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More so than any year before, inflation is a global problem that poses a great concern to all of us, including most countries’ central governments. It’s also the reason why the US Federal Reserve has been constantly increasing its benchmark interest rate since the start of the year.
As consumers in Singapore, we have not been spared from inflation. Even though MAS has strengthened the Singapore Dollar to make our imports cheaper, inflation is still high at 7.5% for CPI-All Items on a year-on-year basis for August.
Given high inflation, one risk we, as consumers, have to deal with is how the purchasing power of our retirement nest egg may be eroded over time by inflation. To overcome this, it’s more important than ever that we invest the savings in our retirement nest egg, including those in our Supplementary Retirement Scheme (SRS) Account.
How The Supplementary Retirement Scheme (SRS) Account Can Help Our Retirement
The SRS is part of the Singapore government’s multi-pronged strategy to address the financial needs of Singaporeans in our latter years by helping us to save more for our retirement. Unlike the CPF scheme, which is compulsory, participating in the SRS is voluntary.
Contributions to our SRS accounts are eligible for dollar-for-dollar tax relief. This is up to a maximum of $15,300 for Singaporeans and Permanent Residents (PRs), and $35,700 for foreigners per year.
For example, in YA2022, an individual with a taxable income of $80,000 (after accounting for all other tax relief) will be liable for an income tax of $3,350. If they contribute $10,000 to their SRS account, their taxable income will be reduced to $70,000, thus reducing their income tax to $2,650, saving them $700 in income tax.
If you think about it, that’s like getting an immediate 7% cashback from IRAS on our SRS contributions! The exact amount you save in income tax for your SRS contribution will depend on which tax bracket you fall under.
Tax Savings Is Good, But It’s Not Enough On Its Own
Unfortunately, merely enjoying tax savings on our SRS Account isn’t enough. After all, the tax savings we enjoy for our SRS contribution will be a one-off.
Unlike our CPF savings that earn us a risk-free interest of at least 2.5% in our Ordinary Account or 4.0% in our Special and MediSave Account, savings in our SRS account earn us a minuscule interest of just 0.05% p.a. This is, obviously, not going to be enough to help us grow our retirement nest egg and protect its purchasing power against inflation.
To maximise the returns we can get from our SRS account for retirement, we need to invest our SRS savings.
How Should We Invest Our SRS Savings?
When investing our SRS savings, the usual concepts and principles of investing apply. Among these are being comfortable with the level of risk we are willing to take with our investments, and knowing how long our investment time horizon is.
An investor who is 35 and started only topping up his SRS account this year may wish to invest in a higher-risk portfolio, knowing that he has a long investment time horizon before he reaches the retirement age.
Through a financial advisory platform like MoneyOwl, a wholly owned social enterprise under NTUC Enterprise, we can access a broad range of diversified portfolios that are SRS-eligible. These include the five Dimensional portfolios that are offered by MoneyOwl for investors with varying degrees of risk tolerance levels.
Using an illustration from MoneyOwl, if we invest $10,000 today from our SRS account in the Balanced portfolio (60% in equity, 40% in fixed income) and hold the investment for 30 years, our portfolio may be worth *$51,276 at the end of our investment horizon.
*This is only a projected illustration.
Investors willing to take on higher risks to get higher expected returns can choose the Equity portfolio which allocates 100% of their funds in equity, or the Growth portfolio that allocates 80% of their funds in equity and 20% in fixed income.
For those of us who are risk-averse, we can consider the Conservative (20% equity, 80% fixed income) or the Moderate (40% equity, 60% fixed income) portfolios. While expected returns from these portfolios may be lower over the long-term, they are also more resistant to downturns in the market due to a higher allocation to fixed income.
You can try this for free and build your own portfolio here.
Taking Reduced Risk As We Near Retirement
While we may have started our SRS investment journey with a higher-risk portfolio that aims to grow our retirement savings aggressively, this may no longer be the ideal portfolio that we want as we near retirement.
As we enter the retirement phase of our lives, we may wish to take lesser risks with our investments. This is when a portfolio like MoneyOwl’s WiseSaver can help us. WiseSaver is a fund that invests in Singapore Dollar bank deposits, allowing us to earn higher interest returns from very low-risk assets. While it’s not likely to generate the kind of high returns we can expect from an equity portfolio, it’s also less risky and can generate consistent, low-risk returns while still offering us liquidity and flexibility. This way, we can withdraw the funds whenever we need them, with minimal inconvenience during our retirement.
Another solution we can consider during our retirement years is WiseIncome — where you can receive a stream of passive income for the long term with potential capital appreciation.
WiseIncome is suitable for investors who want long-term exposure to a multi-asset portfolio comprising of Asian bonds, global equities and REITs, balancing between growth, income and stability. With income being generated from diversified sources, this is then reinvested to help us grow our retirement nest egg faster.
For our SRS investments, we can invest in the Grow & Invest portfolio. For Balanced Growth With Income and Income Focused, these are cash investments.
As an SRS investor, we don’t necessarily need to choose one portfolio over another. While we may still be investing in the Dimensional portfolio to continue growing our wealth, we can still allocate some of our SRS savings to WiseIncome or WiseSaver to suit your needs.
Read Also: Step By Step Guide To Opening Your Supplementary Retirement Scheme (SRS) Account
Thinking of starting your SRS journey this year? We have some great news!
From now till 31 December 2022, get up to $500 FairPrice E-vouchers when you invest your SRS funds with MoneyOwl. Both new and existing MoneyOwl clients are eligible for this limited time promotion.
To qualify for this promotion, you need to invest your SRS savings with MoneyOwl and stay invested at least until the end of February 2023. You can choose to invest in the WiseSaver, WiseIncome and/or Dimensional portfolios.
Find out more details on this MoneyOwl SRS promotion here.
For investors who don’t enjoy any tax savings yet from topping up their SRS account, it might still make sense to consider opening an SRS account first and to make a contribution to lock-in the prevailing statutory retirement age. This is because penalty-free withdrawals from our SRS account start based on the prevailing statutory retirement age when our first SRS contributions were made.
If we wish, we can also invest in any of the above-mentioned portfolios using cash.