10 Ways to Tackle Inflation

The Consumer Price Index climbed to 3.1% in July 2010 as reported in The Straits Times on 24 August. This rise is in line with the expectations of economists for the second half of the year. The increase in costs of food, housing, transport, electricity and clothing have primarily contributed to inflation.

So, how does this affect you and me?

Singaporeans who are uncomfortable taking financial risks and who are happy parking money in bank deposits, playing ‘safe’, are now facing an even bigger risk – that of not protecting themselves against inflation. 

In the long run, your savings will actually shrink and you could become poorer, not richer because of inflation.

Q: How much will S$10,000 in today’s value be worth at different inflation
    rates in 10 years time? 
A: At 2% inflation, it will be S$8,171. At 3%, it will be S$7,374. And at 4%, it
    will be S$5,987.

Therefore, it takes discipline and a sound investment strategy to cushion the impact of the shrinking dollar.

1. Reduce spending and live within your means
Buying things on impulse and on big ticket items beyond your means could cause you to spend beyond your means. It is time to review your spending pattern and your lifestyle. For example, you could substitute a branded item with a no-frills one or switch to a cheaper mode of transport like the public trains and buses etc.

2. Try to save 20% or more of your pay cheque
Pay yourself first before you start paying your bills. Saving 10% is good but if you can manage 20%, you’re giving yourself a bigger head start in building surpluses for long term investments.

3. Do not be overly conservative
Invest your money instead of putting it in fixed deposits or saving deposits. These instruments do not help to overcome the effects of inflation. Another alternative will be to place your money in money market funds that have low sales charge and offer better rates than the deposits.

4. Do not rely on guaranteed products
They guaranteed the principal upon maturity. Returns are almost negligible and they do not provide any protection against inflation.

5. Save regularly via an investment platform
Dollar Cost Averaging is one of the best ways to complement your lump sum investment. This method reduces risk in the long term and it provides a disciplined way to save. The earlier you start investing a fixed sum regularly, the quicker your investment will grow to a significant amount in your later years.

6. Take on sensible level of risk
You do not need to be an aggressive investor overnight. You can build an investment portfolio that is well diversified in the various asset classes that suit your risk profile.

7. Invest for returns that will beat inflation
Consider investing in a diversified portfolio of stocks and bonds over the long term. A moderate-risk portfolio with 70% equities and 30% bonds could generate 6%-8% return a year over the long term.

8. Understand the Power of Compounding
The Rule of 72 will help you to understand how long it takes for your money to double. Simple take 72 and divide by the percentage return. For example, with a return of 9% a year, you will need 8 years for your money to double. If you invest S$100,000 in a portfolio that can give you an annual return of 8%, this amount can grow to about $467,000 after 20 years.

9. Invest in asset classes that appreciate
Property investment is not for everyone. But this can be a good investment only if it is within your means. If rents increase at a faster rate than inflation, your property yield will provide a healthy return.

10. Limit exposure to depreciating assets
A depreciating asset would be cars. If there is no necessity to change your car, then stay with your existing vehicle.

Don't Leave Retirement to Chance

More and more Singaporeans are facing the grim reality of retiring later or lowering their lifestyle expectations when they call it a day. This is because they have not planned or failed to plan early enough for their retirement.

The fact is a majority of Singaporeans are unprepared for retirement. And ignorance is not bliss here.

Here are some factors to consider when planning for your retirement:

1. Retirement age

For a start, determine the age you hope to retire. The earlier you do this, the more time you have to plan and to adjust to or accommodate any hiccups along the way. Having this number in view is important as you can then project the savings you need at the start of retirement.

2. Years in retirement

Life expectancy has increased. In Singapore females have an average life expectancy of 83 years and men 78 years. You should also take your family’s medical history into account. The longer we live, the more resources we will need. The worse scenario is to outlive our resources and have no one to depend on.

3. Income needed in retirement

Most people think they will spend much less during retirement. But with plenty of time on your hands, you would not be sitting at home and not be doing anything. This is after all your golden years and you want to be able to enjoy the fruits of your labour. Giving yourself a retirement income that is 70 per cent of pre- retirement income is reasonable. To go any less would mean that you have to live a simple, even frugal lifestyle.

