Category Archives for Investment

A different perspective on the Supplementary Retirement Scheme

The Supplementary Retirement Scheme (SRS) was started in 2011 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of a greying population by helping Singaporeans to save more for their old age. It is operated by the private sector (mainly local banks).

Participating in SRS is voluntary and you can contribute any amount to your SRS account, subject to a cap ($12,750 in 2015 and $15,300 from 2016 onwards). In 2013, the three local banks administering the scheme said they have seen up to 20 per cent annual growth rate in the number of new SRS accounts opened over the past five years which to me, is a good sign because that shows that more Singaporeans are planning for their retirement.

Why naysayers are against contributing to the Supplementary Retirement Scheme

Despite the increase in new SRS accounts, there are many naysayers who are against the idea of contributing cash to SRS accounts.

Here’s a calculation on tax savings that I’ve taken from OCBC’s website on Supplementary Retirement Scheme based on an individual who earns $60,000 per year (that’s $5,000 per month) and $20,000 in personal reliefs.

supplementary-retirement-scheme-calculations

Naysayers would say that it’s ridiculous to contribute $12,750 in cold hard cash just to enjoy $405 in tax savings, especially the case for the lower-tier of middle income earners. They also argue that the tax savings is minimal when compared to returns generated from investments made with the same amount of money.

It’s really just a retirement savings plan with tax benefits

The way I look at my SRS account, I see it as a retirement savings plan with the added bonus of tax benefits. It acts as forced saving to prepare me for future retirement and I can’t access the money until the age of 62. As a reward for saving for retirement, the same amount is deducted from my taxable income.

Some people see it the other way round, where the sole purpose of having a SRS account is for tax deductions and totally missed the point that it’s meant to complement their CPF accounts and build their retirement funds.

supplementary-retirement-scheme-diagram

Consider the money in your SRS account as a part of your investment portfolio

Using my OCBC Blue Chips Investment Plan (BCIP), I am able to use the money in my SRS account to make regular investments in the stock market. As I am focusing on creating an investment portfolio of ETF index funds, I use the money in my SRS account to purchase Nikko AM STI ETF shares every month. In the past few months where the market is on a downturn, the monthly investment from my BCIP account using my SRS money benefited me because it helped to average down on my Nikko AM STI ETF stock holdings.

In the past, all SRS withdrawals must be made in cash. If money in the SRS account was used in investments, the investments had to be liquidated before the proceeds could be withdrawn in cash from the SRS account.

From July 2015, SRS account holders will be able to apply to their SRS operators to withdraw investments from their Supplementary Retirement Scheme (SRS) accounts without having to liquidate their investments (refer to Ministry of Finance website).

This means that if I reach the age of 62, where I am qualified to withdraw from my SRS account and I didn’t have any urgent need for the cash, I can transfer $40,000 worth of investments from my SRS account to my CDP account. That allows my SRS investments to continue to grow in my CDP account and I can liquidate them when I need the cash. This method of transfer will also qualify for 50% tax concession.

A contingency plan when the Singapore government makes more changes to CPF Life

As we continue to plan for our retirement, the reality is that policies governing our CPF accounts is ever changing and will continue to evolve according to our population trends, e.g. mortality rate, etc.

It’s safe to say that by the time I reach the stipulated retirement age, the age when payout from CPF Life commences is not likely to remain at 65. Having a fully funded SRS account of $400,000, I will be able to withdraw $40,000 from 62-72 without having to pay any taxes. That provides a fallback for me if the age where CPF Life payout commences is delayed by a couple of years.

Conclusion

As someone who is on the lower tier of the middle income class, I still believe that contributing to my SRS account has its merits and will continue to do so until it’s fully funded. I’m also pretty sure that my SRS account will play a pivotal role in my retirement planning many years later.

Are you contributing to your SRS account? I’d love to hear your thoughts.

Avoiding scam investments: 7 things you should know

Every few years, an investment scam surfaces and clears the coffers of naive investors. Whether it is some miracle water or precious gold bars, smooth-talking salespeople will try to get you to part with your life savings in exchange for them with promises of buying them back later at a higher price.

We see scams like this all the time. The business model is often unsustainable and sounds too good to be true. The latest

Here are 7 things you should know about scam investments and if you ever come across one, avoid at all costs!

Introduce a product that is perceived to be rare or highly valuable

Scam investment operators will introduce a product into the marketplace that has a high perceived value or appears to be of limited quantity. It could be a 1 kilogram gold bar during 2011-2012 when gold prices were skyrocketing or outskirt real estate properties from a foreign country that is touted to be the next big city in the country. How about that rare coloured diamond that can’t be found anywhere else?

