3 Obvious Personal Financial Planning Uses for Singapore Savings Bonds (SSB)
From 1st Sept, the Singapore Savings Bonds will be available for purchase. All the important and salient information about the SSB are available on the website and some clients have asked how this will fit into their financial plans.
Before we explore that, it will be good to get a brief background of the SSB as an investment product.
The main features of SSB can be briefly summarized as the following:
0 – This is how much capital loss you will have if you make a withdrawal
2% to 3% – That is the expected yield for the full 10 years
6 Months – This is how regular the interest will be paid
10 years – This is how long the investment period will be
$100,000 – This is the maximum limit each individual can hold
In my opinion, there is certainly a part to play in personal financial planning for the SSB but the needs that it can fulfil are specific due to its unique features. Here is my stab at how it can work for you…
a. Rainy Day
It’s on the website as one of the key benefits and I completely agree. The purpose of a rainy day fund is to provide for an unexpected event that will create an urgent cash need. This means you need the capital to be preserved while allowing for the flexibility to withdraw anytime. However, it will not be wise to put all the rainy day fund into SSB.
As the redemption for the SSB will only be paid on the 2nd business day of the following month, this means you may have to wait almost a month in the worst case. A good suggestion will be to invest part instead of all of the rainy day into the SSB. A good number will be 50% or half of your rainy day savings into SSB.
“How to redeem your savings bonds?”
The SSB may not be generally used as a standalone retirement plan because the interest is paid half-yearly and the term is only 10 years. In retirement, we need income monthly (because most of our bills are paid monthly) and we need income for as long as we live (chances are that for most of us, it’s more than 10 years from retirement).
However, the SSB can be used to complement a well set-up retirement plan by providing half-yearly income to fund lifestyle needs in retirement. For example, if an individual holds the maximum of $100,000 of SSB and earns a yield of 3%, he will receive an interest of $1,500 every 6 months which can be used for a holiday, attending courses or buying gifts for loved ones.
It must be noted that the interest payouts work on a “step-up” basis so the interest in the initial years will be lower. However, the principle still applies in that the income is an “extra” for lifestyle needs and not as the main provider of retirement income.
A small warning here, it will be foolish to do regular withdrawals from the SSB as a retirement drawdown plan as the redemption period (see point a) and the $2 transaction fee for each redemption request will make such a plan both impractical and costly.
Pardon me but I’m trying to find a word starting with “R”. From time to time, we may have a sum of money that we have absolutely no idea on what to do with it. It is a good problem but it causes some amount of irritation as doing nothing with our money may create feelings of guilt as the purchasing power of the money erodes away due to inflation.
If you have a sum of money that you have not attached any goal to or you just want to take a break from “too much financial planning”, the SSB will be perfect. It’s like the airport lounge when you have to make a 12 hour transit from one flight to another. It’s the perfect place to stay when you have nowhere else to go.
However, an airport transit lounge, no matter how comfortable, will never replace the comfort of our own home. Stay for as long as you need a rest but always remember there is a flight to catch. See your GEN planner to review once you’ve past your period of hibernation.
In conclusion, these general suggestions are my views on how the SSB can be helpful in your financial planning. You should always have a discussion with your GEN planner to review your specific needs before making any decision.
Perhaps, when the product is launched and after I’ve purchased some for myself will I be able to offer further in depth views on the SSB. Meanwhile, if you have any suggestions and questions on how the SSB can be used in personal financial planning, feel free to email me your thoughts and I can share them in a follow up article.
Article by Lee Meng Choe
The writer is the Executive Director (Distribution) of GEN Financial Advisory