4. Consider inflation

Inflation is the increase in the general price level of goods and services. It can affect the purchasing power of your money. For example, with an inflation of 3%, $1,000 today will only have a value of $642 in 15 years’ time. Do not overlook this as you would not want to suffer from a shortfall during retirement.

5. Financial commitments

Consider what your likely monetary commitment would in retirement. Would your house be full paid off by the time you retire? Would you need to support your children in their tertiary education? Are your parents dependent on you? Thinking through would enable you to have a clearer picture of your retirement needs.

6. Medical expenses

High medical costs in your later years can leave you financially drained, jeopardizing your retirement. Therefore, it is highly advisable that you consider a comprehensive medical insurance plan. In this respect, when working out your retirement income, do remember to include the premiums of medical plans and other insurances that you would be paying beyond your working years.

7. Leaving a legacy

If you wish to leave an inheritance to the next generation or bequest an amount to a particular charity, this would also affect the way your retirement portfolio is structured. In either case, you would need to make provisions to ensure that the earmarked assets would not be drawn down as your retirement income.

8. Existing assets

Consider your existing assets and any future income streams when working out your retirement numbers. You can, for instance, project the value of your CPF. When in doubt, be conservative in your projections.

Investing in equities is still the preferred option to beat inflation. Equities tend to produce positive returns over the long term. Another instrument that you can consider is annuity which provides a constant stream of income for life.

Two things to remember when investing for your retirement:

• Never put all your eggs in one basket.
• Do not risk more than what you can afford to lose.

Can You Afford to Retire?

Why the need to plan NOW?

Singaporeans are living longer, thanks to the advancement in medical science and the standards of medical care in Singapore. Life expectancy of women is now 83 years old and for men, it is 78 years old.

With this longevity comes a problem – we could outlive the resources that we have in our retirement years.

A startling result from a new survey by global financial services firm Russell Investments revealed that half the working Singaporean population has yet to make financial plans for retirement even though 3 in 5 wish to retire by age 60. This is just 2 years shy of the statutory retirement age of 62. This survey was done with 500 fully employed Singaporeans aged 35-55 for their views on security in retirement (Business Times 23 April 2010).

In another study by HSBC, it found that 91 per cent of Singaporeans do not have any idea what their retirement income would be and only 9 per cent are prepared for this phase of their life (The Sunday Times, 2 August 2009).

This reflects a lack of awareness of the importance of planning for retirement and the social, emotional and physical impact of working longer. The amount is bigger than you think!

To give you an idea how much one would need in their later years:

Take for example – Mr & Mrs Lim are age 35 now and they both wish to retire at age 55. Combined, they estimated they would need a monthly income of $3,000 (in today’s dollars). Using an inflation rate of 3%, the monthly income would swell to $5,418 in 20 years’ time. And with a retirement duration of 25 years, their retirement funding works out close to $1,100,000.

And, may I add, this is assuming a simple lifestyle with perhaps a regional vacation once a year, no spending on luxury items and eating at restaurants not more than 2-3 times a month. The amount needed in retirement is a lot bigger than we think! Like it or not, you got to be a millionaire to retire.

Another alarming finding from the survey showed that:

• The average age Singaporeans start to embark on retirement planning is 59
• Only 40 per cent plan to develop a comprehensive retirement plan
• 20 per cent plan to consult a professional financial adviser
• A majority of the respondents replied that their financial preparations include setting aside fixed savings, CPF and purchasing medical insurance.

In a report by Straits Times dated June 2007, it said that only 4 in 10 active CPF members – those earning an income and who turned 55 in 2005 – had the Minimum Sum of $90,000 in their CPF at end of 2006.

Some questions you need to ask yourself:

• Do you think savings & CPF are enough for one’s supposedly golden years (after showing you the calculation above)?
• Are you willing to compromise on your retirement lifestyle and live on a lower income?
• Do you intend to continue working beyond age 62?

If the answer is ‘no’, my friend, the key then is to start retirement planning early.

The 20 something’s think they’ve still got time to plan for retirement so they postpone this aspect of financial planning often to when they’re in their 30’s. In my observation, the mid 30’s is the time when most people, in the midst of paying for a property and saving for children’s education, start to give some thought to their own golden years.

Remember, time is your friend. The earlier you start, the higher the chance that you’ll be able to achieve your retirement goals.