30 December 2010

An excursion on SRS, deferred taxation

Over the past few years, ever since I got to know about the Supplementary Retirement Scheme (SRS) and its benefit of deferred taxation, I've always assumed that it would make sense to do so only when one is on a higher tax bracket.  Should I have started SRS once I had a taxable income, or should I have waited till I hit a higher tax bracket, like 17%?  My instincts told me it shoud be the later.  So, I decided to work out a spreadsheet to analyse further if indeed this was correct. 

Scenario 1(a) - It's good to start early

I made several assumptions for the analysis.  I assumed that one starts contributing to SRS from the age of 25, with an annual taxable income (pre-SRS) of $30,400, with income increasing at 10% per year [decreasing to 5% after age 45, 3% after age 50, and 0% after age 55; excellent performer who is well rewarded initially!], contributing 10% of that income each year into SRS (but never exceeding the limit of $11,475).  The SRS contribution is then invested, generating a return of 6.5% annualised.  At age 60, the SRS investment is adjusted to a more conservative profile at 4% annualised.  Based on these, at age 65 (retirement age), the SRS investment portfolio would have grown to $1.34 million.  Not bad at all!  But that wasn't the point of this study. 

The total tax avoided as a result amounted to $59,800.  Presuming the $1.34 million SRS portfolio is then drawn down at 1/10th a year, the amount of tax paid over the 10 years would be ~$92,750.  This is far higher than the $30,400 of tax avoided in the years of contribution.  So indeed, it would seem that it isn't worth starting on SRS when the tax brackets in initial years are low as one would end up paying more tax than that avoided.

Scenario 1(b) - Start early, save every cent, invest every cent

However, what if the savings from tax avoidance is invested in a cash-based portfolio at the same rate of return of 6.5% annualised?  It turns out that this cash portfolio would be $175,000 by age 65 (and tax free)!  That certainly outweighs the tax to be paid during SRS draw down.

Scenario 2 - Accumulation begins at 40

I reworked the same scenario.  This time, SRS contribution begins only at age 40, contributing the full $11,475 annually.  The total tax avoided works out to $50,000.  Given the lower contributions, the SRS portfolio grows only to $680,000. 

In comparison, the tax to be paid during the 10-year draw down upon retirement works out to $29,100.  This is less than the amount of tax avoided.

If the tax avoidance savings was invested, the cash portfolio works out to $111,000, positively widening even further the benefit from contributing to SRS.


So, it seems my initial assumption was correct (Scenario 2).  However, if one were to start early, and consistently take the savings from tax avoidance to invest (Scenario 1(b)), it turns out to be an equally rewarding approach as well.

Disclaimer: There are of course many permutations that could be explored since there are so many parameters involved.  I didn't get round to testing out the various possibilities, so there could be other outcomes depending on the parameters/assumptions used.

See also:
SRS: A Brief Analysis (from "A Singaporean Stockmarket Investor" website)

24 December 2010

Merry X'mas 2010

It's the eve of X'mas, and a time for reflection.  Has this been a worthwhile year, and the giving done?  It's a wonderful time to celebrate the decisions and the outcomes. 

If only we had a place and weather like winter in Nami Island (Korea).

But we face the deck of cards we are dealt with, and remain happy to achieve what we can accomplish within those boundaries.

In any case, it's the last week to contribute to SRS and to top up your spouse's CPF!  I'm done.  Have you?

Merry X'mas all!  May your year been a fruitful one.  *burp*

22 December 2010

Ultimate bubble in Singapore

All these talk about bubbles, and we have one ultimate one right here in Singapore.  And it's just a piece of paper!  Imagine, would you pay $72,000 for a piece of paper?  It seems many people are doing that right now to secure the Certificate of Entitlement (COE) for the right to buy a car.  *sheesh*  That's the price I paid to buy make car, COE included, just over a year ago!