You are given the opportunity to buy this product at a ‘bargain’ price

You will be offered an opportunity to have a chance to own this product at a ‘bargain’ price of $5,000-$50,000 depending on the perceived value of the product. They will try to promote the potential growth in value of the product and that why you should buy now and get ahead of other investors. After all, the early bird catches the worm.

The company guarantees a high return on investment for if you keep it for a period of time

The company will promise to buy the product back from you in 1-5 years time, and make a guarantee on paper to offer you a return on investment as high as 50%! The returns are often very attractive and sound too good to be true.

They also have a referral program that rewards you for bringing in new investors

To run the investment scam on a larger scale, the company usually has a referral program for existing investors to bring in their friends as new investors in exchange for commissions. This helps them grow their pool of investors significantly and improves their cash flow.

You can usually identify a pyramid model in the investment program

The ultimate goal of an investment scam is to build a pyramid model of investors where investments from the larger base at the bottom are used to pay the commissions of the higher tier. As they introduce the business model and pricing structure of the investment plans, you can usually see a pyramid model.

The business model is not sustainable

If you try to replicate their business model, you would find that it is impossible to achieve similar returns. Then you start wondering how does this company sustain itself and make profits. That’s a clear sign to stay away.

Conclusion

If the new investment opportunity that you are exploring ticks off quite a number of boxes in this list, I’d be very careful about making that investment, no matter how lucrative it may seem.

Have you come across an investment scam before? I’d love to hear your thoughts.

6 suggestions to get the most out of your bonus

So you worked hard all year in your job and your manager is happy with your performance. Your reward at the end of the financial year as an employee, will be a monetary reward like a performance or year-end bonus. Congratulations! In the current economy, the extra dollars can be hard to come by and can go a long way – that is, if you use them wisely.

Here are 6 suggestions for getting the most out of your bonus.

Pay off debt

If you have a credit card debt or a personal loan that you are repaying every month, using your bonus to pay it off would be your best bet to getting yourself out of the red and into the black. Even if your bonus cannot fully pay off your debts, it reduces the principle amount of your debt and allows you to pay it off much earlier.

Build an emergency fund

Financial experts usually recommend setting aside 3 to 6 months worth of household expenses as an emergency fund. Personally, I maintain an emergency fund of up to 3 months worth of household expenses simply because of the employability of my job. That said, I’m still optimising my monthly expenses to reduce my spendings. If your current job has a low employability and you think you would need more than 3 months to find a new job, I suggest that you stick to the general rule of having 6 months worth of household expenses as an emergency fund. If you’re just starting to build your emergency fund, your bonus can play a substantial role in building the fund.

Maximise your tax contributions

In Singapore, your bonus becomes part of your taxable income. Therefore it’s worth doing some calculations to tally your taxable income for the year to see how much your bonus is going to cost you in taxes next year. For example, if your current taxable income is $80,000, a $5,000 bonus would cost you an additional $575 (11.5%) in taxes. While income tax rates in Singapore is relatively low compared to other developed countries, you will need to ask yourself if there’s a need to use your bonus to maximise your tax contributions to reduce next year’s income tax.

Invest in your retirement portfolio

If you don’t have any immediate need to spend your bonus, consider adding some money to your retirement to build up the nest. That gives your retirement nest some time to compound some returns before you retire. With a 4% annual return on your retirement investment portfolio, every dollar you add to your retirement nest today would double its value in 20 years.

Invest in yourself

Apart from investing in investment vehicles to grow your assets, is there any course or certification that you have been thinking about taking to better yourself? It could be a Master’s degree to progress to the next level of your career, or skill-based courses like cooking classes to improve your cooking skills so that you can prepare restaurant-quality dinners at home instead of dining in restaurants on weekends.

Reward yourself

All work and no play makes Jack a dull boy. After working hard for a full year, think about rewarding yourself with some indulgence. While spending all your bonus money on indulgence may sound irresponsible, how does allocating 10-20% of your bonus money on a vacation sound to you? The allocated amount of money may not get you to the travel destination of your choice, but it could be a start to building your vacation saving goal.

How I’m allocating my bonus next month

With a bonus of $5,000 coming in next month for last year’s performance, I intend to allocate 90% of the money to my SRS contribution for 2015 to keep my taxable income low and 10% to my vacation saving goal. As an avid backpacker, $500 could probably cover my budget return flight within Asia and I’ll need to save a bit more for the trip itself.

How are you allocating your bonus money?