Inflation - How it messes with your retirement planning

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

In order to plan for a secure retirement:

Take into account inflation when calculating retirement costs.

Shield yourself against rising medical costs.

Start by having a clear plan that includes saving, investing and getting insurance.

It is no mean feat trying to tackle retirement planning. Part of the difficulty is simply getting to the starting line: determining how much you will need for retirement. This entails picturing how you will be living during retirement, how healthy you will be and how long you are likely to live.

No wonder the majority of Singaporeans are worried about their retirement future. Snippets of surveys published in local newspapers tell a consistent story:

The majority of Singaporeans said they were financially unprepared for their retirement.

More than half of Singaporeans said they won’t have enough money to maintain an adequate lifestyle after they retire.

The majority of working adults in Singapore were financially unprepared for retirement.

And those fears are very likely well founded. Whatever most young people think they would need financially for their retirement, they are probably going to be wrong. They will most probably underestimate their requirements. And here’s why.

MISSING IMAGE

The biggest reason people underprovide for their future is they think of their retirement needs in terms of present-day costs.

So, do you think you will need $0.5m in financial assets for your retirement in 35 years? Better make that $1.27m because that is what $0.5m of goods and services today will cost in 35 years, using Singapore’s long-term inflation rate of 2.7%. Or putting it another way, $0.5m will be worth only around $190,000 in today’s spending power in 35 years. Thanks to inflation.

A study by the Lee Kuan Yew School of Public Policy, published in May 2019, found that a single elderly above 65 years old needs at least S$1,379 a month to meet basic needs. That is, $16,548 a year.

However, this basic standard of living included only items that participants in that study said were necessary for them. Items such as air conditioning and a car were regarded as “extravagances” and left out of the calculation.

Even if you can picture life in retirement without air-conditioning, a data plan and a mobile plan, $1,379 a month is based on 2019 prices. If you are looking at retirement in 35 years, that figure could—on the basis of Singapore’s long-term historical inflation rate—balloon out to $42,045 a year. Retirement is not as cheap as you might think.

Singaporeans have just outlived the Japanese to have the longest life expectancy in the world – at nearly 85 years1.

Let’s assume you retire at 62. On the basis of the above life expectancy recorded in 2017, you could live another 23 years. And that is conservative. It is reasonable to expect that as medical science advances, those in their late 20s now, could live even longer.

Meanwhile, with each passing year, your annual retirement requirement will continue to grow with inflation. That is, the $42,045 per year required to maintain a basic standard of retirement living will likely keep going up as a result of rising prices.

On the above assumptions of your life expectancy and an average annual inflation rate of 2.7% per year, you will need approximately $1.3m to fund that basic standard of retirement living.

We are living longer. But we are also spending more years in poor health. In 2017, the number of years Singaporeans lived in poor health were 10.6 years, edging up from 9 years in 19902.

Medical cost inflation has been far outstripping general inflation rates throughout the world. Singapore's medical cost inflation was 20% in 2018 - 10 times the general inflation rate of 1% that year, and in line with Asia's average medical cost inflation2.

Everywhere in the world, as populations age—usually in tandem with declining fertility rates (that is, the number of babies born to each female)—economies face ever growing budgetary pressures from the costs of caring for the old, particularly the costs of health care. There will likely be pressures on governments everywhere in the future to reduce healthcare subsidies to maintain budgetary viability. Don’t assume that government subsidies for healthcare will always remain at today’s levels. In the end, it is better to make preparations for your own financial sufficiency in retirement than expect schemes and grants to provide what you might need.

There is no magic solution. But there are ways you can better prepare yourself for retirement. Taking small steps in the right direction is always a good idea.

  • You need to develop a clear plan – one that involves disciplined saving.
  • But savings in near zero interest ratebank accounts won’t build the nest egg you need for your retirement – you need to invest.
  • And even the best laid plans can be messed up by accidents, ill health, and misfortune. You need to protect your plans by setting aside a sum each month for insurance to cover youfor life’s inconveniences or, worse, bad luck.

Even if you haven’t gotten a full retirement plan figured out, taking small steps in the right direction is better than not doing anything until you have a masterplan in place.

Footnotes
1 From The Burden of Disease in Singapore, 1990-2017 report by the United States’ Institute of Health Metrics and Evaluation (IHME), in collaboration with Singapore’s Ministry of Health.

2 From Mercer Marsh Benefits’ Medical Trends Around the World report, 2019.

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