Inflation – The Cookie Monster That Eats Up Your Retirement Fund
Inflation has been rearing its head more assertively of late, inching up in many countries since the start of this year. Coming from low inflation and record low interest rates in the past 5 years, it is easy to forget the ugly effects of inflation, especially for those too young to remember the double-digit inflation during 70’s through early 80’s.
| Country | Jan 2021 | Feb 2021 | Mar 2021 | Apr 2021 | May 2021 |
|---|---|---|---|---|---|
| Netherlands | 1.6% | 1.8% | 1.9% | 1.9% | 2.1% |
| Singapore | 0.2% | 0.7% | 1.3% | 2.1% | 2.4% |
| United States | 1.4% | 1.7% | 2.6% | 4.2% | 5.0% |
Across all 3 countries that I associate with – the Netherlands, Singapore and the US – conspicuous price increases are already taking place, especially big ticket items such as housing, transportation and household goods.
Record Housing Market
Singapore recorded 36 number of Housing and Development Board (HDB – Singapore’s public housing authority) flats that exchanged hands for over 1 million Singapore Dollars (US$740,000/€620,000) first 2 months of this year, a 350% increase compared to the same period last year. These are public housing that are meant to be affordable and targeted at the masses
US market is also riding on new high, as validated by a Forbes article in April: “Inventory in many regions has hit record lows. Days on market are now measured in hours. Home prices are up 15.8% on average year-over-year across the country according to a recent National Association of Realtors’ report.” My own experience in selling 2 houses in the past year affirms this situation.
Dutch housing market is also in feverish pitch with record prices being set, overbidding by over €100,000 certain instances, packed viewings and listing sold within the same day. The spiralling prices in the housing market has become such a huge social and political issue that new rules are under consideration to ban investors from buying properties in some cities to give home owners, especially starters, a better chance at securing their dream home.
With the pandemic under hard tackle from the army of assault vaccines and as more people get vaccinated, restrictions will pare down, economies will open up, trade and travel will resume as borders open up and lives revert much to what they were before the pandemic. All these mean there will be more spending and purchases resulting in higher prices, ie higher inflation. So how does inflation wreck havoc in our lives, especially in retirement?
It eats away at purchasing power so for every dollar we can afford lesser. Unlike employment years where wages generally keep up with inflation, most retirees live off funds built up during active work years and annuity/pension payouts, which are mostly fixed. Picture this: inflation is the Cookie Monster with an insatiable appetite chomping away at one’s retirement jar.
How can we protect ourselves against rising inflation?
- Cash-holding in a rising inflation situation is like using a leaky pail – the content trickles away. Decide on a minimal amount needed for emergency, keep that in an interest-bearing cash account and put the rest to work harder through investing. This is why I strongly advise opening an overdraft account before retirement for access to needed funds. While all investments carry risks, the risks are not the same across asset classes. There are investments with lower risks that provides higher-than-inflation return or at least keep up with inflation.
- Portfolio re-allocation towards higher returns, for example, from bonds to equities. Historically, returns from stocks are better than bonds over mid-to-long term. Established businesses with market leadership or niche positioning are good investment candidates as they are able to adjust prices to cover for higher raw material and distribution costs brought on by inflation. If stock picking is not your cup of tea, then opt for a fund with higher (at least 60%) exposure to stocks versus bonds, or a market index ETF will do fine too.
- Inflation-hedged assets: Gold traditionally hold up very well during periods of high inflation. One can buy the physical gold bars or coins, invest in listed gold mining companies or through Exchange Traded Funds (ETFs) focused on gold. There are other proven collectibles that hold up their value well during inflationary periods, such as classic cars, luxury watches, old coins and antiques
Antique car – object of desire and value. - Property is one of the best hedges against inflation as both rental and property value increase in response to inflation. In effect, the current market situation of limited supply against high demand driven by low mortgage rate is one of be big contributor to higher inflation. I am partial to rental income amongst all income streams as it generates immediate cash flow and is stable. As such, it is important that rental are indexed to inflation during lease renewal to protect the real rental return. Take for example in the Netherlands, base rent for tenants on long-term lease cannot be increased except for inflation indexing. Not taking advantage of this entitlement, even for a couple of years, can be costly. To showcase using an example of a lease that started in Y2015 with a base rental of €1,500:
| Year | Inflation Rate | Inflation Adjusted Yearly | Not Adjusted First 2 Yrs |
|---|---|---|---|
| Y2016 | 1.9% | €1,528.50 | €1,500.00 |
| Y2017 | 1.6% | €1,532.96 | €1,500.00 |
| Y2018 | 2.3% | €1,588.67 | €1,534.50 |
| Y2019 | 2.5% | €1,628.39 | €1,572.86 |
| Y2020 | 2.9% | €1,675.61 | €1,618.48 |
Foregoing the right to adjust rental in the first 2 years when inflation rates were low means a difference of €57.13 per month by the 5th year! Compounding effect works both ways over time.
5. Escalating annuity payout plans, where offered, should be opted for. Singapore’s Central Providend Fund (national pension board) CPF Life Escalating Plan is such a scheme. It begins with a lower payout at the start of pension withdrawal with annual increment by 2% to keep pace with inflation. This way, payouts over one’s lifetime are adjusted to compensate inflation, countering the reduction in purchasing power usurped by its invisible force, if not fully then at least partially.
6. Supplement of retirement income with part-time or project gigs to cover the shortfall caused by inflation is another option. As companies look to stay nimble and as project assignment become more prevalent, this is a highly viable avenue for knowledge workers. Besides financial boost, there is the added advantage of expanding one’s network and keeping abreast of new developments, as well as the satisfaction of contributing one’s expertise and knowledge.
7. Extending work tenure for another couple of years for those who have yet to hop off the corporate band wagon is worth considering to ensure a better retirement lifestyle and the peace of mind of sufficient retirement funds. Such a move allows for additional contributions to be made to pension funds while delaying withdrawal at the same time.
No one knows if the recent inflation spike is temporary due to pent-up consumer spending after months of lockdowns or if it will take stronger hold as a result of the financial stimulus and liquidity provided by the government. With tremendous amount of money printed, reducing this debt by allowing inflation to work its magic is a possibility. The best approach is to stay aware and be prepared for possible tidal wave of price increases that many are expecting due to the massive liquidity pumped into almost every economy.
“Inflation is taxation without legislation.” ~ Milton Friedman
On a personal note, inflation is a good excuse to finally tip over the fence and buy that Rolex Oyster Perpetual Tiffany Blue watch that I have been lusting over. What better way than to enjoy the timepiece during ownership and being able to sell it for a nice profit later 🙂
Gone shopping…
Savvy Maverick
Disclaimer: The views expressed here are drawn from my own experience and do not constitute financial advise in any way whatsoever. Nothing published here constitutes an investment recommendation, nor should any data or content be relied upon for any investment activities. It is strongly recommended that independent and thorough research is undertaken before making any financial decisions, including consulting a qualified professional.
