My thoughts on SRS Account

- I belong to the 8.5% income tax bracket, and my income tax adds up to about $3,000+ every year, if I don’t contribute to SRS.

How much do I intend to contribute to SRS?

- I plan to contribute $5,000 every year to my SRS account from 2009 onwards. This will help me defer $5,000 x 8.5% = $425 each year.

* Assuming I continue to be in 8.5% tax bracket and continue to contribute $5,000 to SRS account until my statutory retirement age of 62 years old, I will be able to save $12,750 (= $425 x 30 years).

[I started my SRS contribution when I was 31 years old, so 61-31 = 30 years]





Now, by the time I reach statutory retirement age of 62, depending on the returns from my investment in SRS, over 30 years, I would have accumulated
- S$250,013 (compounded at 3%p.a.)
- S$296,642 (compounded at 4%p.a.)
- S$353,804 (compounded at 5%p.a.)


AT RETIREMENT AGE OF 62,

I plan to withdraw S$40,000 each year, that should give me S$3,333 of income each month (= S$40,000 / 12 months in a year).

[Presently, personal income below S$20,000 is not subjected to income tax. And since only 50% of amount withdrawn from SRS account post statutory retirement age is subjected to income tax. This means that I would be able to withdraw S$40,000 each year without having to pay income tax.

Assuming this tax regime do not change and by the time I reach statutory retirement age of 62, S$20,000 is still the benchmark, okay, I know this is quite impossible. Given inflation, it is extremely likely that IRAS will raise the S$20,000 to an even higher sum. That will mean that I may be able to draw out more money without paying tax. the S$40,000 withdrawn each year would give me an income of S$3,333 each month.

Convert S$3,333 to Present Value based on 3% inflation, S$3,333 would give me about S$1,333 each month in present value. Well, this is quite close to the monthly expenses I need to survive on. Currently, I need about S$1,500 for personal daily expenses.


So long can this last me?
Let’s take average return of 5% p.a. The S$353,804 (at the time when I reach 61 years old) will enable me to withdraw S$40,000 each year for the next 8+ years.

So, between 62 to 69 years old, I will tap on withdrawal from my SRS account for my living expenses. Post 69 years old, my retirement nest in cash will then be utilized. Perhaps, I can plan to start my CPF life scheme (annuity plan) from 70 years old onwards.


HOW MUCH WOULD I HAVE SAVED ON INCOME TAX?
Assuming $425 per year for 30 years, the following would be the amount that I would have saved at 62 years old, compounded at the various rates

- S$21,889 (compounded at 3%)
- S$26,223 (compounded at 4%)
- S$31,577 (compounded at 5%)


S$31,577 is equivalent to S$12,630 (in present value) discounted at 3%. Quite a substantial savings actually!