[Thoughts on allocation] CPF-SA and SRS Assessed

Introduction

It is the year end and for those who earn a fair bit, it can be a sizeable amount of taxes to pay (see here). Topping up CPF special account/Medisave accounts with cash, and contributing to special retirement scheme(SRS) are the two common approaches to get tax relief and build up our retirement egg-nest.

SRS and/or topping up CPF for retirement egg-nest building

Low-Risk taker. Topping up CPF-SA with cash will be good for the low-risk taker, because the 4% from special accounts is considerable compared to the dividend yield of most blue chip counters, but without the risks equities exposed us to. However, do need to consider that the CPF-SA rates not always at 4% or that the lock-in dates might shift according to policies... there is also a limit how much one can put inside, (1) up to $7K, or (2) till your CPF-SA hits the full retirement sum currently at $166K, while a lot is not enough.

Higher risk taker. SRS is for those with a higher risk appetite, because of the exposure from holding onto equities (if one chooses this path, not talking about endowments because those are figures provided are always almost projected).It also requires competency in investing. However, just by doing dollar-cost averaging on the STI ETF (see here) and re-investing dividend received, the reward for being able to stomach higher risks is the greater cap gains!The cap for this per year is also higher at $15.3K. 

Hybrid Approach best? On gut instinct, I hypothesised that the best approach is to allocate more funds to your SRS as you get a better understanding of investments. So i decided to test my hypothesis.

After doing the mathematics...

Assumptions

• Salary is the same from now till retirement
• maximum contribution is $15300 for SRS and $7000 for CPF (remains unchanged)
• tax savings are invested in asset class of similar risk profile
• If SRS monies are invested in equities, tax savings will be invested in equities
• If monies are allocated to CPF, it suggests a low risk appetite, tax savings likely to be re-invested in lower yield assets (consider it 0% for ease)

Findings for CPF

1. "Stagnant" degree holder. A 30 YO that earns $40K per annum.
2. "Stagnant" PhD holder. A 30 YO who started working later but has a higher starting salary of $80K per annum.

• Assuming both are stagnant in their career progression, it is unlikely for them to get meaningful amounts out of CPF at 55 YO unless they do regular yearly cash top-up early in their working life.

Findings for SRS

• Without reinvesting the tax savings, and paying tax on the after retirement draw-down, making SRS contributions (for up to 20 years) results in us being better off.
• When tax savings are re-invested, contributing to SRS makes even more sense, because cumulative reinvested tax savings is greater than total taxes to be paid during retirement draw down.

***I did not consider $120K annual salary for CPF, because who earns so much at graduation, and if they earned so much,  probably smart enough to think for themselves. :)

Conclusion

1. With a limit to how much  top-up to your CPF and how CPF is structured, better to allocate tax-relief contributions to CPF cash top-ups first, to allow it to compound to a larger amount.
2. (For annual wage above 40K) Once we achieve a degree of investment competency, we should contribute to SRS . 

There is no one-size-fits all due to different priorities in life (such as starting a family and having kids), these will affect the time to achieve our financial goals. However, I think it is still a fruitful exercise to go through.



Additional Info for SRS.








Additional Info for CPF.