Can Singapore retirees afford to be ultra-conservative in a high/rising inflation rate environment?

Well, I reckon the short answer to the above question would probably be: It depends on how much the retiree has in his/her retirement fund?

However, for many of the newly retired who might not be exactly ‘rich’… this might be the question that is in their minds currently.

With the recent inflation rate rising at such a fast pace, it seems like most people in Singapore are already feeling the pinch.

To quote this article: “More than nine in 10 Singaporeans said inflation has affected their lives, with 37% indicating a “significant” impact, according to the poll based on interviews with 758 people aged 20 and above.”

In fact, in this article, it states: “core inflation – which excludes private transport and accommodation costs – went up to 3.6 per cent in May, from 3.3 per cent in April.”

Singapore core inflation hits 13-year high of 3.6% in May amid rising food prices (read here)

On the other hand, stocks as a whole have performed terribly since the start of 2022.

Stocks Close Out Worst First Half Of A Year Since 1970 (read here)

Year to date, the STI index is down by approximately 6.6% from the high in Feb 2022. There seems to be nowhere to hide as the Federal Reserve continues to raise interest rates to combat the rising inflation. Bond prices likewise are under pressure.

With rising inflation, retirees like many will likely see the value of their cash on hand shrink. However, with less human capital on hand, and with no active income, it is all the more important to watch the basket of assets on hand carefully. If these retirees have a portion of their retirement funds invested in stocks, the value of these stocks would have likely dropped since the high in the early part of the year.

For some retirees, having a high allocation of their retirement funds in risky assets like stocks and REITs might not seem like a good idea now.

Seems like either way (invested or not invested), one would hit…

Inevitably, for a newly retired retiree, he/she might be wondering, since either way he/she is going to ‘lose’ anyway, why bother with the stress of investing, and just stick to ultra-safe assets like bank deposits, CPF and Singapore Saving Bonds?

I was wondering, hypothetically if a ‘newly retired’ retiree is to play it totally safe and go for the ‘safest’ assets/ investments possible other than cash, how much he/she requires to survive and for how long?

After all, there is always a ‘price’ to pay for everything…

Commentary: Too few in Singapore understand the impact of inflation on investments and savings (read here)

There are a few parameters which need to be listed first:

1) Safe ‘assets / investments’

There are a few ‘safe’ assets, and with the rising interest rates and volatile markets, there are compelling reasons to go for these assets. These ‘safe’ assets, in the Singapore context, would be the CPF, Singapore Saving Bonds, and bank deposits (and maybe money market funds)….I may have missed out some.

Singapore Saving Bond: The Monetary Authority of Singapore (MAS) has launched the latest August 2022 tranche of Singapore Savings Bonds (SSBs), offering a 10-year average return of 3% per year. The August 2022 SSB will pay out a coupon rate of 2% in year 1 alone. 

Singapore bank deposit rates: As per the article below, one can safely obtain around 2% for a tenure of 24 months with minimum deposits of $20,000.

Best fixed deposit rates in Singapore (July 2022) (read here)

In view of the above, with a mixture of SSBs and bank deposits, one can probably get around 2% to 3% yield (average 2.5%).

Nevertheless, although SSB and bank deposits’ yields have increased, they are still a tad less than the inflation rate (Core inflation rate is 3.6%, while the headline consumer price index, or overall inflation, rose to 5.6 per cent year-on-year in May 2022). In other words, SSB and bank deposits are unable to beat inflation (unless inflation rates dived suddenly).

2) Age of retirement and life expectancy

On 1 July 2022,  the retirement age in Singapore was increased from 62 to 63, while the re-employment age was increased from 67 to 68. (read here)

The life expectancy of Singaporeans is among the highest in the world at 81.4 and 85.7 for men and women respectively in 2019, according to the latest public sector report released in Nov 2020. (read here)

3) How much is needed for ‘Basic standard of living’

How Much Do You Need for a ‘Basic’ Standard of Living in Singapore? 5 Things I Learnt From What People Need in Singapore: A Household Budgets Study (read here)

As per the Oct 2021 Seedly article above, it states that single elderly would require around $1,421 per month for a basic standard of living.

By basic needs, it went beyond subsistence living to include also having enough to enable one to thrive in one’s golden years.

4) How Much CPF Savings Average Singaporean retirees have

Here’s How Much CPF Savings Average Singaporeans Have According to Their Age Group (read here)

According to the July 2022 Seedly article above, for people between the age of 60 to 65, their median CPF balance would be approximately $160,000 to $180,000.

