SRS account a way to grow your nest egg

Think long term; consider putting your savings into dividend-paying stocks that generate income
By Goh Eng Yeow, Senior Correspondent, The Sunday Times, 12 Oct 2014

There is an old journalist adage that today's newspaper may end up lining the chicken coop tomorrow, so it warms my heart to find that readers still find some of my articles useful, years after they were published.

One reader wrote to say that he had only recently read my article about using savings from the Supplementary Retirement Scheme (SRS) account to invest in the stock market when he turned 40.

I wrote that article two years ago to highlight the SRS, which is designed to encourage Singaporeans to save for their retirement.

What is good about the scheme is that by depositing money into an SRS account, you stand to enjoy savings on the taxes you have to pay on your income for that year.

That is because, like Central Provident Fund (CPF) contributions, money put into the SRS account is tax free so every dollar a saver deposits reduces the chargeable income by a dollar.

But unlike the CPF, where contributions are mandatory, putting money into the SRS account is voluntary, so it is entirely up to you to save. A saver can contribute up to $12,750 to his SRS account every year. DBS Bank, OCBC Bank and United Overseas Bank have also made it convenient to open an SRS account at any of their branches.

I have been promoting the SRS for years, and I find that more and more Singaporeans are opening accounts as retirement becomes an increasingly pressing concern.

Time and again, we see surveys that raise the possibility that some of us may run out of money in our old age because our savings will not be able to last through our golden years.

So, cultivating the habit of regularly squirrelling away money into our SRS accounts early in our working lives may spare us a lot of headaches over retirement planning later.

The number of SRS account holders more than doubled between 2007 and last year, rising from 41,334 to 91,652, according to Finance Ministry data. Over the same period, total SRS contributions tripled from $1.44 billion to $4.34 billion.

When the SRS was introduced over a decade ago, account holders would typically either leave their savings idling as cash or use the money to buy unit trust and insurance products.

But, in recent years, larger numbers of SRS account holders are using their cash to invest in the stock market.

Between 2007 and last year, the proportion of SRS savings channelled to the market doubled from 12 per cent to 24 per cent.

However, some readers want to know if they will be exposing their nest eggs to too much risk by investing their SRS savings in shares.

This is not an idle concern. Over the past seven years, the stock market has experienced wave after wave of turbulence, reflected in the huge swings in the Straits Times Index (STI).

In October 2007, the STI hit a record high of 3,850 only to plunge by 62 per cent 15 months later to a then six-year low of 1,456, as a vast financial firestorm rocked the world's banking system, following the demise of investment bank Lehman Brothers. The STI then enjoyed a spectacular recovery and rebounded to as high as 3,313 in the subsequent 18 months.

Since then, the STI has been rocked by a host of financial problems - the perpetual debt crisis in Europe, worries over China's economic growth and conflict in the Middle East.

So timing the stock market cycle correctly can mean a big difference between reaping a huge return on your investment and suffering a big loss.

But it is next to impossible to predict how the market will behave. One way to get around the problem is to adopt a "dollar-cost averaging" approach, which means buying more of a stock when the market is down and less when it is up.

As the SRS is designed for retirement savings, any early withdrawal will attract a penalty charge of 5 per cent. This rule also encourages the SRS saver to adopt a long-term view, and that means putting money into solid dividend-paying stocks that generate a steady source of income during retirement.

In my case, when I started investing my SRS funds, I was lucky enough to place my bets on banks whose share prices had been temporarily depressed by the Sars crisis in 2003.

It turned out to be a prudent strategy. Over the years, those shares have given me a steady source of dividend income while appreciating in price.

There are a lot more choices available now to the SRS account holder if he wants to invest in dividend-paying counters. These include real estate investment trusts, perpetual bonds and the STI exchange-traded funds, which SRS investors can now buy into.

And risk-averse SRS investors should note that there is no way to be 100 per cent right on all your stock investments. As in life, legendary stock guru Warren Buffett once observed, what we have to do is to get a few important things right and not get too many things wrong.