Inflation erodes retirement savings
That is what we set out to understand in the second edition of our Endowus Retirement Report. This year’s edition showed that high inflation is exposing clear and widening gaps in retirement adequacy, especially among those in the middle income brackets who had, just a year ago, felt comfortable with their finances and their retirement plans. Today, rising costs and declining real returns are causing them to reassess whether they are prepared to face retirement with their finances.
According to the Endowus Wealth Insights report launched earlier this year, we noted that the rising cost of living is the top concern for respondents. Of those polled in the report, 45% of them say that inflation is their top finance-related worry for the year ahead. If anything, these concerns would have intensified as inflation has stayed stubbornly higher for longer.
Their concerns are not unfounded. As of the third quarter of this year, headline inflation has sharply increased to above 7% — after a decade low of 1% — and long-term averages of just above 2%. While inflation cannot remain this high forever, there is a clear expectation that even if it stabilises, it will do so at a level higher than in the past decade.
A sustained increase in the long-term trend inflation from 1% to 3% will lead to a 45.8% decrease in retirement savings over thirty years. A 1% annual inflation rate will reduce purchasing power by 26% over thirty years whereas a 3% rate will reduce it by almost 60%. This cost escalation and declining purchasing power makes it even more important for Singaporeans to not only set aside enough money for retirement but to also grow it meaningfully through investments.
Investing during unprecedented times
While this market downturn and the recent negative returns are enough to spook anybody, the long-term empirical evidence backed by long historical data shows that investing on a regular basis over a long period of beyond 15 years would rarely lose you money. However, it must be accompanied with a clear focus on your long-term goal and not on short-term market volatility. You have to remain disciplined and dedicated to your long-term and goal-based investment plans.
Our latest Retirement Report shows that 52% of Singaporeans still do not invest their savings despite inflationary pressures. For others, many prefer options that yield lower returns than inflation, such as Singapore Savings Bonds (SSB) and bank fixed deposits. Many Singaporeans have also professed that they need help to manage their wealth against inflation better.
As Singapore's first and largest digital wealth advisor for cash private wealth and public pension (CPF & SRS) savings, we are on a mission to help people achieve long-term goals and build long-term wealth. We have given access to institutional investment products across cash, CPF, and SRS, to help all Singaporeans invest better today to live easier tomorrow. Endowus has also launched the Fin.Lit Academy this year, providing free and easy access to financial literacy and educational materials to everyone.
The best long-term solution to inflation is not just to save fastidiously but also to take a long-term view on retirement planning and investing. We hope that this report can help everyone gain new insights and a different perspective on how best to manage their wealth during difficult inflationary times.