Building your nest egg through low-risk investments
Those looking at retiring need to make prudent investments so they can build their nest egg.
When you are approaching retirement, capital preservation becomes an increasingly important investment objective. For some, it simply means no loss and for others, it’s about avoiding loss through inflation.
While you will be paying closer attention to guarantees, maturities, liquidity and fees, diversification is still key. In Singapore, this secure portion of your portfolio will likely be made up of monies from CPF (Central Provident Fund), and SGD-denominated instruments such as Singapore Savings Bonds (SSBs), fixed deposits of various maturities, bonds with high credit ratings and money-market funds.
So let’s go through each of these:
If you fancy the risk-free rates of CPF accounts and desire liquidity, here is an option.
Each year, if mandatory contributions do not add up to S$37,740, the member can voluntarily top-up his or her CPF accounts with cash. Top-ups are not tax-deductible and allocation rates are shown in the table below:
|Member’s age||CPF allocation rates (%)|
|Ordinary Account||Special Account||Medisave Account|
|Above 55 to 60||12||3.5||10.5|
|Above 60 to 65||3.5||2.5||10.5|
Once the Medisave account balance hits the ceiling for that year (known as the Basic Healthcare Sum), the top-ups will overflow proportionally to the Ordinary and Special Accounts. Members aged 55 years and above can make full or partial withdraws anytime from their Ordinary and Special Accounts with Special Account Savings being paid out first.
Largely offered through banks and cooperatives, these are deposited for a fixed period typically up to 36 months to earn a guaranteed interest. However, if the deposit is withdrawn before maturity, there may be no or lesser interest earned. Usually higher promotional rates require larger minimum deposits.
What if you wanted a higher fixed return over a longer tenure? What if you wanted to lock-in interest and have the flexibility to withdraw anytime? And all this for an affordable minimum deposit? Heard of Singapore Savings Bonds?
Singapore Savings Bonds (SSBs)
When you buy a bond, you become a lender, therefore you get paid interest usually semi-annually and the principal is redeemed at maturity, which is a fixed date in the future. There are many different kinds of bonds.
One such bond is the SSBs. Offered monthly since October 2015, these bonds guaranteed by the Government offer applicants a maximum tenure of 10 years with step-up yields, so the longer you save, the higher the return. Or, if the applicants choose to exit their investment in any given month, there are no penalties.
Redemptions can be as early as the following month which amount to your principal plus accrued interest. There is a minimum investment of S$500, as well as an application and early redemption fee of S$2. The effective return per year reflects the average 10-year SSBs yield two months before the issue. See the table below:
|Issue||Effective annualised return on maturity (%)||Issue||Effective annualised return on maturity (%)|
With SSBs, the applicant always gets his or her investment amount in full with no capital losses. To apply for SSBs, you need to obtain a Central Depository (CDP) Account and link it to your DBS/POSB,UOB or OCBC account. Go to www.sgs.gov.sg/savingsbonds for details.
Singapore Government Securities (SGS)
For a minimum investment of S$1,000, you can purchase these bonds ranging from one- to 30-year tenures. Brokerage fees apply and the investor can either trade it at the market price for liquidity or capital gains, or hold the bond to maturity.
SGS are ‘AAA’ credit-rated, representing the lowest risk of default.
Money-market and bond funds
Beyond the more secure options above, one can also invest in lower-risk, short-term money market instruments and bonds with high credit ratings through unit trusts and exchange traded funds (ETFs). With both unit trusts and ETFs, your money is pooled with money from other investors and invested according to the fund’s stated investment objective. Both are not principal-guaranteed so you may lose all or a substantial amount of the money you invested in certain situations.The expected risks (such as market risk and foreign exchange risk) and returns are described in the product highlight sheets and prospectus accompanying the funds.
Unit trusts are available through financial advisors or banks, and directly through online platforms, whereas ETFs are traded over a brokerage account. Do compare fees and charges for trading or switching funds as it may take a chunk out of the already low returns.
In summary, keep a low-risk portfolio simple to monitor and easy to monetise. Always exercise prudent asset allocation to reduce risk and not by timing the market.
(The above article was contributed by the Institute for Financial Literacy which holds regular talks on financial matters.)