The good news is that more young investors make use of the SRS, but the bad news is that too much of the SRS money stays in cash.
Jean Paul Wong | Published on 16 Dec 2021
Making sure we have enough money to have a comfortable retirement, giving us the freedom to do things we would like – that is surely one top goal in mind when we think of the why behind investing. Besides investing our cash, one very effective way to grow our retirement nest egg is via the Supplementary Retirement Scheme (SRS).
In addition, transferring cash into the SRS helps us to save on our income tax expenditure. For Singaporeans and PRs, the maximum we can transfer into the SRS each year is $15,300. This was last increased in 2016.
This is also why for investors like myself, when we enter the last few weeks of the year, I will do my annual transfer from my bank account into the SRS, up to the maximum. Not only do I enjoy tax savings on my annual income tax, but having a retirement scheme gives me another reason to diligently invest the money up to the retirement age of 62.
As at end-December 2020, there were more SRS account holders, at 221,849, with higher contributions amounting to $12.23 billion. From the statistics, one very startling statistic stood out: 28% of the SRS investment portfolio was in Cash Balance, as at end 2019. This number was reduced to 26% at the end of 2020, but it still begs the question: why so much SRS money is left in Cash, when this gives SRS account holders 0.05% per annum?
At the risk of sounding like a broken record each year, 0.05% p.a. is an unacceptable return. Not only does this get eroded by inflation, with recent trends pointing to higher inflationary pressures, but we can do so much better if we make our SRS money work a bit harder and more importantly, the world of investment choices has become even larger now. Investors with different risk appetites can therefore have more choices than before in terms of what they would like to invest into.
The investment choices have been growing and they are invested in a wide variety of regions and sectors. The main products are funds, ETFs and stocks.
Are you more into investing in a company’s stock, earnings potential, business model, and other investment moats? Then stocks would be a good choice. With the SRS, there are a number of selected SGX-listed stocks we can consider.
Some investors may prefer not to put too much of their money into just one stock. So here, they may be thinking they want a diversified basket of stocks, such as equity funds or equity ETFs. Again, there are many options here, as some are invested globally; some are invested in Asia, Emerging Markets, China, among others.
What’s more, there are also baskets of other asset classes besides stocks, e.g. bonds. There are bond funds and bond ETFs, and there have been more SGX-listed bond ETF options as well. Within the bonds universe, there are also differences between the safer segments, e.g. the Singapore dollar-focused short duration bond funds, as opposed to Asian high yield bond funds which are invested in longer-dated and lower-investment grade bonds. The differences in their investment mandates show up in the returns, volatility and yields.
Talking about yields, a number of Singaporean investors’ appetite for this remains strong. Yields can come from the coupon payouts from bonds and other asset classes such as REITs. Again, there are now more options for investors who wish to have a portfolio invested in yields, which can come from a combination of dividend payouts from stocks; dividend payouts from REITs, and coupon payouts from bonds. In more recent times, the importance of investing in companies and asset classes that prioritize ESG factors has grown and the good news for investors who are keen, there are more options available for them to consider too.
Here are a few tips on how to look at making our SRS money work harder:
1. Consider my goals – if it is clear I want my SRS to offer a decent nest egg upon retirement age, then I should be willing to consider investing it to beat 0.05% p.a. There is no way 0.05% p.a. will help with my retirement planning.
2. Even if I am risk-averse, there are numerous options to consider, e.g. safer fixed income funds or ETFs, including the Singapore investment-grade money market funds, or ETFs invested into Singapore investment-grade corporate bonds.
3. Divide my SRS money into different buckets to take into account different risk appetites, e.g. with one bucket in safer investments that can try to beat the 0.05% per annum from Cash. This bucket I can call it the Safer SRS bucket. For my other bucket, I can consider it as my long-term SRS bucket.
4. Have a core and a supplementary portion in your portfolio: For my long-term SRS bucket, I can invest into the core investments such as US equities, European equities, Digital Economy equities, and this could form the backbone of my investment portfolio e.g. at 80%. The remaining 20% can be in more volatile and tactical positions we call the supplementary portion of the portfolio. Such examples can include Financial Technology, Healthcare, Cybersecurity and other sectors.
5. Age is an important factor. If I am too close to retirement age, I would want to dial down my risk levels and reduce for instance my weightage in equities, and increase the weightage in safer bond segments. Also, the good news when looking at the SRS statistics is that more Singaporeans and PRs are investing when they are younger (age 18-35) in 2020, with the biggest percentage jump coming from this group, from 15% to 19%. Imagine investing from age 30 and having a runway of over 30 years to grow your SRS – that thought alone is enough to get me excited in terms of what one can do!
6. Keep investing in a disciplined way, because a good investment habit can outperform any fancy strategy that makes us do emotional buy and sell decisions constantly. Not only does investment fees go up when we do so, but we may not be giving our investments the time to deliver the results. One good way to be disciplined is via a regular savings plan (RSP) in a fund. For funds with dividend payouts, you can have the option of reinvesting the dividends back into the funds, potentially enjoying the benefits of compounding over time.
The first step towards building our retirement nest egg can come from strategies such as the SRS but do not forget that this is just one step in the journey. Investing wisely is the crucial next step, if we are to build a decent nest egg for our retirement dreams!