I was invited to Endowus Head office to “Ask Sam: Recession vs Retirement” on 12 Dec. A good way to curb your 12.12 urge and rein in your spending, when you rethink about the yet-to-happen recession and your pending retirement 30 years from now. It is not a question of ‘if’, but ‘when’.
So far, I have probably went for a couple of FinLit workshops and seminars. Most would have stressed on the importance of investing and staying vested for the long term. One thing that I felt lacking as a learner is that I am constantly told to look at investing long-term — when should I start to enjoy the fruits of my labour? And which order of priority?
Supplementary Retirement Scheme (SRS) is a tax-deferred voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings
I thought one of the important takeaways during the discussion on maximising your wealth through SRS investment is the order of draw down during your retirement years — first your SRS investments, then cash, then CPF after the earlier are all depleted.
So imagine a senior in his mid-60s, with a portfolio of equities and bonds, SRS investments, CPF savings and cash.
SRS investment returns are tax-free till withdrawal, from retirement eligibility age onwards till 10 years latter. Only 50% of the withdrawals from SRS are taxable at retirement. Mathematically, the sweet spot is a portfolio value of $400,000 and below for zero tax payable. You want to maximise the returns your SRS generates, yet you don’t want your SRS portfolio to grow so big that it attracts tax.
After you reach retirement eligibility age, it makes more sense to draw down your SRS investment first to cut down tax payable for future. Then you move on to deplete cash at hand. At mid-60s, investors typically require income as opposed to growth. Or if capital growth is preferred, the target is usually just ahead of deposit returns plus inflation. Your CPF SA or OA is earning relatively risk free of 4% and 2.5% per annum. If you have not drawn out any in excess of your FRS in RA so far, I would continue to leave it there to earn the higher bearing interest while using cash and my CPF LIFE monthly payout which would have kick-started.
I have to qualify that the order of draw-down is subjective, and there is no right or wrong answers depending on the individual’s preference. The logical approach for myself is to draw-down first from investment instruments which gives the least returns or pros. If I were to weigh in my own opinion, I would do this:
SRS > Cash > Equities > Bonds > CPF savings
Putting equities in the centre is also a little contentious for me. It also depends on the market conditions during that time. In a boom, I would begin to take profits off the table. In gloom, I know that markets would recover in a couple of years so it pays to continue staying vested for a while longer. I am also looking at capital preservation. This is the time I am making a mental note of what I really have and can expect to spend in my silver years. Bonds, especially government bonds, form my income funds. Though the returns are lower than CPF savings so I would draw on this source first.
I thought I would reiterate that all this while, I would still be living on dividends from equities, coupons from bonds, CPF LIFE payouts and possibly the interest from CPF savings. I stress that I only liquidate just enough for living. There is no need to keep a bulk of cash lying at home unless you require use of it.
Have you personally made your retirement payout strategy yet?