A year ago, middle-income households were fairly confident in their retirement plans in spite of Covid-19. But in 2022, high inflation is exposing the gaps in retirement adequacy. For retirement planning, the challenge of inflation makes it even more important to set aside enough savings and grow it meaningfully through investments.
The original version of this article first appeared in The Business Times.
It used to be a luxury to grow old.
Then came better healthcare and improvements in quality of life as incomes rose which allowed people around the world to live longer. Singapore has among the world’s highest life expectancy, standing at 83.5 years in 2021.
But longevity can be less appealing if we are not going to live to a ripe old age with the means to support a quality of life that we want or need. With surging inflation dominating the headlines in recent times, are we well prepared for retirement and all the challenges it will throw at us?
Unfortunately, the second edition of our annual Endowus Retirement Report showed a waning sense of confidence. High inflation is exposing widening gaps in retirement adequacy.
Most Singaporeans will feel the pinch from the higher cost of living that inflation brings, and this is particularly so for lower income families, with close to 50% of those polled in this income segment showing a lack of confidence in their ability to retire well.
But what’s also key to observe is that a sharp drop in confidence is notably felt by those in the mid-high income brackets who had, just a year ago, felt comfortable with their finances and their retirement plans. (A mid-high income bracket is defined here as households with net income of S$8,001-S$15,000 a month, taken after tax and contributions to CPF.) Today, rising costs and a fading wealth effect (amid falling markets this year) may make a comfortable retirement seem more elusive than before.
The Endowus Retirement Report is based on an independent survey conducted by YouGov and commissioned by Endowus. It showed that the percentage of those in the mid-high income bracket who are not confident about retirement adequacy jumped to 42% from 24% just a year ago, the biggest loss in confidence seen. Those in the mid-high income bracket will include sandwich-class families that are squeezed by higher household expenses from raising kids and caring for elderly parents.
As it is, the Endowus Wealth Insights 2022 report earlier this year showed that rising cost of living is the top concern for respondents. Of those polled in the report, 45 per cent of them said that inflation would be their top finance-related worry for the year ahead. If anything, these concerns would have intensified as inflation has stayed stubbornly higher for longer. Headline inflation has sharply increased to above 7 per cent here in Singapore after a decade low of 1 per cent and long-term averages of just above 2 per cent. Inflation, even if it again stabilises, is expected to be at a higher level than that seen in the past decade.
How does inflation hurt your savings? Our data showed that a sustained increase in the long-term trend inflation from 1 per cent to 3 per cent will mean a 45.8 per cent fall in retirement savings over thirty years. A 1 per cent annual inflation rate will reduce purchasing power by 26 per cent over thirty years; inflation at 3 per cent will reduce it by almost 60 per cent.
Living by Singapore Savings Bonds (SSBs) and T-bills alone?
Despite these sobering statistics, 48 per cent of Singaporeans polled still do not invest their savings to overcome inflation. For others, many prefer options that yield lower returns than inflation (negative real returns), such as Singapore Savings Bonds (SSB), T-bills, and bank fixed deposits. While the yields have increased to attractive levels for managing our short term cash liquidity, there are also hidden costs to consider.
For example, with fixed deposits, you lock in at a fixed rate, which means you will not get the benefit of the increasing interest rates. If you try to move to the new higher fixed deposit interest rates, then you have to pay a penalty for early withdrawal. Short-term cash management accounts at platforms such as Endowus provide for the best of both worlds by providing daily liquidity and higher yields, while continuing to allow investors to benefit from rising interest rates that are reflected in the funds over time.
A rapidly declining purchasing power makes it even more important for Singaporeans to not only set aside enough money in just savings for retirement but to also grow it meaningfully through investments. Our latest report showed just 48 per cent of Singaporeans are open to investing to tackle inflation. Investing is most well-received by millennials and even then, the proportion stands at just 58 per cent.
A lack of understanding on how best to navigate an inflationary environment also contributed to muted investment interest. The Endowus Retirement Report showed that less than half are clear on which asset class (47 per cent) and what investments (45 per cent) work well during high inflation.This is aligned with findings from the MoneySense National Financial Capability Survey 2021, which showed 4 in 10 respondents did not understand concepts such as risk diversification and simple/compounding interest.
Middle-income Singaporeans can make better use of tax relief schemes too. Cash top-up and CPF transfers under the Retirement Sum Topping Up Scheme is one option, where Singaporeans can get maximum tax relief of S$8,000 for their own CPF account. Another good option is the Supplementary Retirement Scheme (SRS) top-up, which offers a maximum tax relief of S$15,300. Single-income households with a monthly income of S$15,000 can save up to S$4,095 by leveraging tax savings through CPF and SRS top-ups.
Taking a holistic approach
Despite the anxiety that may be associated with the current environment, there are ways to organise how you can better grow and manage your long-term wealth, with market valuations at a more attractive level and with fixed income providing more yield.
Consider taking a goals-based approach to wealth planning, looking at your future needs or goals first and then coming back to try to figure out what actions you need to take now in order to get there. This means matching the investment horizon of financial goals against the risk levels of those investments, which will help us remain invested to hit longer term goals.
Such an investing framework is useful to keep anxieties from the volatile short-term market fluctuations at bay. Research also shows that an automated dollar-cost averaging (DCA) strategy on a regular monthly basis often beats lump sum investing during market downturns. The growth of a DCA portfolio from buying into US stocks over 24 months beats that of a lump sum investment whenever the market falls, such as in 1974, 2000 and 2008.
The best long-term solution to inflation is not just to save fastidiously but to also take a long-term view on retirement planning and investing. When we prepare for retirement, inflation is our greatest enemy, but we have the ability to make time our greatest ally. Let the power of compounding work its proven magic, so we can rest assured of a more confident future.
With Endowus, investors can build their wealth for long-time needs in a simple and regular way, whether you are using cash, CPF or SRS. The earlier you start, the more you can compound your wealth for a better future and peace of mind. Let time do the work for you. To get started with Endowus, follow this link.
This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Endow.us Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.
Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance.
Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.