Tuesday, November 10, 2015

SRS Contribution? Not so fast buddy....

The year end is coming and recently the local banks are in full force with all the SRS publicity to pull back in some customers.

But before you throw in $12,750 and expect at $2550 in savings, there might be some things to consider.

Well, the first thing is... should you even start contributing to your SRS account right now?

Since you only can withdraw up to $400,000 tax-free, ideally you would want to hit that cap right when you retire, so when your normal income disappears and your SRS withdrawals replace your income since it is taxed as income. Doing this of course minimizes the total tax that you will pay.

If that is the case, then working backwards from retirement age, that every year you will put the maximum amount, not even invest it and only use it simply for tax relief, when should you start?

$400,000 (limit) - $12,750 (this year) - $15,300 x N = 0
15300 N = 387250
N = 25.3

Since you can start your withdrawals from age 62 onwards, taking away that 25.3 years and you should only start contributing to your SRS account from age 36 onwards. Of course, this makes a few assumptions:
1) You will work until 63 (which you could work longer)
2) You won't even invest the money in fixed deposits (which you should at least probably do)
3) The SRS contribution limit doesn't raise (which it probably would)

These 3 assumptions makes it so that contributions starting at 40 would probably also almost fully utilize the tax relief benefit of the SRS account.

Some young guns might ask: "Why should you postpone your contribution to the later years instead of just contributing early and just max it out?"

Personally, I have 2 arguments against doing that:
1) For young people, every extra dollar of disposable income has a lot more utility today compared to when you are in your 50s
2) For young people, their tax rate is probably the lowest that it would ever be and their annual tax burden increases every year. Do you want to get tax relief at a 2% rate or a 22% rate? (that's the highest marginal income tax rate proposed in the future)

Last year, I did a very in-depth look at the SRS scheme and my conclusion was that no-one under 30 should even think about contributing to their SRS, unless they have firm plans to retire early, they have no risk-tolerance to invest at all and they are in a high tax bracket. I don't imagine there being a lot of people that fit those criteria.

Since then and now, quite a few numbers have changed, so technically there isn't any need at all to do an SRS contribution until you at 36, unless you plan on retiring early. If you do, take your retirement age and knock off 26 years. Want to retire at 55? Then start contributing at the earliest, 29 years old. If you plan to invest, you can probably start contributing much later as well.

However, if you are somebody in your late 40s and you haven't made your first SRS contribution yet, it may be a very good time to consider if this scheme will be beneficial to you or not. 50% of my readers are under 35, I don't think you guys really need to panic too much, unless you are in a high tax bracket. Contributing to your SRS and making conservative investments with a very long-term view (20+ years) would highly likely yield positive results.

If you are going to make an SRS contribution, the bank you work with is important. Since my digging last year, my conclusion is that OCBC would probably be the best bank to have an SRS account with. No, this isn't paid marketing for them. I wish they snuck in $100 into my account though. Hey OCBC, if you need my account number, let me know, okay?

However, like I said, I'm not even 35 yet, my brain shouldn't give a shit about the SRS for many more years to come.

This post mainly goes out to the 20% of my readers who are above 45, all the best!

8 comments:

  1. One point to consider though, that the 62 years may get pushed back as the years pass.

    But if we simply contribute $1 now and lock in the withdrawal age (at 62) now, it's not a bad idea yeah?

    ReplyDelete
    Replies
    1. yup. this is something that most people missed out. i've contributed $50 (to lock in the retirement age) and am waiting till i'm in my mid-thirties before contributing it diligently.

      Delete
    2. Brilliant idea LGRT!! I think I will be doing the same! It makes sense that if they shift the goalpost, it will be based on when you made your contribution, rather than age. At least, to me!

      I shall open an account soon, wow exciting haha!

      Delete
  2. Hi agree with the above idea.

    You should make your first contribution as soon as possible because the withdrawal age is tied to the retirement age. Should you wait a few years later, the retirement age may shift and your tax free withdrawal becomes later. However as young individuals, we too have to balance getting the optimal tax relief when contributing. Hence, my perfect answer will be to contribute to SRS when your assess able income (total income-tax deduction) hits $50,000 region at any age.

    ReplyDelete
    Replies
    1. Hi Choon Yuan,

      You are right, it depends on each individual. Not everyone will be able to stash away the maximum amount allowable in their later years. There really isn't too much harm in saving more and saving early. It might not be the most optimal way, but it definitely isn't a bad way either! All the best!

      Delete
  3. what make ocbc the best bank to open an srs account. can you share your assessment ?

    ReplyDelete
    Replies
    1. u never click the link issit... it has the lowest fees

      Delete
    2. Hi Anon,

      OCBC has the lowest fees, so in my opinion it is the best. DBS has a huge list of their schedule of charges.

      Delete

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