Can I Depend On My Property For My Retirement?

They say that money can’t buy happiness, and we agree, but a sound financial plan is crucial for a happy, healthy retirement.

To succeed in retirement, you do need a framework that helps you make good choices about where to invest your money as retirement draws near, and a plan for how you’ll “spend down” your assets when you’re no longer working.

In Singapore, the tendency is to depend on our CPF monies for our retirement.

The government has expanded the scheme in the last few years and introduced CPF LIFE which basically guarantees a monthly CPF payout for the rest of your life. Currently the CPF payout starts at 65 years old.

Your Various CPF Accounts

In your active working period when you are aged 35 years old and below – do take note that 37% of your income is contributed to your CPF Accounts.

23% of your income actually enters your CPF Ordinary Account (OA). The remaining 14% is split between your Special Account (SA) and Medisave Account (MA).

When purchasing your first property eg a HDB flat – your CPF OA account would have been wiped out to pay for the initial downpayment. Last year in Aug 2018, HDB allowed up to $20,000 to be retained in the CPF OA when taking a HDB loan.

The rationale? In the event of job-loss where there are no CPF contributions – there is still a buffer of $20,000 inside the OA account which can be used to service the monthly mortgage of the HDB loan.

As you grow older, the contribution amounts will change. More will be put into the SA and MA – while lesser will be into the OA.

Take note of the significant drop in contribution to your OA after age 50

The Significant Age of 55 Years Old for CPF Members

For real estate agents, we like to tease our customers who are turning 55 years old as entering the “Club 55”.

In Singapore, this is a very significant process and indicates you are moving to the next chapter of your life.

This is the point when your Retirement Account (RA) is created!

Your Retirement Account will consists of whatever monies within your Ordinary Account and Special Account. Your Medisave Account will remain untouched.

To enjoy the monthly payouts, your RA will need to hit the Full Retirement Sum.

The Retirement Sum is destined to increase every year due to inflation.

Here are some of the issues to remember:

The CPF Board guarantees 2.5% interest rate for monies in your OA
However, you are also withdrawing money from your OA to service your monthly installments for your property
Will you then have enough for your money in your CPF OA to meet the Full Retirement Sum upon turning 55 years old?

That is the question!

The Key Process Is Downsizing

Now if you think of your home as an investment – essentially what you are doing is parking your monies from your OA to your property.

So after paying for 20-30 years…. how do you extract the monies from your property?

You can choose to rent out a room while you are still staying there. There will be the inconvenience of having a tenant.
You can choose to sell the property and extract the gains

Hence there is this additional step of how you can depend on your property for your retirement.

We assume the property is able to appreciate

The key process is through downgrading – selling your existing property and buying a cheaper property for your next home.

Whatever gains you have made from your earlier property can then be part of your retirement nest egg.

Let’s Work Backwards

So in order to make sure we are able to extract enough for our retirement nest egg, we need to be purchase a property that has the following criteria:

able to appreciate and make decent capital gains
able to retain its value better and does not depreciate easily
able to remain attractive to buyers when it is time to sell

This is why some HDB homeowners are making the decision to upgrade to private properties.

It gives them the opportunity to downgrade later in the future.

How A Client Extracted Her Retirement Monies Through Property

Earlier this year, I helped one of my clients to sell off her residential property which was a private property located in the east.

She bought this property way back in 1997 when she was 44 years old.

She received the keys in 2001 and stayed there till early 2019. For almost 18 years – this was her family residential property.

She also has been paying the monthly installments throughout the period and has no more outstanding loan.

At the age of 67 years old – she sold it off for $1.68 million. She made a profit of about $627K.

But as she has no more outstanding loan – the entire amount is returned to her in form of both cash and CPF.

So her retirement nest egg consisting of both cash and CPF is $1.68 million.

Here are the numbers:

1997 – Age: 44 years old
Bought a private property in the east at $1.06 million
TOP in 2001. Stayed there for the past 18 years.
2019 – Age: 67 years old. Decides to sell.
Sold at $1.68 million. Net Profit: $627K
No more outstanding loan – so receives full $1.68 million in cash & CPF

She has more than enough to buy a HDB flat within the same area if she wishes. This is power of careful planning and the impact of using property as part of your retirement portfolio.

Inflation has always been known to erode the value of your money. But with property, inflation works for you – instead of against you.

Had she parked her monies in a bank account, it is unlikely to provide such returns.

What If I Choose Not To Upgrade?

If you are already holding on to a HDB and you intend to hold on to it until retirement, you need to be aware of your alternative choices.

Some of these choices are:

Downgrading from a 4-room HDB flat all the way to a studio flat to extract the most from your retirement
Lease Buyback scheme which is dependent on how much the HDB flat is worth
Pledging your HDB flat to meet the Full Retirement Sum

The common factor in all of the above?

The value of your HDB flat. Will it be able to appreciate or even retain its value?

Or is it more likely to depreciate?

Private Properties Do Depreciate As Well

Do take note that private properties do depreciate as well.

But do take note that for private property owners have 2 ways to exit out of their investment property – either by selling or through the en-bloc sales process by collectively selling to a private developer.

For HDB owners – the exit is by selling or through VERS (Voluntary En-bloc Redevelopment Scheme). Unfortunately VERS is still an unknown process as it will only happen in 20 years’ time.

Those who are keenly aware of their decaying HDB lease are actually taking action by upgrading to private property. This is especially so if they can afford it.

As a property agent, my observation in Singapore is that there is always a buyer available for any property in Singapore. The most important thing however is whether buyers can match the seller’s price expectations.

Buyers will still exist for your HDB flat. However you might need to manage your own selling price expectations.

Conclusion

In Singapore context, you are essentially borrowing from your retirement nest egg to pay for your property.

If you leave your money in your OA – you gain the guaranteed 2.5% per year.
But if you park the money in a property that appreciates more than 2.5% per year – then you are actually making money.
But if your property starts to depreciate by 1% per year, you are actually losing 3.5% per year!

And I haven’t even considered the 2.6% interest rate of your HDB loan.

My gentle reminder to you – always always check on your current property value.

Find out the transaction values of your neighbouring units.
Check on your CPF accrued interest – how much will you need to return to CPF when you sell your flat.
Login to HDB website to check on your outstanding HDB loan
Or login to the bank’s website to check on your outstanding bank loan