Three Lessons From A Singaporean Favourite Game

Apart from red packets and delicious snacks, there is one other thing that everyone look forward to during the Lunar New Year. It’s Mahjong! On top of being a good game to stimulate your brain and catch up with your relatives and friends, this household favourite game yields many lessons about investing and life.

Lesson 1: You can’t win it all

The first lesson is a tough pill to swallow. No matter how skilled you are at reading the cards of others or how disciplined you are at playing defence, you cannot always win in Mahjong. Sometimes, people just keep winning from 自摸 (drawing the tile themselves). Disgusting! Trust me, I understand how frustrating this is (been on the receiving end of that multiple times). Unfortunately, this is something that is completely out of our control. You win some, lose some. Sometimes you are lucky, and sometimes you are not.

Thankfully, doing nothing is perfectly fine! Luck comes and goes, but in the long run, over many repetitions, what gives one an edge is skill and the right mentality. Thus, by directing our efforts to the things we can control, we can poise ourselves to seize opportunity when the tides turn.

This is very applicable to investing and anything that involves a mixture on luck and skill, even life. Given the infinite number of factors affecting the outcome, there is a infinite possibilities that could occur. Even if we have done everything we can to the best of our ability, some things are just out of our hands. In investing, we should expect a third of our decisions to not work out. With that in mind, we should have a sound plan and take precaution to ensure that we can remain financially resilient. Eventually, lady luck will once again shine on us.

Lesson 2: Take calculated risk

Mahjong also teaches us a thing or two about risk, something that is hard to understand simply by reading or listening. This makes it challenging to learn anything much about risk from our formal education. Yet, risk is pervasive in life. At every step of the way since birth, luck and risk is at play regardless of whether we are aware of it, and arguably much more so in investing. In my opinion, the best way to learn about risk is to learn from experience, and playing Mahjong is an excellent opportunity to do that.

Take for example a situation where someone is calling (waiting to win) a 满台 (the maximum “points”, usually 5 in Singapore) and the best you can do with your hand is 三台 (three “points”). In this case, the downside if you throw the winning tile is huge while the potential gain of winning a 三台 is relatively small. So, what would you do in that situation? As rational players we should play defence when we draw a tile that we think may be the winning piece for the other player. While doing so may mean that we submit to fate that we won’t win this round, we do not risk losing more. We much rather wait for another round where the reverse is true, when we are calling a 满台 and others are calling only two or three 台. These situations where the payoff is skewed in our favour present excellent opportunities to play aggressively.

In investing, we want to “bet” big on situations which has a huge upside and minimal downside. Or in the words of Monish Pabrai, “heads I win, tails I don’t lose much”. The converse is also true. We should ignore investments that have small upside but could potentially lead to large permanent losses. We much rather wait for the low risk high reward opportunity. Following this logic, I never short a stock. This is because the upside is at most a 100% while the downside is unlimited. When we invest in a company, the upside is unlimited. Why would I take the first bet? When we make rational decisions based on this sound principle, they cease to be bets. Instead, they are strategic moves involving calculated risks. Such opportunities are few and far between so when we are lucky to find one, make sure to capitalise on it.

In both Mahjong and investing, there are many nuances that writing cannot encapsulate. However, the idea of looking for “bets” with huge upside and minimal downside remains the core of a winning strategy. As mentioned above, the best way to learn about risk is by experiencing it. In order to truly appreciate how luck and risk come into play, one has to put themselves through those situations, and one of the best ways to do so is playing Mahjong.

Lesson 3: You can’t know everything

Building on the concept of risk, the next lesson drawn from Mahjong applies to investing and life as well. Picture this:

You are calling a 满台 and it is your turn to draw. You look at the tiles on the table and know that another player is gunning for a 清一色 (full suit) 索子 (bamboo). You pray to god to draw anything but a 索子. As you draw your tile and slide your thumb across the face of the tile, you feel sticks… and you heart drops. You know that he wants 索子 but you are not sure which exact piece he needs (unless you have a PhD in mahjong like the Aunties and Uncles). At this point in time you face a major dilemma. Do you throw the 索子 and risk losing a lot of money? Or do you play defence and miss out on the potential of winning a lot of money? In such situations, there is no easy way out. Neither is there a correct answer. It all depends on you.

Similarly in investing, you cannot pinpoint what the future beholds. The best you can do is assess all available information and make a decision that you are comfortable with based on your current financial situation, risk appetite and goals. If you think that the risk-reward ratio is attractive after thorough assessment of the available information, you just have to take the leap of faith. As such, we can expect that unknown unknowns may occasionally derail some of our theses. This makes the case for a certain degree of diversification, never put all your eggs in one basket.

That being said, I am not promoting gambling. We all have to take responsibility of our actions and know our limits. Sometimes before making a big decision, a certain friend of mine will look in his drawer to count his chips. In both investing and Mahjong, we only risk what is reasonable. And what is reasonable, depends on a variety of factors such as our risk tolerance and financial resilience. I simply hope to share that there is value we can gain from playing intricate games such as Mahjong that formal education cannot offer us. So, the next time you play Mahjong, pay attention to the life lessons that this Singaporean favourite game has to offer.

Supplementary Retirement Scheme – The $1 Hack!

“Top up $1 to your Supplementary Retirement Scheme (SRS) account to lock-in your retirement age!”

Some of you may have heard about this hack from your savvy friends. This article is a complete guide on what the SRS is and why everyone should make use of this $1 SRS hack.

What is the Supplementary Retirement Scheme (SRS)?

The SRS was started in 2001 and is part of the Singapore government’s multi-pronged strategy to address the financial needs of an ageing population. Similar to the Central Provident Fund (CPF), the SRS was conceived to encourage Singaporeans to save more for their retirement.

