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A war chest called "SRS".

Saturday, October 12, 2013

I have blogged about the advantages of having an SRS account before. Basically, if we are paying income tax, we should think of contributing to our SRS account. It is quite simple.

Now, I am holding a fair bit of cash in my SRS account. Excluding what I will be contributing by the end of this year, the cash portion of my SRS account is about $60,000 now.

Some might wonder why I am not putting the money to work. Even putting the money in a fixed deposit might get me $300 a year in interest income.



http://www.ecitizen.gov.sg/Topics/Pages/Tax-free-investments-with-the-SRS-scheme.aspx


Well, I really want to keep the liquidity on hand to take advantage of any deep correction in the stock market which could happen anytime. Could something like this happen in the next 5 years? It could, couldn't it?

So, over a 5 year period, I would "lose" $1,500 for holding on to cash in my SRS account. Can I afford this? I think so. For me, this is the cost of holding on to liquidity.

However, the cost of not having liquidity could be higher since I could potentially make much more money by deploying the cash during a deep correction in the stock market.

The cash portion in my SRS account now forms one of my 4 war chests. The other 3 war chests are money in my savings accounts, money in my CPF-OA and money in my CPF-SA.

Related posts:
1. SRS: A brief analysis.
2. SRS, CPF-OA, CPF-SA. (Note publishing date.)
3. CPF or SGS.
4. Don't see money, won't spend money.

17 comments:

Cory said...

3 of out 4 in CPF. I am thinking maybe more on gold or gov bond ?

Solace said...

Hi Ak,

Like to check with you, at what age did you join SRS?

I did some calculation on excel spreadsheet and believe the best age to join SRS will be around 45-47 years old. This is to avoid the situation where tax payable on withdrawal is higher than the tax saved on the contribution.

I make the assumption that the tax rate during the contribution period and withdrawal period is the same and total withdrawal is made at 62.

AK71 said...

Hi Cory,

I don't think bonds are the place to be now. The risk of capital loss has heightened for people in bonds.

As for gold, I think of it more as a hedge against the inherent flaws of fiat currencies and not a war chest.

Of course, we could make some money trading gold and bonds if we are good at it but that is another topic.

AK71 said...

Hi Solace,

I started an account when the SRS was first introduced in 2001, iirc. It was tough squeezing out the contribution money. I remember my first contribution was $7+K.

I know what you mean about starting at age 45. However, I like to start ASAP. Who knows what would happen in future? Could I be unemployed by age 45?

I mean I could stop contributing to the SRS anytime I want. It is voluntary. However, whether I would still have a job later on in life is something else. ;)

To push the case a bit more, consider that $1 saved from the tax incentive today is worth more than $1 saved 10 years later due to time value of money. ;p

Solace said...

Hi AK,

The scenarios that you have presentated have provided me much food for thought.

i calculated saving only based on math but have overlooked whether i still have income to contribute from age 45 onwards hahaha.

Always nice to hear your insight.

Cory said...

Kind of worry today that USD suddenly may crash out and no longer a reliable trading currency. The world will go to abyss and alternative solutions may emerge to keep trades moving. If this ever happen, inflation in US will be sky high as it lose is leverage.

AK71 said...

Hi Solace,

Happy to share. We learn from one another! That is the spirit of ASSI! ;p

AK71 said...

Hi Cory,

I know what you mean and I believe that it is a valid concern. What is the probability of it happening? I am not sure but if we can afford some insurance, why not?

So, I have some physical gold and silver. Paper gold and silver just won't cut it in the worst case scenario. Paper is only good for trading.

EC said...

I think it's good to open a SRS account and contribute some amount now to 'lock in' the current statutory retirement age of 62, even if the calculations may show negligible savings for lower income at a younger age.

I feel it's a matter of time before the retirement age would be increased further so why not keep a SRS account now and it might be of use years later.

Eugene

AK71 said...

Hi Eugene,

That is a very good point! It is something I did not consider when I started mine.

This is going to push Solace to open an account tomorrow. ;p

Ph Beh said...

Hi,

If you are willing to forgo FD interests, why not still put cash into FD but will use it (forgo the interest only then) if and when opportunities arise? In this way, if the opportunities never come, or come later, you still get the interests. You could further break the whole amount to smaller amounts so that you don't have to forgo everything at one go?

Just my few cents worth of thought. No offense.

AK71 said...

Hi Beh,

I thought of that. It is a lot of work having to visit banks to open and close SRS FD accounts. That puts me off. :(

JW said...

Need money for wedding and renovation.... SRS has to wait lol

AK71 said...

Hi JW,

We have different priorities, for sure. Congratulations! :D

AhJohn said...

Hi AK, when we use SRS to buy stock, will it be transferred to CDP account too? If so, if buy 1 lot with cash and 1 lot with SRS, then sell 1 lot, the money will go back to SRS account first?

Thanks!

AK71 said...

Hi Ah John,

You have to choose whether you are buying or selling using cash, SRS or CPF. So, when you sell, depending on your choice, the money will be credited to your designated bank account (if you choose cash), your SRS account or your CPF account. The choice is yours.

Capricon said...

John
To be specific, the money goes back to whichever account that you used to buy. If you bought using cpf, it goes back to cpf if you sell and so on. CDP only hold stocks that you pay using cash. For cpf or srs, the bank is the custodian, the bank will mail you the monthly statement of your holdings. Please note you can't attend AGM if stocks bought through cpf or srs, may need some arrangement before you can do so. You would still receive annual reports, dividends etc, dividends goes back to cpf or srs.

Regards

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