3 Straightforward Ways Singaporeans Can Upsize Their Retirement Fund
Saving for retirement is no longer as straightforward as keeping all your funds in your savings account, thanks to inflation that erodes the value of your money year on year. Exactly how much you need for retirement depends on numerous factors that are difficult to pin down as the future is anyone’s guess.
However, there are factors that you are able to gauge now, for example, the kind of lifestyle that you want when you retire, how likely are you to have financial commitments like supporting dependents post-retirement, and whether it’s reasonable to assume that you would have paid down all your major debts like auto loan and mortgages.
Regardless of your present circumstances, you would most likely need to consider ways to grow your retirement fund in addition to the Central Provident Fund (CPF) payout that you will receive.
Here are some ways in which you can use to grow your retirement savings.
Retirement insurance plans
These days, you can buy an insurance policy for almost anything that has a financial risk, from your health to travel to your home. It certainly makes sense that there are attractive retirement insurance plans.
What a typical retirement insurance plan does is that it gives you a guaranteed monthly income for the payout period and a guaranteed capital, which means that your total guaranteed return is more than the total amount that you have paid in premiums.
Not all insurance plans are the same, so it pays to do your homework. For example, the AXA Retire Happy plan gives you the option to increase your guaranteed retirement income at 3.5% per annum to take into account the effects of inflation.
The Manulife RetireReady plan also doubles the guaranteed monthly income if during your payout period you experience a Loss of Independence, which is defined by essential activities like toileting, feeding, and washing.
There are several advantages of signing up for a retirement insurance plan. For one, it helps to address the issue of discipline in saving up for retirement. For some, putting money aside is hard enough, not to mention the temptation to dip your hands into money that you had intended for old age. In addition, it’s also a bonus for people who want are risk averse and prefer the idea of a guaranteed payout.
- Protection coverage. Agents tend to sell these plans as savings plans, but these plans also come with insurance coverage. To ensure that you are not over-insuring yourself, ensure that your total coverage, including other policies that you, are not over what you should rightly be covered for.
- Premium allocation. Insurance savings plans allocate certain amount of your premium for protection, and the balance for investment to grow your savings. If you are paying S$100 per month for the plan, not the full S$100 is used for investment. The allocation split depends on your age, as you become older, the percentage allocated for protection will be become higher, while lowering your investment portion of the premium.
- Maturity benefits. Find out what is the age of maturity so you will be sure that you will get your funds when you retire.
Exchange Traded Funds (ETF)
An Exchange Traded Fund is a security that tracks an index, a commodity, bonds, or a basket of assets. It trades on the stock exchange just like any common stock would, and is more liquid than mutual fund shares.
One of the advantages of investing in an ETF is diversification. An ETF groups together a broader range of stocks, so you can have, for example, an ETF for the BRIC economies, or an ETF that tracks an index, like the Straits Times Index (STI) ETF that gives you exposure to the 30 companies that make up the Straits Times Index.
If you want to stay invested but cannot be bothered with choosing and placing your bets on one company, then an ETF like the STI ETF will be a sensible option. Furthermore, ETFs form part of many savvy investors’ portfolios due to its diversified exposure.
It’s also cheaper to invest in ETF compared to unit trust as an ETF does not require a fund manager.
Also, all you need is a stock brokerage account to invest in an ETF and the price of an ETF is continuously quoted throughout the day.
- Fees and charges. Find out all the costs of investment involved as the costs will erode your returns in the long-run.
- Dividend policy. Is the dividend payout every half yearly or yearly?
Supplementary Retirement Scheme (SRS)
The Supplementary Retirement Scheme is a voluntary scheme to encourage Singaporeans and residents to save for retirement in addition to the CPF funds that you will have. One of the greatest advantages of the scheme is that you get a tax relief amount that is equivalent to the amount of SRS contribution you make, thus giving you some tax savings. And as you may already know, a dollar saved is a dollar earned.
From Year of Assessment 2018 onwards, there will be a personal income tax relief cap of S$80,000, so be sure to review your own tax relief items and amount to determine whether the SRS will still be of help for you. Also, there is a maximum amount that you can contribute to the SRS on an annual basis – S$15,300 for Singaporeans and PRs, and $35,700 for foreigners.
In addition to the eligibility of tax relief, another attractive factor of the SRS is that when you withdraw from your account at age 62, only 50% of your withdrawals from the scheme are taxable for the subsequent 10 years. If you withdraw S$40,000 a year, you can get away without paying tax as only S$20,000 will be taxable, but the current taxation rate for that income level is 0%.
The SRS account doesn’t have attractive interest rates like your CPF account, but you can use that fund to invest in approved financial instruments like insurance products, SGX-listed shares, fixed deposits, unit trusts, and bonds. POSB offers a service that helps you to utilise your SRS funds for investment so that you can grow it over time.
- Potential tax savings. The SRS makes sense for those who are nearer to retirement age, who are earning S$40,000 to maximise the tax savings.
- Restrictions on investment. As the potential rate of returns are not significant, it is prudent to find out everything about reinvesting your SRS funds and the restrictions imposed.
No matter your preferences, when it comes to saving for retirement, the earlier you start, the more you’re able to take advantage of compound interest to grow your funds. How risk averse you should be would depend on factors like your age or stage in life, though it is always prudent to diversify and employ a variety of instruments instead of solely relying on one.