5) How much monthly CPF payout the average Singapore retiree might receive

Using the CPF Life estimator, we can roughly work out how payout much a 63-year-old male (eg. born in 1959) with $170, 000 in his CPF would receive if he chooses (a) Escalating Plan (b) Standard Plan (c) Basic Plan.

Assuming (b) Standard Plan, it would look like the below.

That would be around $1,010 per month. Decent amount of money. However, this amount still falls short of the average monthly $1,421 a single retiree would need for a basic standard of living in Singapore.

Scenarios

Let’s assume a few scenarios with varying starting retirement amount (excluding the value of property in which the retiree is staying in), and varying inflation rates but keeping the few parameters as mentioned earlier constant.

In gist,

a) Variables:

– Starting retirement fund amount (war chest)

– Annual core inflation rates

Note: Core inflation, which excludes accommodation and private transport costs, came in at 3.6 per cent year-on-year in May, up from a previous 10-year high of 3.3 per cent in April…The last time Singapore reported higher year-on-year growth was in December 2008, when core inflation was 4.2 per cent. (read here)

b) Constants:

– 63-year-old ‘newly retired’ male (in the current year 2022), and expected to live until age 81 (retirement income to last for at least 18 years)

– $170,000 in CPF, paying him around $1,010 per month.

– He needs around $1,421 per month for a basic standard of living. Hence he needs to withdraw around $400 per month or around $4800 annually from his savings (SSB or bank deposits). This withdrawal amount will increase annually as per the rate of core inflation.

Using this website, we are able to see, how long his war chest can last him.

Scenarios based on the current core inflation rate of 3.6%

1) Starting retirement amount: $500,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $330,000 in SSBs and bank deposits yielding 2.5% annually.

c) Annual core inflation rate remains high at 3.6%.

2) Starting retirement amount: $300,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $130,000 in SSBs and bank deposits yielding 2.5% annually.

c) Annual core inflation rate remains high at 3.6%.

3) Starting retirement amount: $250,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $80,000 in SSBs and bank deposits yielding 2.5% annually.

c) Annual core inflation rate remains high at 3.6%.

What if core inflation rates continue to trend higher in Singapore? After all, the core inflation rate in Singapore was much higher around 2008 – 2009.

In the US, on 13 July 2022, it was reported that excluding food and energy, core CPI rose 5.9%, compared with the 5.7% estimate. (read here)

Scenarios based on the projected core inflation rate of 6%

1) Starting retirement amount: $500,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $330,000 in SSBs and bank deposits yielding 4.5% annually. (assuming these yields are around 1.5% lower than core inflation)

c) Annual core inflation rate became higher at 6%.

2) Starting retirement amount: $300,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $130,000 in SSBs and bank deposits yielding 4.5% annually. (assuming these yields are around 1.5% lower than core inflation)

c) Annual core inflation rate became higher at 6%.

3) Starting retirement amount: $250,000 (in CPF, SSB, bank deposits)

a) $170,000 in CPF (assuming he does not touch this amount)

b) $80,000 in SSBs and bank deposits yielding 4.5% annually. (assuming these yields are around 1.5% lower than core inflation)

c) Annual core inflation rate became higher at 6%.

In gist

It seems that a retiree with a limited war chest and an ultra-conservative investment mindset would find it difficult if the inflation rates were to remain high or trend much higher.

Even with a quarter million in CPF, SSBs and bank deposits, if inflation rates remain high or trend higher … he/she might not have enough for the full length of the retirement years. A mere increase of $50,000, with a retirement fund of min. $300,000 makes a big difference. However, that is assuming that there is no major cash emergencies, and if the core inflation rate does not trend higher (and remains much higher for long).

However, this a just a hypothetical study, flawed in many ways.

In fact, there are many other considerations.

For instance, should the headline inflation rate be used (instead of the core inflation rate)? Eg. if the retiree is renting his/her accommodation or continues to drive his/her own private car.

Would inflation be constant through the 18 retirement years or varies widely?

Would medical expenses be higher as one gets older (70s, 80s yr old)?

What if the retiree lives beyond 81 years old and is in poor health in his 80s or 90s or beyond?

Would SSB and bank deposit yield remain at around 2% to 3% if the inflation rate further increases?

The retiree might also have other sources of income (eg. the retiree’s children may give him/her a monthly token sum) and the retiree can choose to monetise the property he/she is staying in.

Ultimately, life is unpredictable. So back to the question: Can Singapore retirees afford to be ultra-conservative? Well, I guess it is the keyword ‘afford’. It really depends on one retirement fund, needs & wants, available passive income, character, and time horizon… For some, they invest in riskier assets due to greed, while for others, they have to invest cause they do not have the choice.

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