

#2. There is probably some PV or opportunity cost consideration when comparing different amounts across time. Exactly what discount rate or assumed rate of return one wants to use is up for debate.

Lastly, one needs to evaluate the state of the world when they hit these ages/decision points (no need to set your mind 100% on something now). For example, if you were to retire (or get fired) in a bear market, you are going to want to try to avoid liquidating assets (the prospective return or opportunity cost of doing so is high). On the contrary, if you retire at the top of a market/in a bubble and the prospective future returns are crummy, the guaranteed payments / fixed rate of return may be better.

Of course, we never know exactly where we are or what the future will hold when we make the decision. They key is to make sure you are still "OK" if you end up in the situation where you are "relatively worse off."

[smoulder]

I'm sitting here right now wondering whether I really should put in $15300 into SRS today for a total estimate tax savings of $1050 (7%). I think at 60 (considering I need to wait til 62 to get my SRS) cash in hand today might be king.

What I did this year was to liquidate some CSPX investment (bought using cash over the years), transferred the proceeds over to my SRS and then bought an S&P 500 index fund through Endowus. So tax saving was done without changing what I'm invested in and I didn't touch my cash on hand. Obviously the only difference now is that my investment is not as liquid.

London traded CSPX is generally the lowest-cost and most tax effective way for a Singapore based (non-US) investor to get S&P500 exposure with cash (non-SRS).

For Endowus, I assume you are in Blackrock’s synthetic S&P500 index? I guess Endowus will charge a fee for access. In the past I’ve seen 0.3% from similar outfits. Do share if you know.

Yes correct. iShares. And yes off the top of my head their charge is 0.3%.

[malcontent]

I’ve only done limited analysis comparing age 65 vs 70 claiming scenarios for CPF LIFE. One thing that surprised me at first is how the bequest runs out faster when starting at age 70, but I figure this is just a function of a ~ 6%^5 higher payment eroding ~ 4%^5 higher principle.

A good point you made is how waiting lets you earn favorable interest rates in RA longer, which generates more value for those additional 5 years versus “buying” longevity protection when CPF LIFE kicks in… which may or may not generate future value.

[malcontent]

Yes correct. iShares. And yes off the top of my head their charge is 0.3%.

This 0.3% seems small until it is compounded long-term, for example, it adds up to over 7.5% over 25 years. That can eat up any tax savings you might have enjoyed upfront, even worse if you end up paying any tax on the way out.

This is why I was so perplexed by SRS when it was first introduced in 2001. I have always been interested in any tax advantaged opportunities and my first instinct is to max it out. But SRS is a different animal compared to tax advantaged accounts in other countries. Back then I determined that 3% was the risk-free benefit (current top tax rate minus the concessionary rate on withdrawal), which would be eaten up quickly by higher expenses found with SRS qualified investments. So I decided then, it just wasn’t worth it. I wouldn’t have an SRS today if my employer hadn’t changed our benefits to include SRS contributions.

Where SRS has the highest chance of paying off is the following:

1. You’ve got a short runway, so that the higher expenses don’t compound as long.

2. You’re in a high tax bracket where the savings is more substantial.

3. You’re retiring in Singapore and can spread the withdrawals over 10 years.

[smoulder]

^ 2 & 3 would be applicable for me. The other factor for us non Americans is that the dividends get eaten up by investing in S27. The other fear is the estate tax.

Now specifically coming back to the topic of moving some investment from CSPX to Endowus, it's not something I would repeat often. It's mainly because I wanted to keep some additional cash on hand this year. CSPX is definitely a more efficient investment for a non American. No doubt about that.