The synergy of SRS and compound interest in Singapore

The Supplementary Retirement Scheme (SRS) offers individuals a means to begin growing their retirement fund at an early stage in life.

SRS typically involves decades of investing before retirement withdrawal and that’s why investors should understand the compound interest concept – which paradoxically can be your best ally and your best enemy. Returns can compound over time, and so can fees. 

As such, choosing a cost-efficient fund platform will allow you to retain a significant portion of the returns from compounding your SRS investments, to beat the meagre 0.05% you get by leaving your SRS monies as they are. 

Understanding this synergy between SRS and compounding can help Singaporeans and residents in the country leverage it for wealth creation, in addition to tax advantages.

Understanding the Supplementary Retirement Scheme (SRS) in Singapore

SRS is a voluntary savings programme that complements your CPF savings. It offers tax benefits and investment opportunities to boost your retirement funds. You can contribute up to $15,300 annually ($35,700 for foreigners). 

Benefits of leveraging SRS for long-term wealth accumulation

SRS contributions offer immediate tax relief, reducing your taxable income. Upon withdrawal during retirement, only 50% of the amount is subject to tax, providing significant long-term tax advantages. 

Investing your SRS funds can prove crucial in combating inflation and maximising your retirement savings. SRS funds can be invested in various instruments, potentially growing your savings beyond the 0.05% interest on idle balances.

The power of compound interest

Compound interest is a financial concept that can significantly boost your wealth over time. It occurs when you earn interest on both your initial investment and the returns and dividends accumulated. As your money grows, it generates more interest, creating a snowball effect. 

Essentially, when invested, your money is earning more money for you – The more time you give your money, the more it will reward you. Even small contributions can snowball into substantial sums when given decades to compound.

This growth can transform your standard savings into substantial wealth, especially over long periods. 

How SRS and compound interest work together

In retirement planning, the power of compounding becomes even more significant, as it leverages a longer timeframe to grow your money exponentially. 

When you contribute to your SRS account and invest those funds, you will effectively be using compound interest.

Your SRS savings can grow over time, as returns are reinvested and will generate additional earnings, significantly boosting your future retirement fund, especially when you start early and invest consistently in your savings accounts.

One critical factor to take into account is that SRS contributions and investment returns provide you with tax relief. 

Calculating compound interest on SRS investments

To calculate compound interest on your SRS investments, use the formula: 

A = P(1 + r/n)^(nt)

Here, A is the final amount, P is the initial principal, r is the annual interest rate, n is the compounding frequency, and t is the time period in years.

The symbol “^” exponentiates the former number against the compounding frequency and time period in years. In simpler terms “^” stands for “to the power of”. 

3 Variables of compounding in SRS

For an easier overview of how your SRS investments would look, here are three charts about the three variables of compounding: Rate of return, time, and recurring investments. 

1. Rate of return: Leaving at banks vs invested

The graph depicts one’s standard SRS savings with 0.05% returns per annum, compared to those same amounts but invested. 

Staying invested, and letting your investments compound can significantly boost your retirement savings. Leaving your SRS funds at banks barely accumulates any form of wealth over the 40 years.

2. The impact of time on SRS and compound interest

Time is your greatest ally when it comes to SRS investments. The longer you leave your funds to grow, the more you can benefit from compound interest. 

Even if you didn’t start investing during your first 10 or 20 years of work, it's never too late to begin. The beauty of compounding is that it can still work in your favour. Remember it is never too late to start investing, as it accumulates. 

3. Consistency is the name of the game 

Starting early gives your money more time to grow, potentially turning small, regular contributions into a substantial retirement fund over decades. 

For instance, if you contribute $1,000 monthly, or $12,000 a year, for 40 years, your nest egg could grow to a remarkable total of $1.35 million. 

Even contributing $500 per month, or $6,000 per year, can accumulate a sum of more than $670,000 after 40 years.

Note: Singaporeans and PRs can contribute up to $15,300 annually, foreigners can contribute up to $35,700. 

Strategies to maximise SRS returns through compounding

To optimise your SRS returns, consider investing in a diversified portfolio of low-cost index funds, unit trusts or exchange-traded funds (ETFs). This approach allows you to capitalise on long-term market growth while minimising fees. Regularly contributing to your SRS account and reinvesting dividends can further amplify the compounding effect, potentially leading to substantial wealth accumulation with time.

Comparing SRS compounding with other investment vehicles

When investing your Supplementary Retirement Scheme (SRS) funds, you’ll find that the potential for growth is significantly higher compared to leaving them in the default SRS account. 

Unlike the 0.05% interest earned in standard SRS accounts, investing these funds will very likely yield better returns. This approach aligns with long-term retirement planning, potentially helping you achieve your financial goals more effectively.

Early start, consistent contributions, right strategies

By combining SRS contributions with the principle of compound interest, you can attain significant growth in your retirement savings. 

To maximise the benefits of SRS and compounding, it’s crucial to start early, contribute consistently, and choose appropriate investment strategies. Explore our curated section on SRS investing.

FAQs about compound interest and SRS

What is the current SRS interest rate?

The Supplementary Retirement Scheme (SRS) account earns 0.05% interest per year. This low rate underscores the importance of investing your SRS funds to grow your retirement savings and keep pace with inflation.

How often is interest compounded in SRS accounts?

Interest in SRS accounts is typically compounded annually. However, due to the low interest rate, the power of compounding is limited unless the funds are invested. Investing SRS funds can potentially yield higher returns over time.

Can I withdraw my SRS funds before retirement?

Early withdrawals from your SRS account are possible, but they may incur penalties and be subject to taxation. It's generally advisable to keep your funds invested until retirement to maximise tax benefits and potential growth.