Retirement Savings You Already Have (And You Didn’t Know Exist)
Lifestyle | 30 Oct 2019
Retirement planning is an important part of every working adult’s life. If you haven’t started planning yet, we hope you will start your retirement planning by the end of this read! Plan retirement early so you won’t suffer when you’re supposed to be enjoying the fruits of your labour.
First, let’s start with a retirement saving plan that all working adults already have. Everyone’s aware of the CPF scheme, right?
Retirement Savings You Already Have
CPF is a government forced saving scheme implemented to help Singaporeans save for retirement. The CPF scheme automatically contributes 20% of your income and segments into 3 separate accounts: Ordinary Account, Special Account, and MediSave. On top of that, your employer contributes 17% of your salary to your CPF savings as well.
Credits: CPF Board
CPF accounts give an interest rate of 3.5% on their Ordinary Accounts and up to 5% on their Special and MediSave accounts. This includes an extra 1% interest for the first $60,000 of your combined balances. Singaporeans aged 55 and above will get another 1% interest on the first $30,000 of their balances.
This means, good news! Singaporeans can actually earn up to 6% interest per year on their retirement balances.
More Ways to Save for Retirement
Is the CPF retirement fund sufficient for the majority Singaporeans in their golden years? Research shows that monthly payouts from the CPF retirement scheme alone barely covers half of what a single elderly person needs. This is highly concerning especially if many people are over-reliant on a single source of income.
Besides CPF, the government implemented the Supplementary Retirement Scheme (SRS). The SRS is a voluntary scheme for individuals who wish to make contributions to an SRS account on top of CPF contributions. Here are some things to note when opening an SRS account.
To open an SRS account, either visit a DBS, OCBC or UOB branch or sign up directly from their website. Monies in an SRS account earn the market rate of 0.05% interest per annum. While much lower than that of the CPF account, placing funds in your SRS account brings the benefit of tax-relief for contributions with a cap of $15,300 annually. The money in your SRS account isn’t meant to sit idle but rather to be put into investments that can generate a much better return.
Gains on your investments in the SRS account are tax-free. Nonetheless, after you’ve reached 62 years old and have retired, 50% of future withdrawals from the account will still be subjected to relevant taxes. Withdrawals before the age of 62 are 100% taxable in addition to a 5% early withdrawal penalty. Since contributions to your SRS account are tax-free, you’ll save on income taxes. Use the IRAS website and their excel sheet tax calculator for information on the current tax rate and tax brackets.
Investments For Risk-Averse Investors
Knowledge about the market and great analytical skills are a BIG plus for stocks investments. Risk-averse investors can invest in stocks listed on the Singapore Exchange (SGX). Being the most volatile investment amongst those in the list, stocks can bring huge gains to your portfolio but can also lose you the most money.
ETFs or Exchange Traded Funds are funds that mirror an index’s performance and their returns are tied. By mirroring the portfolio of the index, the fund aims to achieve a return equal to the index it’s tracking. There are 2 ETFs that track the Straits Times Index – the SPDR STI ETF and the Nikko AM Singapore STI ETF. T. ETFs don’t necessarily track a stock index, there are some that track bond indexes or even REITs. Read more from OCBC.
3. Singapore Saving Bonds
The Singapore Savings Bonds was not made available until December last year. With the relaxed rule, investors can now purchase SSBs with their SRS account monies. The limit of SSBs an investor can hold is also increased to $200,000, which is great for risk-averse investors looking to diversify their portfolios.
4. Fixed Deposits
Fixed deposits require you to place a sum with a financial institution for a set amount of years. During which, a fixed interest rate is applied to it and you won’t be able to withdraw any amount of money without usually incurring a penalty. Extremely low risk for the risk-averse!
The latest disruption in the financial tech world, Robo-Advisors provide advice on investments and financial matters. Robo-Advisors manage an investor’s portfolio, allocating and reallocating the portfolio assets to achieve the desired return to exposed risk suitable for the investor’s risk appetite.
Singapore has numerous Robo-Advisor services such as MoneyOwl, StashAway and even OCBC’s own RoboInvest. These advisors differ in investible assets and funds. If you’re interested, make sure to pick one that’s suited to your portfolio.
You are truly mistaken to think that it’s too early to plan for investments – it’s never too early. Understanding that the compounding interest effect is extremely powerful is the first step to realising that it’s never too early to set a retirement plan in motion.