Thursday, 25 August 2016

Is it easier to build wealth in Singapore?

Since August is a big dividend month, our average monthly passive income has been inching close to S$1,000. We might get there just for August before it falls back below S$1,000 in September. I'm not sure whether this counts as meeting my goal since it will only be for a brief period of time.

Anyway, it's still something to be excited about and I'm patiently waiting for the last week of August to pass before doing the monthly financial update to see how we fared. After all, we should be receiving some distributions/dividends this week that might make all the difference.

Recently, I had a chat with my wife about how fast time has passed since we moved back to Singapore in Jan 2014. Between getting married, adjusting to working & living in Singapore and making new friends, I can't believe it's been 2.5 years.

What triggered the conversation was that my wife's colleagues/friends from Australia are starting to plan for their move back there. They are usually families with young kids or couples looking to settle down. We have gotten close to some of them since we all get along well and have similar interests.

Talking to them about their job, money and lifestyle concerns from making the move back to Australia was reminiscent of the same discussions we had with our colleagues/friends in Sydney when planning our move back to Singapore.

Although it's nice to have some stability in our life and not have to worry about these things, this also made us wonder whether this means we are not likely to make such a move anytime soon. I can't deny that we have made more financial and career progress in the past 2.5 years in Singapore compared to the 4 years before that in Sydney/Melbourne.

I want to see for myself why this is the case and hence the motivation for this post. Is it really easier to build wealth in Singapore and will greater financial progress make our life better off here? I must stress that this is written from the perspective of a dual-income couple with no kids for now and this could change drastically in the future.
1. Low personal income tax rates in Singapore

If you don't already know, Singapore has one of the lowest personal income tax rates for a tax resident here. For illustration purposes, a Singapore tax resident individual with S$80,000 of taxable income (assessable income - allowable tax reliefs/deductions) has a tax payable of S$3,350 i.e. a personal income tax rate of about 4.2%. The tax payable can even be paid in twelve interest-free monthly instalments to the Singapore Tax Authority after the year of assessment.

The personal income tax return can be easily filed electronically using the online portal with most of the data automatically pre-filled or rolled over from the prior year. The assessable income and allowable tax reliefs/deductions are also more easily understood and identified. Hence, it becomes a much less costly and painful annual process to go through than filing a personal income tax return in Australia.

Most importantly, low personal income tax rates provide us with the incentive and motivation to work hard at increasing our salary income. This facilitates the journey to financial independence for salaried employees like us and makes it a more viable wealth-building route to take.

2. Singapore-sourced dividend and interest income are not taxable

Dividends paid by a Singapore resident company and interest paid by approved banks/finance companies & debt securities are not taxable in the hands of a Singapore tax resident individual. Can you imagine how useful this is to wealth-building by investing in shares, funds, REITs, Business Trusts and bonds in Singapore?

By constructing a large enough investment portfolio of such equity & bond instruments in Singapore, it's possible to live off the non-taxable passive income and capital withdrawals for the rest of your life. If you are worried about concentration risk, you can diversify into global financial assets but they will have more complex tax considerations.

3. Costs of living can be low or high

This is a lot less straightforward. It's actually possible to keep your costs of living low in Singapore, especially for a couple, if you follow these steps:
  • Buy a 4-room HDB BTO flat in a non-mature estate for housing
  • Don't buy a car and take public transport
  • Cook at home
  • Eat out at coffeeshops & hawker centres instead of cafes & restaurants
  • Don't drink alcohol or smoke
  • Travel to Asia-Pacific destinations for leisure instead of Europe or US
Reasons are simple:
  • Affordable housing loan payments from CPF without using cash
  • A new Toyota sedan car can cost S$110,000 and you can get to most places using train, bus or taxi/Uber/Grab
  • Having home-cooked meals can be cheaper than eating out depending on the dishes you cook and the number of people you are cooking for (impacts the type and amount of groceries bought)
  • It's possible to eat a meal (rice, 1 meat dish and 1 veggie dish) for S$3 or less at coffeeshops & hawker centres but you are going to pay a lot more at cafes & restaurants. This is how eating out can sometimes be cheaper than cooking at home
  • Wines, beers and cigarettes cost 1.5x to 2x as much here
  • Due to Singapore's geographical location, travel trips to Asia-Pacific destinations are less expensive than Europe or US due to the availability of budget flights. Shorter trips with stays at budget hotels during off-peak periods are more feasible that way too
Sounds easy yeah? The problem is having to do the above consistently here in Singapore. Just using us as an example, we failed to complete most of the steps because of a higher propensity to spend here compared to Australia.

It could also be because we tried to replicate aspects of our lifestyle in Melbourne/Sydney but the fact is our costs of living are higher here. Essentially, necessities cost less but luxuries cost more and it's how you differentiate the two that makes all the difference.

