New Strategy: StashAway + Supplementary Retirement Scheme (SRS)

One can now invest your money in the Supplementary Retirement Scheme (SRS) account with StashAway as seen here - Take your SRS funds further. If you are not familiar with SRS, I suggest reading up more first (Kyith from InvestmentMoats recently blogged about it - I Spent $1 to Open a SRS Account to Fix the Withdrawal Age). Generally, it is more beneficial for people with a higher tax bracket.

The statutory retirement age is currently at 62 and one can make withdrawals over the next 10 years after the first penalty-free withdrawal where only 50% of the withdrawal amount will be subjected tax. Based on the current income tax rates, the magic number - $400,000 would not be taxable then if one were to withdraw $40,000 every year over 10 years. What's the caveat? It is a long time (34 years for us) and the policies/tax rates may change, and most importantly, would you really have $0 income then? Rental income is considered a form of chargeable income! But dividends aren't (hint hint).

In addition to tax-free withdrawal in the future, one can save on tax immediately. I previously blogged about CPF RSTU - Is It Worth It? and the same calculator can be reused here to find out the tax savings one can get by topping up SRS. The fastest way is to simply take the amount you are topping up multiply by the tax bracket you are in but may not very accurate when there is a shift/change in the tax bracket.

Our Plan
Top up X amount to both our SRS accounts which will then be invested using StashAway. The ideal end goal is to have around $400,000 in each of our SRS accounts in 34 years time when we are 62 years old. The question is how much should we be contributing? I attempted to forecast this number using StashAway Portfolio Projection function.

Things to take note of:

Shaded Area: Range of results that can be achieved, with 90% probability.

Savings invested with StashAway: Based on historical performance, there is a 50% probability that you will reach or exceed this goal with this plan.

StashAway Risk Index: 13.0%

If the investment horizon is short (e.g. 1 year) or the risk is high, you will see the dotted line (savings not invested) falling into the shaded area which means there is a high chance of losing your capital/money.

StashAway Risk Index: 20%, $150 monthly for 34 years

Projected: $404,409
Savings not invested: $87,051

This seems to be perfect except that the projection assumes that one will be contributing $150 every month for the whole of 34 years which is not very realistic considering one may retire earlier and stop contributing at one point in time.

Using a finance calculator, one will be able to compute the annualized rate of return which works out be around 9.57%. As for the savings not invested, it is compounded at around 2.04% to account for inflation.

Let's look at increasing the monthly deposit to give ourselves more buffer.

StashAway Risk Index: 20%, $200 monthly for 34 years

Projected: $539,226 - annualized return of 9.57%
Savings not invested: $116,072 - inflation at 2.04%

Since there is a 90% chance your investment will end up in the shaded area, knowing what the lower and upper bound will be pretty helpful/important. Hence, I contacted StashAway and got them to generate the numbers for different risk profile based on $200 monthly for 34 years.

StashAway Risk Index: 6.5%

Lower bound: $223,962 - annualized return of 5.46%

Projected: $289,600 - annualized return of 6.71%
Upper bound: $356,497 - annualized return of 7.69%

StashAway Risk Index: 13%
Lower bound: $231,825 - annualized return of 5.64%
Projected: $413,274 - annualized return of 8.38%

Upper bound: $592,156 - annualized return of 10.02%

StashAway Risk Index: 13.5% 
Lower bound: $226,840 - annualized return of 5.52%
Projected: $420,655 - annualized return of 8.46%

Upper bound: $624,995 - annualized return of 10.27%

StashAway Risk Index: 20%
Lower bound: $161,678 - annualized return of 3.81%
Projected: $539,226 - annualized return of 9.57%

Upper bound: $925,325 - annualized return of 12.01%

StashAway Risk Index: 26%
Lower bound: $62,433 - annualized return of -1.69%
Projected: $542,032 - annualized return of 9.62%
Upper bound: $1,056,796 - annualized return of 12.60%

StashAway Risk Index: 36%

Lower bound: $15,556 - annualized return of -15.38%
Projected: $639,588 - annualized return of 10.37%
Upper bound: $1,508,913 - annualized return of 14.15%

Notice the difference in the shaded region between the least risk (6.5%) and the highest risk (36%) portfolio? As you increase your risk, the portfolio will be subjected to higher volatility. Interestingly, the lower bound return increases as one take on more risk until 13.5% and beyond, it starts to decrease. Some of the annualized return for the lower bound is even lower than CPF SA! 

CPF as a Baseline?
Another alternative is to top up CPF SA. Although they are completely different in terms of the possibility to withdraw (SRS - confirm can withdraw vs CPF - excess of minimum sum), the age that one can withdraw (SRS - 62 vs CPF - 55) and the return one is getting (SRS - 0.05%/unknown vs CPF - 4/5%), they are all part of one's retirement planning.

For simplicity, let's assume that we are able to hit the minimum sum and delay our withdrawal to 62 instead of 55. As stated on the CPF site, Withdrawals of CPF savings from 55 - The withdrawal of your CPF savings is optional. If you do not withdraw at 55 years old, you can do so anytime later.

$150 monthly or $1,800 yearly compounding at 4% for 34 years ~ $125,744
$200 monthly or $2,400 yearly compounding at 4% for 34 years ~ $167,658
$250 monthly or $2,400 yearly compounding at 4% for 34 years ~ $209,573

It only makes sense to pay a fee and invest using StashAway if it can beat CPF SA return.

CPFIS/SRS Charges
One of the annoying thing that is stopping us from investing in stocks using SRS/CPF is due to the various fees/charges imposed by the banks e.g. services charge of $2 per stock per quarter on top of the transaction costs which is based on the number of shares purchase?! Oh, they charge $10 per rights application and $5 if you want to apply in excess too.

You can take a look at them here:
DBS SRS Charges
UOB SRS Charges
No SRS Charges for OCBC based on this thread in HardwareZone - OCBC SRS Account - What are the charges?

Having said that, it seems that these charges were all waived (DBS/UOB) as reported by various people in HardwareZone/Seedly. Regardless, we have decided to give it a miss because they can start charging/stop waiving anytime and there is nothing you can do about it.

Conclusion
We are currently contributing $1,000 every month.

My proposal to CZM was to contribute $250 each to our SRS and invest using StashAway (13% risk index). $250 into our current portfolio (20% risk index, not changing the risk profile of it again to avoid the bad experience) and $250 to the max risk profile (36% risk index). This allows us to take on lesser risk with the 13% risk portfolio while maximizing the returns in order to have a higher chance of beating the CPF risk free interest of 4%. At the same time, there is a small portion (1/4) of our investment which will either be gaining/losing more than 10% >.<"

CZM response was "I am surprised you want to take on lesser risk. Nope, 36% is too risky." lol.

My SRS ---> StashAway 13%: $250
CZM's SRS ---> StashAway 13%: $250 (I can refer CZM and save $10,000 on fees for the next 6 months!)
Current StashAway 20%: $500

With that, we will be saving ~$420 (7% x 250 x 12 x 2) on taxes next year :)

What about you?

You might be interested in previous months update too:
StashAway - January 2018
StashAway - February 2018
StashAway - March 2018
StashAway - April 2018
StashAway - May 2018
StashAway - June 2018
StashAway - July 2018
StashAway - August 2018 + An Unpleasant Experience
StashAway - September 2018
StashAway - October 2018
StashAway - November 2018

StashAway Referral Link for Our Readers
Here you go: KPO and CZM Referral Link

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