SRS contributions are not working efficiently for their owners, so savers must learn to take compensated risk towards a better financial future.
The original version of this article first appeared in The Business Times.
It seems obvious. Top up your Supplementary Retirement Scheme (SRS) and get 2020 tax relief of up to $3,366 for Singaporeans and PRs, and $7,854 for foreigners. But if you don't top-up before 31 Dec, the opportunity is lost forever for the year's tax savings.
With the help of technology, you can now make such a top-up without leaving your couch, and in just a few taps on the UOB, DBS, and OCBC mobile banking apps.
In 2019 alone, $1.5 billion poured into SRS, which now has over 185,000 account holders. Contributions have been growing a compound annual growth rate of over 17% since 2011, reaching S$10.6 billion at the end of 2019.
We expect record contributions in 2020.
Money is all about tradeoffs and opportunity cost.
To get the benefits of SRS and make withdrawals without penalty, you need to lock up your money until the statutory retirement age (which was increased from 62 to 63 years old, effective from 1 July 2022).
To capture higher expected returns by investing, you have to stomach the volatility of markets and stick to your investment time horizon. Globally diversified equity markets have historical annualised returns of 8% but with swings as large as plus or minus 40% in a single year. Can you tolerate this volatility?
SRS by nature is long-term, and should therefore be invested by stomaching higher volatility for higher expected returns, making thoughtful adjustments as you approach your withdrawal date (at retirement). Capturing an 8% annualised return over 30 years would mean a very meaningful return of 1,000%.
Unfortunately, this is not what people are doing. Approximately 30% of SRS money, or $3 billion in total, sits in the SRS cash balance earning interest of just 0.05%, which after 30 years will be a return of just 16% with a massive erosion in purchasing power after considering inflation.
SRS contributions are growing at an impressive rate, which is a great sign of savers accepting delayed gratification. But this money is not working efficiently for its owners, which is a sign that more must be done to educate on how to take compensated risk towards a better financial future.
Fintech Festival and financial literacy
Undoubtedly, Singapore has earned the status as a global financial technology (fintech) hub. The Singapore Fintech Festival launches on Monday, with an impressive line-up of over 800 global CEOs and thought leaders, from Bill Gates to Larry Fink, speaking on the future of money.
I've always thought of fintech as the use of technology to democratise access to financial services at scale, all with the purpose of enriching people's lives. An issue that keeps gnawing at me is that fintech proliferation without more education will not lead to a more inclusive society, and may actually further bifurcate those with the knowledge to participate, and those without.
More must be done at the grassroots level, now.
Starting with the Singapore FinTech Festival, the NUS FinTech Lab, in partnership with Endowus, Grab Finance, The Fifth Person, and Seedly, will be launching financial literacy at hawker centers with a goal of reaching out to people of all walks of life.
Associate Professor (Practice) Keith B. Carter, Director of the NUS FinTech Lab, explains: "The programme aims to empower those with little to no financial literacy, equipping them with the basic knowledge required to make sound judgments from budgeting to investing, all the way to retirement. For those who are already equipped with financial know-how as well as an interest in fintech, the programme will provide training and mentorship with partners like Endowus, to accelerate the acquisition of expertise and encourage careers in fintech."
Explore the Endowus Fin.Lit Academy to pick up tips on investing, wealth building, personal finance, CPF and SRS, and retirement planning.
Doing what is right
Richard Magnus' RHT GRACE Institute speech on 5 Nov 2020, "It's possible to be profitable and principled", illustrated holes in regulation and internal corporate controls that allowed for the snowballing of highly unethical short-term profit-driven decision-making. No industry is immune, from Big Tech, to the pharmaceutical industry, to financial services.
With the age of fintech upon us, business models can scale quickly. Compensation systems must be reviewed to ensure that the value-chain is aligned with the customers. In the case of wealth management, it is as simple as advisors only being allowed to be paid by their client — and only their client. This means we must start working towards the eradication of product kickbacks and churn-focused incentives, now.
Like the SRS savers and investors, fintech companies must also delay their gratification. This will lead to better, client-centric outcomes, and a more well-informed, wealthier and inclusive society.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.