4. Lower childcare/helper/nanny costs

We hear this often from our colleagues with kids who have lived in Australia, UK and US. The childcare/helper/nanny costs are lower here and this allows for both parents to work full-time jobs. The secondary income can sometimes accelerate wealth-building more than investing can ever do so. However, this might not be as feasible in those countries due to the high childcare/helper/nanny costs and personal income taxes there.

5. Healthcare costs can be low or high

This is a tricky one. If you have medical insurance at your full-time job and only fall sick with minor but not major illnesses that don't require hospitalisations, it's possible to see a doctor at the clinic and get the medicine for free i.e. costs are borne by your employer. Without medical insurance, the medical costs are still reasonable for the quality of healthcare you receive.

The problem is when you require hospitalisations. Even with subsidised healthcare available (e.g. visit public instead of private hospitals), the costs can quickly escalate. This is made worse by the lack of a universal public health insurance scheme and you have to bear these costs yourself. However, it is possible to rely on your CPF - MA and external medical insurance to defray the costs.

For your information, this is a useful article from MoneySmart on how Singaporeans should make sure they don't get crippled by healthcare costs. Which means it is possible to keep your healthcare costs affordable.

These are just some of the factors that have contributed to our greater financial progress on wealth-building in Singapore. And it does look like we have a higher chance of attaining financial independence here if we stay on our current path. That being said, living in Singapore is not without its compromises and trade-offs, which is something we deal with every day.

Things can always change and it might be that our financial goals become less important over time. The pursuit of financial freedom should never come at the expense of our happiness and personal well-being. We just have to keep working on balancing these objectives in our lives.

Monday, 22 August 2016

Distribution/Dividend Reinvestment Plans (DRPs)

I know I have been slow with this but better late than never. Congrats to Joseph Schooling for winning Singapore's first Olympic gold medal. It's a fantastic achievement and something to be proud of for Singapore!

On the other hand, I feel both happy and sad for the Malaysian badminton players in the Olympics. They came so close to winning their first Olympic gold medal for Malaysia and I hope their hard work & efforts will pay off in Olympics 2020.

Sigh. It hurts to watch Lee Chong Wei lose his third consecutive Olympic badminton final and receive a silver medal. I reckon he is the most deserving Malaysian athlete to win the first Olympic gold medal for Malaysia but it is not to be this time round.

Anyway, that's enough of a sporting update from me and I'm going to write about how August is a big distribution/dividend month for me instead. I noticed this after looking at the Dividends Upcoming and Collected sections of my SGXcafe portfolio. Always nice to see passive income flowing in.

As the amount of distributions/dividends received increase with the size of my portfolio, I have started to consider whether it's worth participating in the available Distribution/Dividend Reinvestment Plans (DRPs). These refer to plans that allow unitholders/shareholders to automatically reinvest distributions/dividends to accumulate more stock without paying brokerage fees.
Especially with the recent changes to the brokerage fees of the Standard Chartered Online Equities Trading Platform in Singapore. In summary, there are now minimum brokerage fees to be charged for each trade and they are SGD/USD/GBP 10 on the SGX and LSE markets for Personal Banking Clients (i.e. Non Priority Banking Clients) like me.

Considering how aggressively Standard Chartered Bank (SCB) had been marketing this Online Equities Trading Platform as the only one with no minimum brokerage fees in Singapore, this turnabout was disappointing at best.

To implement a Dollar-Cost Averaging (DCA) approach with index ETFs effectively, it's important that brokerage fees are as low as possible. Where I could invest small cash amounts previously to take advantage of market dips in times of uncertainty, I'm now forced to use larger cash amounts and have to wait for bigger market drops. It's annoying but I will just have to adjust my investing strategy.

This also means that picking up small numbers of units/shares via the DRPs is a more viable approach now and definitely something worth considering. There seems to be no easy way to find out which of the stocks I invest in offer such DRPs other than monitoring the actual distribution/dividend corporate announcements or waiting for SCB to inform me about them. 

Generally, REITs and Business Trusts usually offer DRPs and I reckon this is a good way to increase their asset allocations slowly in my share portfolio without actually using my investment cash. The problem is that my asset portfolio is over weighted on real estate now and I'm hesitant to add to my positions. Maybe when it's more balanced in the future?

OCBC Bank offers DRPs and I'm kicking myself for not participating in it earlier in the year. I'm planning to increase my exposure to the Financial Services industry in my share portfolio as I believe it will continue to be one of the main drivers of economic growth in Singapore. And this goes beyond just the banking sector.

Given the increasing demand for healthcare services due to an aging population and general decline in health from the modern lifestyle, it was good to know that Raffles Medical Group offers DRPs as well. I only have a small portion of healthcare stocks in my share portfolio and I would like to grow this more aggressively.

I know what I'm saying sounds counterintuitive to my focus on index ETF investing. It's just that index ETFs don't offer DRPs and I can't get excited about nothing. After all, this discussion is more in the context of DRPs and less about the utilisation of my investment cash.