Monday, September 1, 2014

Retirement Planning in Singapore: SRS Account (Revision 04)

Revision 04 (last paragraph): updated on March 4, 2015
Revision 03: updated on October 14, 2014
Revision 02: updated on September 6, 2014

Retirement in Singapore is always a hot topic. Many people are questioning if CPF is indeed enough to retire in Singapore. Nobody can tell you how much you need to retire but I am going to show you what you could/ should do now in order to have good retirement life in Singapore.

SRS (Supplementary Retirement Scheme) Account.

Many people misunderstood SRS account to CPF account. It is totally two different independant accounts. I only opened SRS account last year together with my wife. This is an alternative option for us to save for retirement.

There are couple of key points you should know about SRS account:

(1) The maximum contribution per year is only S$12,750 for SC and SPR, S$29,750 for foreingers.
(2) Your contribution will reduce your taxable income by S$12,750 max per year for SC and SPR.(The tax savings is great and that's our primary objectives)
(3) Investment gains made using SRS funds are TAX-FREE.
(4) Upon retirement, only 50% of the amount withdrawn will be taxable. (You can and you should spread the withdrawals over 10 years upon retirement, you hardly need to pay a single cent based on the income tax structure today.)
(5) Earn interest of 0.05% p.a. on your cash balances in your SRS account. (This is definitely not the reason you contribute to SRS, for 0.05% interest? Hence, use the money in the SRS account to buy good stocks, ETF, index funds, fix deposits, unit trusts, life insurance, etc.)
(6) You can withdraw the money at any time. However, a 5% penalty for premature withdrawal applies, should the withdrawal be made before the statutory retirement age. (You should keep the money inside, that's for retirement purpose!)

Example 1:

This is to show you the SRS returns based on (6%, 7% & 8%).

Always remember:
Real Gain = (1) Tax Savings + (2) Dividends received + (3) SOLD stocks transactions

I would say 6% is very easy to achieve as you have confirmed good tax savings in the calculation and with good solid blue chips dividends, you can easily hit 4-5% or REITS easily 6-7% dividend yield. Not to mention, you have 30 years horizon to witness the price appreciation of the good quality stocks.

With conservative 6% calculation, your portfolio should yield S$1.228 million by the age of 64. Why age 64? It is because you SHOULD start to withdraw money at the age of 65, spreading 10 years, you have at least S$122,800 per year from age 65 to age 75. This is a great retirement side income, don't you think so?

Example 2:

This is how I keep track my SRS portfolio in yearly basis. I just contributed last year December. So, I only monitor the savings which kicks in this year. So far, I have hit 10.43% in the first year (due to some SOLD stocks transactions).

I set a rather high target myself. I would like to achieve 10% gain every year. With the help of tax saving amount, I would say it is NOT IMPOSSIBLE to achieve, let's see down to the years.

With 10% p.a. returns (stretch goal), the portfolio can yield S$2.82 million by the age of 64. The power of compound interest kicks in!

With CPF account and SRS account, two pillars, rest be assured you can retire comfortably in Singapore.

Updated on September 6, 2014
A correction of the SRS returns per year, 10% is too low. It has to be much  more.

Real Gain = (1) Tax Savings + (2) Dividends received + (3) SOLD stocks transactions

Based on the above calculation, the (1) Tax Savings per year is already >S$1,275.

With yearly maximum contribution of S$12,750, the tax savings itself is already well pass 10%.

With (2) and (3) added into calculation, the percentage has to be more. Of course, your capital will keep increasing each year, your tax saving per year >S$1,275 is " >10% of your contribution of S$12,750 ONLY", you have to work harder with your remaining balance when years go by.

With that calculation, my first year return shall now be 20.9% instead. :)
Or to make the calculation "fair", your tax savings shown in the IRAS statement in year 2015 should be added into the year 2014 Real Gain formula because that is the saving results due to your SRS contribution in year 2014. :)

Updated on October 14, 2014
Under the Retirement and Re-employment Act (RRA), the statutory minimum retirement age is still 62, but employers are now required to offer re-employment to eligible employees who turn 62, up to the age of 65.

We can withdraw our SRS monies over 10 years from the date of our first penalty-free withdrawal. Withdrawals are penalty-free only if they take place after the statutory retirement age that was prevailing at the time of our first SRS contribution. The statutory retirement age for all SRS members is currently at 62.

So, I can start to withdraw SRS monies at age 62 until age 71 without penalty. This is good !

Updated on March 4, 2015
It was announced on Budget Day 2015 that the cap of contribution of SRS will be increased by 20%.

The cap of contribution by Singaporean and Singapore PR will be raised from S$12,750 to S$15,300.

It will take effect on January 1st, 2016. The increment is S$2,550. Another good sum for tax relief ! The above table shall be updated based on S$15,300 contribution from year 2016 and onwards.

It will be good if SRS rules can be changed for the following:

(1) Give 1.5 or 2 times of tax relief instead of 1 to 1.

(2) Spread the withdrawal duration from 10 years to 15 years or 20 years. 10 years is too short and we might hit a little tax if our funds in SRS are doing tremendously well.

(3) Give better interest rate in SRS. 2.5% is a good start. :)

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