Monday, December 6, 2021

The Returns of the Supplementary Retirement Scheme

The Businesstimes published an article in November 2021 titled " More Young Investors Turning to SRS Retirement Needs". 

It wrote.

" The share of younger people with Supplementary Retirement Scheme (SRS) accounts has risen steadily over the years, according to data from the Ministry of Finance. As at end-2015, 11 per cent of SRS account holders were between the age of 18 and 35. This share had risen to 19 per cent at the end of 2020. "

18 year olds putting money into SRS already? 

Assuming an 18 year old invested $1000 every year into his SRS account. Let's assume the 18 year old has a marginal tax rate of 7% every year and so pays less tax of $70 every year till age 62. A marginal tax rate of 7% means the chargeable income of the 18yo is between $40,000 to $80,000 already which is pretty high in my opinion at that age!

The SRS account has a base interest rate of 0.05% pa and he leaves money in the SRS account uninvested. 

The interest rate pa (IRR) he would be getting over the 45 years with the yearly 7% tax savings and 0.05% pa SRS base interest rate is only 0.34%pa if he just left the money in the SRS uninvested.

The table below shows the different interest rate pa ( IRR) based on his marginal tax rates if he did not invest his SRS.

IRR(age 18 to age 62)

What the table means is that, if the 18 year old were to diligently place $1000 into a normal bank savings account every year and this savings account gives 0.34% pa every year till age 62, he will be getting the same returns as simply contributing into his SRS account without investing it.

Of course the funds in the SRS account would most likely be invested in some approved investments, say in the stock market which more likely than not yield him about 6%pa for the next 45 years. Add this 6%pa  to the 0.34%pa and he gets 6.34% pa if he is at the 7% marginal tax rate compared to if he had invested using cash, getting only 6%pa.

Is the "extra" returns due to the tax savings resulting in the additional returns of  0.34% pa  justified for a lock-up in liquidity and policy risk over such a long period?

At a marginal tax rate of 22%, he would be getting 6.89%pa using SRS compared to 6% pa if he had used cash. 

Let us look at a 40 year old  and a 50 year old and the interest rate he will get from the tax savings and SRS interest till age 62 if he had just simply left the money in SRS uninvested.

IRR ( age 40 to age 62)

IRR ( age 50 to age 62)

Probably one has to see whether the price of locking up one's cash is worth the additional interest rate ( as shown in the table above) one would get from simply the tax savings and SRS base interest over the years.

Leaving one's SRS uninvested at all will yield one the above interest rates in the tables. Please do something about it if you haven't!

I use the following for my SRS investments.

Use my Endowus referral code to get $20 in access fee credit

I use the following for my cash investments:

Use my IBKR referral code to get free IBKR shares.

Use my Tiger referral code to get free apple shares.

Use my Moomoo referral code to get SGD200 Stock Cash Coupon

[I am not a financial advisor]

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