This begs the question, “If they both serve a similar purpose, what’s the point of having another scheme?” Before I answer that question, here are a few important things you need to know about the SRS.

Unlike the CPF, which is an involuntary savings scheme that aims to provide Singaporeans with a very basic retirement, the SRS is completely voluntary. Thus, the SRS can be seen as an additional retirement savings scheme for those who wish to set aside more money for their golden years.

Since the SRS is for your retirement, you are only able to make a withdrawal without facing penalties after the statutory retirement age. Upon reaching the retirement age, you can withdraw up to $40,000 per year from your SRS account tax-free (read below to find out how the statutory retirement age is determined.

However this is where the SRS differs from the CPF. With the SRS, there is greater flexibility if you wish to take the money out before your retirement age. However, much like a typical fixed deposit with the bank, doing so will subject you to a penalty. If you perform an early withdrawal before the stipulated retirement age, there will be a 5% penalty and the amount withdrawn will be taxed. These penalties are implemented to ensure that Singaporeans actually put money in for their retirement.

Of course, there are incentives to use the SRS. Similar to the CPF, making contributions to your SRS account by 31 Dec of every year will qualify your for tax relief. As with the CPF, there is a contribution cap as well. For Singaporeans and PRs, the cap is $15,300. For foreigners, it is $35,700.

Why set up an SRS account on top of the CPF account?

Now that we have laid out the basics of the SRS, here are some benefits of setting up an SRS account on top of CPF.

1. Money in SRS can be invested more flexibly

While CPF money in your CPF can be invested as well, there are certain limitations that make it very restrictive. First, your ordinary account (OA) savings can only be invested after setting side $20,000 in your (OA) while your special account (SA) can only be investing after setting aside $40,000 in your SA. Furthermore, you can only invest up to 35% of your investible savings in stocks.

Don’t understand what I just said? Not to worry, you are not alone.

These rules make it troublesome to invest using CPF monies. SRS, on the other hand, is much more flexible in terms of investing and there is a much wider range investment options available.

Here are some examples of government-approved SRS investment options:

  • Bonds
  • ETFs
  • Fixed deposits
  • Life cover
  • Real Estate Investment Trusts (REITs)
  • Robo-Advisors
  • Shares
  • Singapore Savings Bonds
  • Single-Premium insurance products (both annuity and non-annuity plans)
  • Unit trusts of Mutual funds

2. SRS is more flexible than CPF in terms of withdrawal

Unlike the CPF, money in your SRS account can be withdrawn at any time albeit with some penalties. However, this can serve as a last resort in the event that you require a large sum of money for an emergency and do not have sufficient cash set aside. That being said, it’s still better to have an emergency fund and avoid having to drawdown your SRS savings.

3. Greater tax breaks

Currently, the maximum CPF cash Top-up Relief per year is $14,000. This is broken down into a maximum of $7,000 if you top up for your own CPF account and a maximum of $7,000 if you top up your family members’ accounts. If you max out the CPF tax relief, any additional amount you contribute to your CPF accounts will not provide you with additional tax benefits. If you wish to set aside even more money for retirement, a SRS account will allow you to do so while enjoying even more tax reliefs at the same time (up to $15,300).

Of course, there are trade-offs between choosing to top up your CPF or SRS account. While SRS has greater flexibility than CPF in terms of withdrawal and investments, CPF provides 2.5-5% interest guaranteed by the Singapore government. On the other hand, cash left in the SRS will earn a measly 0.05% interest. This means you have to invest in assets (equities and/or bonds) to earn a fair rate of return. This would also mean that you will be taking on greater risk than if you topped up your CPF account. However, I do think that an SRS account on top of a CPF account do provide many benefits.

How is the stipulated retirement age determined?

The stipulated retirement age at which you can withdraw money from your SRS account without incurring penalties is the prevailing retirement age (set by the government) when you open the account. This retirement age is “locked in” when you open your SRS account and make your first contribution.

This means that if you open an account this year, the “locked in” retirement age on your account will be 62 years old, no matter what your age is today. However, starting from 1 January 2022, the prevailing retirement age will be raised to 63 and this will be the retirement age at which you can withdraw your money if you set up your SRS account next year. While one year may not make a huge difference, it is worth noting that the government has plans to raise the statutory age of retirement to 65 years old by 2030!

The $1 SRS hack

If you are still on the fence about the SRS but you are worried that the government will keep raising the retirement age in the future, this $1 SRS hack is for you!

Simply create your SRS account and top up $1 into your SRS account before 2022 (just a heads up, at the time of writing, there’s only 21 days left!). This “locks in” your retirement age at 62 years old, regardless of whether you make contributions to your SRS account in time to come.

You can choose to open your SRS account with any of the following banks in the private sector: DBS, OCBC, or UOB. The good news is, you can set up the SRS account online in under a minute!

I personally used DBS as that is my savings account but I do not think that the choice of bank really matters. Here’s how to create your SRS account for DBS users:

  1. Open the digibank app
  2. at the bottom panel, select “more”
  3. Under the “apply” section, find “SRS Account”
  4. Create an account and contribute $1!

Additionally, here are more information about creating your SRS accounts with the respective banks.

Personally, I find the SRS a complement to the CPF. On top of setting aside more money for retirement, the SRS will allow us to enjoy greater tax reliefs and tax-free returns. Even if you are not sure whether you will make use of the SRS, I think everyone who is eligible should create an SRS account before 2022 to lock in their retirement age. There is no costs involved and you only stand to gain from locking in the retirement age earlier.

Okay fine, I lied. The cost is $1 and a minute of your time.