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Planning to put $100, $500, or $1000 aside every month for retirement? How much will your retirement savings look like then?

Ravinder Kapur

Putting money aside on a regular basis is the best way to save for your retirement in Singapore. If you invest, say, 10% of your net income every month consistently, you can accumulate a sizeable sum over a period of time.

One of the greatest advantages of saving in this manner is that after the first few months, you will not miss the money that you are saving. Your budget and spending pattern will automatically adjust itself to the reduced monthly income.

Of course, you must have the discipline to stay with your investment plan. It can be tempting to access your funds if you want to make a big ticket purchase or pay for an expensive overseas holiday.

The most important issue that you have to address in connection with your monthly savings is the manner in which you will deploy your funds. Will you choose safety and low returns or opt for an investment that carries a greater degree of risk but offers the possibility of earning more?

The choice depends on your risk appetite. But you must remember that you can’t get away from the “risk-return tradeoff. What this means is that if you want to earn a higher return you have to live with the possibility of losing some of your capital.

Here are three ways in which you can invest for your retirement. For the purpose of this comparison, we have assumed that your retirement is 15 years away and that your monthly investment is S$100, S$500, or S$1,000. This article will also not be discussing the impact of your CPF savings or CPF contributions on your retirement planning in Singapore.

 

Bank deposit

A bank deposit is one of the safest options. But the returns that you will make are very low. For example, OCBC Bank offers a monthly savings account that pays interest of 0.40% per year.

Here are the returns that you can expect to make with an investment of this type:

 

Amount invested per month for 15 years
S$100 S$500 S$1,000
Rate of interest per year 0.4% 0.4% 0.4%
Accumulated sum at the end of 15 years S$18,548 S$92,739 S$185,478

 

As you can see, the returns are very low. If you deposit S$100 per month for 15 years, your principal itself is S$18,000. The interest that you earn in 15 years is only S$548. That’s an insignificant amount.

Of course, your risk with this type of saving is close to zero. But you will actually be losing money as inflation reduces the buying power of your money. If inflation is 1.5% per year, the real value of your principal will fall at about 1.1% per year.

 

ETFs

Investing in the stock market is risky, but offers the chance of making a much higher return. Investing on a regular basis in an ETF can be a good option.

An exchange-traded fund (ETF) offers several advantages. It tracks a particular index as closely as possible. For instance, the SPDR Straits Times Index ETF tracks the Singapore Straits Times index. This index comprises Singapore’s top 30 companies. By buying into this fund you are investing in companies like DBS Bank, OCBC Bank, UOB Bank, and Singtel.

Your investment will also give you an exposure to firms like Keppel Corporation and Thai Beverage Company.

How has the SPDR Straits Times Index ETF performed in the recent past? In the last year, it has provided a return of almost 24%. However, over a longer timeframe, returns have been lower. The following data from the ETF’s prospectus provides the returns over different periods:

 


Source: SPDR Straits Times Index ETF Fact Sheet

 

As you can see, the returns are not consistent at all. In fact, investing in the equity market means that there could be periods when the value of your investment could fall below the principal sum. If you sell at this time, you would incur a loss instead of earning a return.

If you are prepared to take this risk, then investing in the stock market is for you. As you can see from the chart above, the SPDR Straits Times Index ETF has provided a return of 7.52% over the 15 years since its inception.

If we assume a similar return in the future, then you can earn the following amounts with your monthly savings:

Amount invested per month for 15 years
S$100 S$500 S$1,000
Rate of return per year 7.52% 7.52% 7.52%
Accumulated sum at the end of 15 years S$33,169 S$165,847 S$331,694

 

Another advantage of ETFs is that their expense ratio is quite low. For example, the expense ratio for this ETF for the financial year ended on 30 June 2017 was only 0.30%. Low expenses help to increase your returns.

 

Direct investment in shares

An ETF invests in a basket of shares. But you also have the option of putting your money into a particular share that you think has the potential to appreciate in value over the long term.

This could be a high-risk strategy, especially if you are saving for your retirement. But you can make a significantly high return as well.

If you had invested in DBS Bank stock a year ago, you would have made a return of 37%. On 5 December 2016, DBS Bank stock was trading at S$17.97. Exactly a year later, its price has risen to S$24.66. But it is highly unlikely that you will be able to make such a high return on a consistent basis.

For the purpose of this calculation, we have assumed a return of 12% per year. If you buy a stock that provides an average return of this magnitude, here are the returns that you can expect to make on your monthly investments:

Amount invested per month for 15 years
S$100 S$500 S$1,000
Rate of return per year 12% 12% 12%
Accumulated sum at the end of 15 years S$49,958 S$249,790 S$499,580

 

As you can see, an investment in shares can be the best option.

 

Which type of investment should you choose?

You should select an investment option that matches your risk profile. If the S$100/S$500/S$1,000 that you plan to invest every month is going to form an important part of your retirement savings, it is advisable to stay away from individual shares. Buying into an ETF on a regular basis could be a good idea.

But if you have the stomach for a greater degree of risk, you can consider a combination of ETF investments and direct share investments.

 

This article first appeared on ZUU online.

ZUU online is an Asia-based financial education online portal. Founded in Japan by Kazumasa Tomita, a former private banker at Nomura Securities, the portal seeks to fill the information gap between institutional research houses and the private investor.

(By Ravinder Kapur)

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