My SRS vs. Crypto Investment Challenge: A Singaporean Crypto Investor’s Approach to SRS
GM.
In this article, I'll be discussing my thoughts on the Supplementary Retirement Scheme (SRS) and introducing an investment challenge that compares the performance of SRS against crypto investment strategies.
I will be covering the following topics:
- A brief introduction to SRS
- Limitations of SRS
- My SRS vs. crypto investment experiment
Let's dive in.
A brief introduction to SRS
The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings. Contributions to SRS are eligible for tax relief. Investment returns are tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.
Simply put, SRS is a voluntary contribution scheme with tax benefits launched by IRAS to encourage saving and investing for retirement. You can read about the details on IRAS's website here.
There are tons of articles and discussions on IRAS online, so I won't delve too deep. Here is a quick summary of SRS's benefits:
- Annual contribution cap of S$15300 for Singaporeans.
- Contribution counts towards personal tax relief, subject to the tax relief cap of S$80k.
- SRS account has a base interest rate of 0.05% per annum, which is nothing if we don't invest the contributed funds.
- The tax savings are 11.5% and 15% for income brackets of S$80–120k and S$120–160k, which fits the age profile of most of my readers.
- Early withdrawal incurs a 5% penalty with tax payment on 100% of the withdrawn amount.
- Tax-free withdrawal starts from the age of 62 (as of Jan 2022), with a withdrawal window of 10 years to 72.
- Tax-free withdrawal of S$40k annually, totaling S$400k for 10 years.
I view SRS as a saving and investment vehicle that exchanges current cash liquidity for tax savings. I.e., contribute to save on present-day taxes and receive S$400k of tax-free income in the future from the age of 62–72.
Limitations of SRS
SRS is a fantastic tool for the average Singaporean investor to save on taxes. However, I'm not a huge fan of it due to a few factors:
Importance of Liquidity
Liquidity is essential for me. While I fully understand the logic of SRS's 5% withdrawal penalty, I find it highly inflexible. The investment is effectively locked up for decades.
If I need to mobilize my funds in the SRS in an emergency due to unforeseen circumstances, I will lose 5% of my investment. If I had the same invested amount in liquid investments, I wouldn't face this unfortunate issue.
Diminishing future value of investment due to inflation
With the US government's recent massive COVID stimulus packages, inflation is becoming more and more pertinent. The most recent November 2021 CPI reported a 6.8% inflation rate; it's evident that we are losing purchasing power at an unprecedented rate.
As a result, this renders SRS's tax-saving utility much less attractive. Even if I could save 15% of tax right now on my S$15300 annual contribution, the same S$15300 will be worth much less in terms of purchasing power when I withdraw it at the age of 62.
Limited Investment Choices in SRS
As you can see from the above illustration from Seedly.sg, the types of investment we can make in SRS are very limited. Most of them are lower-risk, lower-return investment vehicles that fit the conservative profile of an official IRAS scheme.
What this means is even though we save on tax payment right away, the yield we can potentially generate with the permitted investment instruments in SRS might not be worth it in the long run.
The only type of investment listed above that generates decent returns is Robo-Advisors such as Endowus and StashAway. Both Robo-Advisors allow us to allocate to a full equity portfolio that roughly tracks the performance of SPY, the famous S&P 500 index fund.
I'm using the Endowus Flagship 100% Equity Aggressive Portfolio. I find that it is the only permitted SRS investment instrument that could match the performance of SPY.
From the above screenshot, we could see that the annualized return of SPY since inception in 1993 is 10.56%, slightly lower than Endowus' Flagship Portfolio of 12.18%.
However, please note that Endowus' 12.18% ROI is only over a 10 year period. If we stretch out to a longer time horizon, its performance will regress to SPY's ~10%.
Tax-free withdrawal amount capped at S$400k
Another issue with SRS is that due to its withdrawal window of 10 years, we can only effectively withdraw S$400k from SRS tax-free.
The amount (except for life annuities) in the SRS account will be deemed to be withdrawn immediately after the end of the 10-year withdrawal period.
If we have more than S$400k in our SRS, the additional amount is still taxed accordingly at the end of the 10 years withdrawal window. You can read more about the rules of SRS withdrawal here.
S$400k may sound like a lot, but over of long time horizon of 20–30 years, it is easily achievable with the power of compounding. Let me illustrate with an example.
Suppose we invest the full $15300 each year over a 25-year time horizon. Even with a more conservative 8% ROI (SPY is at 10%), we will hit the S$400k tax-free withdrawal amount by the 13th year.
This means that when we have a total of S$1.3m in our SRS at the end of 25 years, S$900k is still taxed accordingly at the end of the 10-year withdrawal window.
Although this first-world problem is nice to have, it certainly limits SRS's usefulness.
Hence we could consider either:
- Not contributing the full $15300 each year.
- Only start contributing to SRS when we are closer to the retirement age.
My SRS vs. Crypto Investment Challenge
So, when should we not use SRS at all? Here's my take:
We can consider forfeiting SRS's tax relief if we are confident of generating a consistent return of more than 15% annually.
This is where I want to introduce a personal investment challenge I'm doing.
I've always been fascinated by the outsized returns of the crypto market and often wondered if it's worth it to allocate $15300 into crypto investments instead of SRS.
Since the crypto market is still very young with no long-term data for me to examine, I've decided to be my own guinea pig and conduct an experiment to find out.
Methodology
My thesis is that we can achieve more than 15% annual ROI by simply holding BTC or using Pionex trading bots.
Hence starting from December 2021, I've divided the full SRS contribution amount of S$15300 into three portions of S$5000 and allocated to SRS, spot BTC position, and Pionex trading bots respectively.
I'm only allocating 2/3 of the investable amount to the crypto market because I want to use SRS both as the control investment and a tool for risk diversification.
To make it a fair comparison, I'll simulate the absence of the 15% SRS tax-relief by allocating only S$4250 (5000*85%) each year to spot BTC position and Pionex trading bots.
Note that 4250 SGD roughly equaled 3130 USD in December 2021.
SRS Allocation: Endowus 100% Equity Portfolio
For my SRS allocation, I'll throw all S$5000 into Endowus' Flagship 100% Equity Portfolio to roughly track the performance of SPY.
Spot BTC Position
For my BTC spot position allocation, I bought 3130 USD worth of BTC by DCA in December 2021. It was done in the price range of $47–50k.
Pionex Trading Bots Allocation
For my Pionex Trading Bot allocation, I've divided the 3130 USD allocation into two portions. I invested the two 1565 USD portions into Pionex mBTC Moonbot and Martingale bot, respectively. You can read more about Pionex BTC Moonbot in my previous article here.
Conclusion
Now that it's been about two weeks into my SRS vs. Crypto challenge, we have the following short term results:
- SRS Endowus: +1.79%
- BTC HODL: -10.21%
- Pionex mBTC Moonbot: -12.71%
- Pionex mBTC Martingale: -7.26%
It is what it is guys, the crypto market is highly volatile, and I've acquired all my crypto positions right before a price dip. However, I'm in this for the long haul, and I'm incredibly excited to monitor the progress continuously.
I plan to review all my positions quarterly and add to all my positions proportionally every December.
Stay tuned with me on this journey.
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