This craze has reached a point where of the Top 3 selling cars in Singapores, two of them are luxury cars.

I think that money is better spent investing for better returns.  Meanwhile, go take public transport and live with it.  Wait for this bubble to burst.  If only there was a way to "short" this market. 

I suppose this is one bubble the 'gahmen would have little motivation to prick.

15 December 2010

A tour and a view on Korea

I've just concluded a whirlwind tour, holidaying in Korea, traversing across Incheon, Seoul, Cheju and Daegu.  It was not without trepidation given the situation at the border. But it would seem that Koreans were generally nonplussed about the whole affair.  The view was one of "don't care, leave them alone".

With the threat of North Korea always on their mind, defence spending will continue to be a constant burden and a drain on government coffers.  Interestingly, South Korea has switched from giving rice to giving barley to North Korea, and there is an interesting logic to this.  Rice can be stored, but barley cannot.  Therefore, doing so is to force the North Koreans to distribute the barley to its people, rather than to store it to support the military.  There is much logic amidst the madness.

In so far as unification is concerned, it is most definitely not on the cards under present circumstances. One school of thought is that only if the North develops its economy and becomes more prosperous, will unification possibility become more realistic.  The thinking is that if the people of the North starts to enjoy a life of wealth, will it still ever want to go to war?  Therefore, the best bet is for the North to be influenced by China as the later becomes increasingly affluent.

Having experienced early winter in North Korea, I must attest that it is really unbearable to be out in the open.  Even with four layers of cloth on, headgear, glove and scarf, I was still freezing cold.  With temperature swinging from 0 degrees celsius on one day, and -10 the next, the extremeties are really severe.  Let alone going to war under such drastic conditions. Not anybody can operate in such conditions. The North-South situation today is very different from that of the Korean War, when South Korea had nothing but 50,000 troops then.

The welfare system in Korea seems to be one that takes care of the ageing populance. But government spending on education is probably low, consequently, the cost of education burden on the typical family is high.  That explains why many Koreas choose to study overseas. Afterall, if studying at home is just marginally cheaper than studying overseas, why not consider studying overseas and pick up Mandarin or English? 

I've often heard that Koreans send their girls for complete plastic makeovers when they graduate from high school, and apparently this is not a fable.  In fact, it is apparently common coffeeshop talk among Korean girls to talk about the latest plastic surgery that they have done.  They are so advanced in this respect that FaceShop even offers a wrinkle removal cream containing botox substance.  Wrinkle-free guaranteed, for a given duration.  No more painful botox injections on a six-monthly basis. Simply apply the cream whenever needed!  It seems like there's much worth thinking about from an investment viewpoint on beauty care companies in Korea.

With the social belief that "man in front, woman follow behind", it seems that for the same fresh graduate seeking a job, given the same academic background and results, the man gets twice the salary expected from that of the woman.  The reason for this dichotomy lies in the belief that woman will get married, give birth and stop working.  Therefore, there is little reason to invest in their training and career development therefore.  Korea appears to suffer from the same problem as Singapore, being perpectually short of workers.  With the social expectations creating an unbalanced environment for its women, I think this is going to be a challenge and impediment to their development.  Their birth rate also compares similarly poorly as Singapore, at 1.2x birth per family, and is probably going to result in an increasingly aged population and the social burden in healthcare and social needs.

On our very first day in Incheon-Seoul, we were greeted by snowfall. What a wonderful experience!  They should invite their Northern neighbours to visit Nami Island for a sojourn during winter. I've never watched "Winter Sonata", which was filmed here. But, if you've been there, you'll realise how beautiful it really is.  Peace and bliss.

I am remaining vested in LionGlobal Korea, an equity unit trust fund, and I remain positive about the future of Korea, despite its many challenges that it has yet to overcome, and the ever present threat of conflict with its Northern brothers.

Disclaimer: This is not a sales pitch. It is merely my own views and is not based on any economic, fundamental or technical analysis.