Personal Finance

How hoarding money in the bank can destroy your retirement

Despite plenty of better options, many Singaporeans are still stuck with fixed deposits. Some of us are plagued with a “winning by not losing” mentality, where we think hoarding the money is safest. Nothing could be further from the truth. In fact, those who hoard rather than invest are the ones living on the edge.

What’s wrong with just cramming money in accounts?

The simple answer is inflation. Over time, the cost of goods will increase. To get a sense of this, you can try out the inflation calculator that the Monetary Authority of Singapore (MAS) has on their website; but here’s an example for you:

A three-room flat priced at $200,000 in 1990, would cost around $352,640 in 2015. This is a 76 percent increase over 25 years, at an interest rate of around 2.29 percent.

Now if you have had kept $200,000 in a Milo tin in 1990, and waited till 2015, the money would not have magically decreased – the numbers printed on it would not get any smaller. However, because the supply of money in Singapore has increased, the $200,000 no longer has the same real value. It does not buy the same number of goods it used to.

So while your $200,000 may have gotten you a three-room flat in 1990, you’d be around $152,000 short if you tried to buy one last year.

Alternatively, you can work backwards. If you are old enough to remember the 1980s, for example, you will remember when fast food meals (entire sets, with fries and toys and all) were around $2. You might also recall that cab rides from Jurong to Changi could be under $12, and that music wasn’t rubbish.

The point is, everything you buy – from food to clothes to education and healthcare – tends to rise in price over time.

How much more expensive do things get?

The rate of inflation is regularly monitored, in the form of the Consumer Price Index (CPI). An alternative measure is core inflation (core inflation excludes the price of housing and private transport).

The inflation rate is like a speedometer: it moves up and down every day, as inflation or deflation is a little unpredictable. But for the most part, it’s safe to assume an inflation rate of about three percent in most developed countries, including Singapore.

(For reasons that can literally bore you into a coma, most central banks aim for an inflation rate of three percent. It’s a healthy figure that suggests economic growth, without being too high to manage).

If you intend to retire in a “cheaper” country by the way, like Malaysia or the Philippines, do note that inflation in such developing countries is often in the double digits. That’s because they’re growing, and it is important to plan your retirement accordingly.

Can your bank account cope with the rate of inflation?

In a word, no.

The typical fixed deposit (unless you are very rich and have access to a private bank) grows at under one per cent per annum. A current account has an interest rate of around 0.125 percent, or sometimes just zero, because why even bother at that rate.

Assuming inflation of three per cent, it means that every year you keep your money in a fixed deposit, you are effectively “losing” around 2.2 per cent.

A safe retirement fund is one that can beat the rate of inflation by two percent (around five percent per annum). This is why your CPF Special Account and Medisave Account are meant to yield five percent (including the extra one percent interest paid on the first $60,000 of your combined balances).

By those standards though, your bank account is about as helpful as a three-legged horse in an F1 race.

What can you do about it?

There are a number of simple investment strategies that can produce five per cent per annum. For example, Singapore REITs have an average dividend yield of around seven percent. If you’re interested investing in REITs for dividends, here’s how you can identify the best Singapore REIT investments.

The Straits Times Index Fund has also made an annualised return of 6.94 percent since its inception in 2002 (although its performance has fallen of late, and is likely to be lower in the near future). But it’s clearly not impossible to beat inflation.

Even investing in Singapore Savings Bonds (around two to three percent interest per annum over 10 years) puts you in a better position compared to fixed deposits.

Then what should go in a bank account?

Gold and jewellery should go into safety deposit boxes because most home insurance only pays out $2,500 per article (up to a cap of $5,000) stolen or damaged. That’s a useful type of bank deposit.

The other thing that should go into bank accounts is savings, not investments. You should gradually hoard up to six months of your income in a bank account, and then put the rest in investments.

This money is kept within arm’s reach, for fast and easy payment. Even then, you might want to consider Singapore Savings Bonds (SSBs) for this, as they allow you to cash out every month and have a better interest rate.

Ryan Ong

Ryan is a successful property investor and has been writing about money, saving and spending, and personal finance for the last ten years. His articles have been featured in leading publications including Yahoo! Finance, Esquire, Her World and AsiaOne.

1 Comment

  1. To;natkunasingam . This article explains why u should not keep your money in fds (fools deposit) in banks. From : a.davidn

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