Retirement will be one of the biggest expenses we have in our lives. After all, living for decades without work requires a significant amount of money. So, when it comes to preparing for retirement, is CPF, a house, and some cash enough to live the retirement of your dreams?
CPF is a great retirement program, and in fact, Singapore was recently ranked as having the top Asian retirement system for the fourth consecutive year in the Melbourne Mercer Global Pension Index. However, CPF is designed to provide a foundation for Singaporeans’ retirement, and to then be paired with personal savings.
For individuals with salaries above S$100,000 per year and commensurate lifestyles, CPF alone is likely not sufficient to maintain a similar quality of life to which they were accustomed during their working years.
CPF Alone Might Not be Enough for Retirement
Why would CPF not necessarily be enough?
Let’s dive into an example. Take a married couple that started their careers with salaries of S$3,000 per month per person and, over 40 years, get to S$9,500 per month per person, and that have used CPF to pay for a S$500,000 property downpayment and mortgage in their 30s or 40s.
At age 65, and after CPF Life Enhanced Retirement Sum and Medisave accounts are deducted, they would have combined CPF balances equivalent to approximately four annual salaries.
In this case, the sum of CPF Life Enhanced Retirement monthly pay-out and the income generated from the remaining CPF balances would be able to fund a combined income approximately only equal to 40% of pre-retirement income for 20 years, or 25% for 30 years.
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Look for Tax Relief to Increase Retirement Savings
What’s the solution to having the retirement you want?
Saving more, and make those savings work for you. It comes down to investing and paying close attention to where you can find tax relief.
First, look to maximise your CPF contributions up to the S$37,740 per annum cap. This will give you approximately 3.0% to 3.5% annual returns, risk free. If you have already reached the annual cap, or, if you want to invest some of your retirement contributions to target higher returns than the 3% to 3.5% (and take higher risk), look to SRS.
What’s SRS, you ask? The Singapore Government created the Supplementary Retirement Scheme (SRS) for the exact reason suggested by its name: to help Singaporeans and foreigners working in Singapore supplement their retirement funds, through a significant tax incentive that reaps benefits in the long term.
SRS is a program designed for people who can leave the money invested until age 62. Unlike with CPF, the money can’t be invested in property, and cannot be withdrawn for medical purposes. In other words, SRS is good if you make enough to be confident you won’t need the funds in your SRS account before age 62.
After age 62, you can withdraw money for up to 10 years, and only 50% of each withdrawal is taxable. Early withdrawals (i.e., before age 62) incur taxes on 100% of the balance as well as an additional 5% penalty.
Immediate Tax Benefits in Contributing to SRS
SRS account holders can contribute up to S$15,300 per annum to their SRS accounts, and can deduct this amount from their taxable income. So, if your income tax bracket is 15% to 22%, your S$15,300 contribution immediately saves you S$2,300 to S$3,300 per annum.
|Annual Gross Salary||Marginal Tax Rate||Tax Savings/Annum||Tax Savings with SRS
|Tax Savings with SRS
|Tax Savings with SRS
*Assuming S$15,300 annual contribution for full 10, 20 and 30 years
Tax Benefits When You Invest Your SRS Contributions
SRS account holders can invest the contributions. Let’s say that each person in the couple mentioned above decides to invest the S$15,300 SRS contributions for 30 years, versus investing the same gross amount without the SRS tax benefits.
After 30 years, they will have total capital of S$2 million with SRS tax savings, versus S$1.6 million if they did not use the SRS tax breaks, assuming 5% net returns per annum. This is close to an additional S$400,000 that the couple can now have towards their family’s retirement fund.
The table below summarises the total tax benefits per person, as the tax benefits are calculated on an individual basis, not on a household basis. The table is based on annual gross salary and number of years of contributions. As annual salary most probably varies over 10-30 years, the figures below should be used as only an indication of the overall value of the potential tax benefits.
Value created by SRS, Net of Taxes
|10 Years of SRS Investment||20 Years of SRS Investment||30 Years of SRS Investment|
*Assuming 5% annual returns for both SRS and non-SRS investments; full S$15,300 annual contribution for full 10, 20 and 30 years
SRS is also available for foreigners and the fiscal benefits are significantly larger. Foreigners enjoy a higher maximum contribution cap of S$35,700 and enhanced flexibility on withdrawals (can withdraw after 10 years of account opening, regardless of age, in a lump sum, without penalties).
But is SRS for Everyone? No, It’s Not
The table above makes it clear the SRS tax benefits are particularly significant for individuals in higher tax brackets. Additionally, the willingness and ability to leave the money in the scheme until retirement age is important, and therefore higher earners have a higher chance of being confident in their liquidity situation, therefore avoiding the risk of requiring to withdraw the funds for emergency purposes.
For foreigners, the program can be a great tool especially if they plan to stay a minimum of 10 years in Singapore, but still needs to be evaluated on a case-by-case basis.
How to Open an SRS Account and Start Investing Leveraging the Tax Benefits
You need to open an SRS account at DBS, UOB, or OCBC, the three managers of the program. But then don’t leave your SRS savings in a bank account yielding just 0.05%. As this is a long-term plan, use it to invest and take the appropriate level of risk. You can select the best investment product for your needs from a list of providers approved by the Ministry of Finance.
Don’t stop at the ones offered by your bank, as the list will not be complete. Do your homework and look at fees and management strategies. If in doubt, ask your preferred fund manager or financial advisor if they’re eligible for investments with SRS.
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StashAway is an online investment management company headquartered in Singapore. The company was founded in 2016 and was the first robo-advisor to obtain a full capital-markets services license from the Monetary Authority of Singapore.
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