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THE SCIENCE OF WEALTH

Billions in SRS, delayed gratification, and the need to do more now

SRS contributions are not working efficiently for their owners, so savers must learn to take compensated risk towards a better financial future

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IT SEEMS obvious. Top up your Supplementary Retirement Scheme (SRS) and get 2020 tax relief of up to S$3,366 for Singaporeans and PRs, and S$7,854 for foreigners. But if you don't top up before Dec 31, the opportunity is lost forever.

With the help of technology, you can now make such a top-up without leaving your couch, and in just a few taps on the UOB, DBS, and OCBC mobile banking apps.

In 2019 alone, S$1.5 billion poured into SRS, which now has over 185,000 account holders. Contributions have been growing a compound annual growth rate of over 17 per cent since 2011, reaching S$10.6 billion at the end of 2019.

We expect record contributions in 2020.

Delayed gratification

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Money is all about trade-offs and opportunity cost.

To get the benefits of SRS without penalty, you need to lock up your money until the age of 62.

To capture higher expected returns by investing, you have to stomach the volatility of markets and stick to your investment time horizon. Globally diversified equity markets have historical annualised returns of 8 per cent, but with swings as large as plus or minus 40 per cent in a single year. Can you stomach this volatility?

SRS by nature is long term, and investments should be done with the tolerance for higher volatility for higher expected returns, making thoughtful adjustments as you approach your withdrawal date (retirement). Capturing an 8 per cent annualised return over 30 years would be a very meaningful return of 1,000 per cent.

Unfortunately, this is not what people are doing. Approximately 30 per cent of SRS money, or S$3 billion, sits in the SRS cash balance earning 0.05 per cent interest, which after 30 years will be a return of just 16 per cent with a massive erosion in purchasing power after inflation.

SRS contributions are growing at an impressive rate, which is a great sign of savers accepting delayed gratification. But this money is not working efficiently for its owners, which is a sign that more must be done to educate savers on how to take compensated risk towards a better financial future.

Fintech festival and financial literacy

Undoubtedly, Singapore has earned the status of a global fintech hub. The Singapore Fintech Festival launches on Monday, with an impressive line-up of over 800 global CEOs and thought leaders, from Bill Gates to Larry Fink, speaking on the future of money.

I've always thought of fintech as the use of technology to democratise access to financial services at scale, all with the purpose of enriching people's lives. An issue that keeps gnawing at me is that fintech proliferation without more education will not lead to a more inclusive society, and may actually further bifurcate those with the knowledge to participate, and those without.

More must be done at the grassroots level, now.

Starting with the Singapore FinTech Festival, The NUS FinTech Lab, in partnership with Endowus, Grab Finance, The Fifth Person, and Seedly, will be launching financial literacy at hawker centers with a goal of reaching out to people of all walks of life.

(https://fintechlab.nus.edu.sg/singapore-fintech-festival-2020/)

Associate Professor (Practice) Keith B. Carter, Director of the NUS FinTech Lab, explains: "The programme aims to empower those with little to no financial literacy, equipping them with the basic knowledge required to make sound judgments from budgeting to investing, all the way to retirement. For those who are already equipped with financial know-how as well as an interest in fintech, the programme will provide training and mentorship with partners like Endowus, to accelerate the acquisition of expertise and encourage careers in fintech."

Doing what is right

Richard Magnus' RHT GRACE Institute speech on Nov 5, 2020 - "It's possible to be profitable and principled" - illustrated holes in regulation and internal corporate controls that allowed for the snowballing of highly unethical short-term profit-driven decision-making. No industry is immune, from big tech, to pharma, to financial services.

With the age of fintech upon us, business models can scale quickly. Compensation systems must be reviewed to ensure that the value chain is aligned with the customers. In the case of wealth management, it is as simple as advisers being allowed to be paid by their client - and only their client. This means we must now start working towards the eradication of product kickbacks and churn-focused incentives.

Like the SRS savers and investors, fintechs must also delay their gratification. This will lead to better, client-centric outcomes, and a more well-informed, wealthier and inclusive society.

  • Gregory Van is a founding partner of Endowus.com, the first fee-only digital wealth advisor for CPF, SRS & cash. He can be contacted at gregory.van@endowus.com

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