Category Archives for Retirement

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?

How much do you need to retire?

“Am I ready to retire?”

This is a question that many people ask themselves when they are thinking of quitting a job and wishing to travel the world for the rest of their life. When I say ‘them’, I’m kind of referring to me. 🙂

The Rule of 300

The Rule of 300 is basically an explanation of having a 4% safe-withdrawal rate (SWR). The 4% SWR is a guideline for a sustainable rate of spending during a 30-year retirement. So, if you have $1.2 million invested, you could take out $48,000 during the first year. That provides you with $4,000 per month.

The Department of Statistics Singapore highlighted in their Household Expenditure Survey 2012/13 that on an average, a family spends $4,724 per month. That means a family’s annual expenses is $56,688 ($4724 x 12). To make sure that they have enough to retire, we need to multiply this amount by 25 which brings us up to $1,417,200.

Now, they are able to withdraw 4% of this $1,417,200 portfolio in their first year which is $56,688. They can then divide this money up by month to derive $4,724 per month (notice that this is the same amount we started with).

You’re probably thinking, ‘Would I run out of money in my investment portfolio if I keep withdrawing 4% each year?’ A study using data from the past few decades shows your investment portfolio will not run dry if you maintain a conservative withdrawal rate of 4% for 30 years. It is important to note that past performance doesn’t necessary represent future performances.

trinity-study-portfolio-success-rates-1946-to-1995-small

As time goes on the portfolio balance will continue to increase as the markets increase. The question is, what allocation should your investment portfolio be so that when utilizing the 4% SWR, your portfolio balance should never bottom out. So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

What do you need to do to retire early?

  • Take control of your expenses. If you can reduce your annual expenses, your SWR would much lesser and it would be much easier to achieve your investment portfolio size.
  • Focus on increasing your monthly saving ratio. If you diligently put your monthly savings into your investment portfolio, it will grow and reward you in time to come.
  • Eliminate debt. Growing your investment returns is useless if your debts are holding you back.

So let me ask you now this, are you ready to retire?

Singapore Savings Bonds – a new investment option for retail investors

The Government and Monetary Authority of Singapore (MAS) are planning to introduce Singapore Savings Bonds (SSB), a new type of bonds to help individual investors get a better return on their savings.

“In short, the Singapore Savings Bonds will offer the higher returns of a long-term bond and give what investors call a term premium, while retaining the flexibility of a shorter-term deposit, and the safety of an instrument guaranteed by the Government,” – Senior Minister of State for Finance Josephine Teo

While details about SSB are still being finalised, here’s what we know about this product:

  • It is a low-cost investment made widely available to retail investors to encourage individuals to save and invest to meet their long-term financial goals and retirement needs.
  • SSB will be principal-guaranteed by the Government which means the investor’s original outlay is fully protected.
  • Bond-holder will be able to sell the bond and get his money back in any given month without incurring a penalty.
  • SSB will pay higher coupons if the bonds are held longer unlike conventional bonds where the same coupon rate is paid each year.

Given that my current portfolio is 100% equities instead of an 80-20 split between equities and bonds, I certainly look forward to rebalancing my portfolio after SSB becomes available.

In my opinion, SSB has a steep hill to climb in order to be well-received by retail investors.

Offer higher interest rates than the regular bank deposits

I don’t think this will be difficult seeing how the average interest rates that banks are offering for deposits are very low. The highest bank deposit interest rate offered in the market right now is the OCBC 360 deposit account where account holders can earn up to 3.05% per year in interest by performing these tasks every month:

  • Crediting their salary to the account
  • Spending at least $400 on an OCBC credit card
  • Paying any 3 bills using OCBC online or GIRO

If SSB could offer an interest rate of approx. 2.5-3.5% per year, I’m pretty confident that investors would move their deposits from OCBC to SSB because it is much more simple. I for one would love to not have to spend at least $400 on my OCBC credit card if I don’t have a need to.

Be more attractive than Singapore Government Securities (SGS) bonds

Singapore Government Securities (SGS) are marketable debt instruments of the Government of Singapore. These debt instruments take the form of either Treasury bills (T-bills) or bonds and are backed by the full faith and credit of the Singapore Government.

They are offered in the following options:

  • 3-month Treasury Bill
  • 6-month Treasury Bill
  • 1-year Treasury Bill
  • 2-year SGS bond
  • 5-year SGS bond
  • 7-year SGS bond
  • 10-year SGS bond
  • 15-year SGS bond
  • 30-year SGS bond

The SGS bonds and Treasury bills are not widely marketed and I’m quite sure that the average investor would not have the knowledge on how to go about applying for one. I personally have participated in a 1-year Treasury Bill auction many years ago when the interest rates offered back then were quite attractive. In recent years, the interest rates offered for SGS bonds and Treasury Bills have been rather unattractive for me to make the effort to add them into my portfolio.

Our senior minister has mentioned that SSB offer interest rates close to long-term SGS bonds and would not have any lock-in periods tagged to them. Awesome! The next hurdle to cross would be to make SSB easy to buy (and sell). The best way to do this would be to allow investors to purchase SSB through internet banking platform of local banks and making payments with their deposit accounts.

Remain simple to understand and sustainable in the long run

With lofty ideas such as to offer interest rates close to long-term SGS bonds and allowing investors to get their money back any time without penalties, this product will need to be well-planned and given a thorough scrutiny to ensure that it is self-sustainable and not become a ponzi scheme.

As an investor, I would want to know how the money in the bond is being invested in order to generate the returns promised. As they say, if it sounds too good to be true, it probably is.

If done correctly, the SSB could become a disruptive innovation that forces the fixed-income market to improve on its offerings in order to retain its investors. Banks may be pressured to increase their interest rates for deposit accounts to keep account holders from withdrawing their money to buy SSB. Bond issuers will have to think out of the box in order to entice investors in parking their money in their bonds.