Retirement Income

Here's How to Use Your Funds in the SRS


Article Author - Eddy Cheong
By Eddy Cheong
Oct 03, 2017

old couple cycling image

This article follows from our earlier piece on “How to save on taxes using SRS?“

Funds in the Supplementary Retirement Scheme (SRS) can be invested into a wide range of instruments such as shares, unit trusts, insurance, bonds and fixed deposits. Or you can simply leave your SRS monies in cash, which is not a wise financial decision due to the current low interest rates of 0.05% offered by the banks.

 

SRS Funds Pie Chart

 

As of 31st December 2016, total SRS contributions amounted to $7,200,000,000! And surprisingly, a third of these money sits in cash, which earns little interest.  

On top of enjoying tax savings with SRS, it is important to look at how you can grow your SRS funds. Since you are likely to only withdraw your SRS after retirement age to avoid penalties, you should make your SRS funds work harder since you have the benefit of time


The Power of Compounding

Illustrating using a table below, we project the amount of SRS you will have at age 62 assuming you have $30,000 in SRS and have 25 more years before reaching age 62. Depending on the returns you receive (Eg. 0.5%, 2% or 4% per annum), the projected amount which you can get at age 62 is vastly different.

 

Product A

Product B

Product C

Lump sum

$30,000

$30,000

$30,000

No. of years before reaching age 62

25 years

25 years

25 years

Interest P.A / Return

0.5%

2.0%

4.0%

Projected amount after 25 years

$33,984

$49,218

$79,975

Gain %

13.28%

64.06%

166.58%

 

If $30,000 of SRS is left in cash and assuming an interest of 0.5%, you can expect your SRS funds to grow to about $34,000 after 25 years. But if you are able to obtain a higher rate of return of 4%, the end result will be around $80,000, a potential gain of 224%. Of course, these returns are not guaranteed. However, some insurance products do provide some form of guarantee on their projection.

Whilst you can invest your SRS in various instruments, the focus of this article is on SRS-approved insurance policies and how you can use them to build up your retirement nest egg.

 

Using SRS to generate income stream for Retirement

When you have stopped working and are in retirement, how would you fund your living expenses?

For many people, it could be either:

  • Withdrawing from your bank account. This can cause undue worry when you notice how your bank balance decreases with each withdrawal. The current low interest rate environment does not help.
  • Cashing out from your investments e.g. Shares, to fund your living expenses. This can be worrying especially during a market downturn. Your investment value may have suffered a significant loss and any cashing out further will shrink your investment holdings further.
  • Enjoying a stream of income payout from investment instruments. Examples like dividends, rental income and insurance-based retirement income products.
[Note: You should probably use all of the 3 components above in an integrated and balanced approach for retirement planning. In this article, we focus on the importance of a recurring income payout which, in my opinion, is understated in retirement planning.]

During retirement, having a stream of income (“pay-check”) is ideal as it helps to fund our retirement lifestyle. Most Singaporeans would have their CPF LIFE as their first layer of recurring income. CPF LIFE is a good scheme which people should maximise first. However, if CPF Life is not sufficient for you, you can increase your stream of income pay out further with retirement income products.

 

How do retirement income products work?

You first commit a lump-sum amount. At a specified age (e.g. age 62), the policy will pay a series of income pay out either for a fixed number of years (e.g. 10 or 15 years) or for life. For some plans, there is an additional pay out when the policy ends (at maturity).

 

How retirement works

 

There are many SRS-approved insurance products in the market and it can be confusing. Every product has different features and you are more likely to have more questions than answers about them. 

At DIYinsurance, we understand your concerns. And we make things easier for you. The following is a 3-step guide to help you select a suitable retirement income product that meet your needs.

 

3-step Selection Guide

Step 1: Do you need an income stream that pays for life or only for limited years?

Lifelong income takes away the fear of out-living your assets. Naturally, a plan that pays lifelong income would cost more than one than pays only for a fixed number of years.

 

higher payout for srs fund

 

With the same SRS amount, the shorter the payout duration (e.g. for 10 or 15 years), the higher is the yearly payout. Generally, if you plan to have multiple sources of lifelong retirement income such as dividends and rental income, you may not need to be too concerned with getting another policy for an additional lifelong income. A plan which pays for a fixed number of years and with a higher recurring payout may suffice.

 

Step 2: Do you require your recurring income amount to be fixed (guaranteed), variable (fluctuating) or increasing?

Generally, if you like your income payout to increase every year to combat inflation, there is a higher cost (greater premiums). On the other hand, it will cost lesser if you prefer your income payout to remain the same (fixed amount). The premiums (cost) may be even lesser if you do not mind that your payout fluctuates, i.e. your payout is lower if the insurer dosen’t do so well (although there is some guaranteed portion).

In addition, there are further considerations which are a bit trickier for you to consider such as your risk tolerance, the size of your retirement goal relative to your resources and your other sources of retirement income. Since your SRS funds is usually a small component of your overall nest egg, a quick way is to consider based on your preference on the nature of income payout.

 

Nature of your income payout

Premiums required to obtain the same initial yearly payout

Amount increases each year

Highest premiums (cost)

Amount remains fixed and guaranteed

Average premiums

Amount may fluctuate

Least premiums



Step 3: Compare the Products

Hopefully with Steps 1 & 2, you have a better understanding of the features you are looking for. Now is the time to look for suitable products. One easy way is to use our DIYinsurance platform to compare.

To compare products:

  1. Go to www.diyinsurance.com.sg
  2. Select the Retirement Income module
  3. Specify your Gender, Age
  4. Select your purpose; either Income Payout over limited years or Income Payout for life
  5. Select your payout type; Increasing, Fixed or Variable (some options may not be available)
  6. Finally select the Payout Age and Payout Amount, and GO

You will see a list of available products based on your selected criteria. A ranking of products is also provided to help you identify superior products. You can also drill in to understand the product’s unique features and benefits.

If you have further questions or require advice, please feel free to send a non-obligatory Quote Request and we will get back to assist you.

Click here to find out about the best SRS-approved retirement plans you can use in our next article.



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DIYInsurance (Do It Your-way Insurance) is Singapore's First Life Insurance Comparison Web Portal started in June 2014 by Providend Ltd to empower people to make informed decisions about their own insurance purchases. In addition to ongoing promotions, we rebate 50% of the agent’s commissions back to our clients so that they enjoy greater cost savings.

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