The Inflation Threat – 5 Things You Must Know

The COVID-19 pandemic has forced governments all around the world to launch historic stimulus measures to keep businesses going and making sure the cost of borrowing will remain low.

This means interest rates will remain low.

The problem with interest rates being kept low – inflation will increase.

We all live in a world where inflation causes the prices of goods and services to creep up a little each year

But to bring the reality closer to home – I simply monitor prices of items at my local supermarket.

And when I look at news from around the world – the prices of groceries and essentials are increasing.

In other countries, grocery prices are already increasing during this pandemic.

We in Singapore are especially vulnerable since we don’t grow enough to support ourselves and are highly dependent on imports from other countries.

In this case – we don’t have the ability to set the prices but everyone else does.

So where does this leave you – the Singaporean homeowner?

Here are 5 ways to observe the invisible threat of inflation:

#1: Inflation Is Higher For The Older Generation

The danger of keeping our monies unused is significant as inflation slowly erodes its value.

This is especially true for the older generation as they face higher costs from medical services and housing.

With medical inflation being pegged at 10% – its impact is significant if you are not in good health in your older age.

At the same time – for older folks – they face higher borrowing costs and will not be able to get loans at concessionary rates compared to those who are younger.

For example – if you are 35 years old – you can be offered a 30-year housing loan. This means lower monthly installments.

But if you are 50 years old – you can only get a 15-year housing loan.

Imagine the monthly installments on a shorter loan tenure?

That is why the critical age to make decisions about your property choices is between the age of 30 to 40 years old.

But unfortunately, many do not take advantage of the hidden assets within their own property.

Whether is it a HDB flat or private property – many homeowners have failed to extract the gains their properties has made.

Instead, depreciation comes into the picture as the property gets older and becomes less sought-after.

As an agent, I have seen far too many cases of this happening.

From potentially cashing out on a $200K gain had they decided 5 years ago – it becomes much smaller now or might not longer exist.

The delay in decision-making has caused them to miss out on potential buyers who were willing to pay higher prices for their previously “newer” property.

Elderly couples in their 50s and 60s looking to downgrade to a smaller HDB flat discovers that the cash proceeds are too small or most of their funds will have to be returned back to the CPF accounts.

This resulted in much smaller nest egg for their retirement funds as they become more dependent on their CPF Life payouts.

We all live in a world where inflation causes the prices of goods and services to creep up a little each year.

And that brings to my next point:

#2: Your Wealth Growth Decade Is Between 35 to 45 Years Old

In your 20s – you are building up experience and learning how to navigate the working world. Your expenses are limited and this is actually the best time to start saving.

Your 20s will be your wealth accumulation stage.

Once you reach your 30s – you should now be able to have your monies work hard for your.

In the prime of your career – your monies should be invested and multiplying.

This is your decade where you grow your wealth.

As you cross your 50s – you begin to take lesser risks and start securing your gains. This stage will be the wealth preservation stage.

And finally – once you approach your retirement age – this will be your wealth distribution stage where you start to enjoy the fruits of your labour.

Delayed gratification is hard especially when you are young and it seems that you have a lot of expenses to take care of.

But take a minute to think about this.

The 45-year-old today won’t be 65 for another 20 years. So he is going to be spending inflation adjusted dollars that will be worth far less than they are today.

The 45-year-old spends $50 on groceries today.

But how much groceries will be able to get at the age of 65 years old in 20 years’ time with the same $50?

Assuming you spend 25% less every 10 years as you age, inflation should easily wipe out all those advantages.

Since an inflation rate of 3% per year will compound to an increase in spending over that same 10 years will be far, far greater…. than the 25% reduction.

So take a step back and ask yourself – how can I make my assets grow faster than the inflation rate?

#3: Don’t Play It Too Safe When You Are Young

Sitting on a lot of cash in your bank accounts might feel good.

You might even feel secure.

But when you factor in low interest rates that don’t keep pace with inflation – parking your money in cash over the long haul is a money-losing proposition.

In dollars and cents, that risk aversion will cost your portfolio dearly.

Parking your portfolio in cash will not cost you not only in terms of inflation but in lost returns.

So how do we make sure our investment returns can outperform the inflation rate?

Well – you need to know the inflation rate first.

There are a few ways to monitor the inflation rate in Singapore. One way is through data from MAS.

But for me, since CPF monies is closely tied to retirement – I monitor the CPF Retirement Sum.

If you refer to this page on CPF website:

Specifically – I monitor the rate of the CPF Retirement Sum increases.

 

Based on this table – we can make an assumption that the inflation rate is about 3%.

Real inflation today is far higher than you think it is.

Let’s consider what could have happened to your money if you had allowed your fear to affect your investing decisions.

Let’s assume that you had opted to keep your money in your bank accounts and sat on the sidelines.

Your $100 will lose $3 every year.

Your $100K will lose $3K per year.

$3K can buy you how many meals in 1 year? 600 meals?

Imagine all that gone – without you doing anything.

Don’t wait for things to happen to you. Don’t waste years of your life for the great opportunity to fall into your lap.

Nothing is going to happen until you take the initiative to make it happen.

Previously I wrote this article about how I personally profited from my own property investment:

If you checked it out – I put it as a nett gain of $235K after about 7 years.

Since I held on to the property for about 7 years, it was about 15.9% returns on an annualised basis.

If I take into account for 3% inflation – that means I made about 12.9% returns per year.

I could have kept that $210K (my initial cash outlay) in the bank but I decided not to.

Was there some risk? Yes.

To me – it was a calculated risk but one that I am confident of.

Parking it in that property allowed me to not only hedge against inflation but also make my monies work harder for me.

#4: Your Property Cannot Hedge For Inflation If It’s Depreciating

Property is an excellent hedge against inflation.

But in our Singapore context – it has to be the RIGHT property.

Everyone is now aware about the impact of 99-year leases. And as an agent I’ve seen first-hand how highly sought-after new properties are.

Newly MOP HDB flats – especially those with tasteful renovation – can easily command high prices and high Cash-Over-Valuations (COV).

But if your current property is an old and aging development – be prepared to lower your selling price expectations.

Depreciation starts to take hold quietly and when the day comes for you to sell – you might be incurring losses instead.

 

So never let your profits lay dormant quietly within your property till it disappears right underneath your nose.

#5: Paper Profits Are Paper. Learn To Extract Them.

To be honest – when I looked back at my decision to sell my property back in 2018 – I was not 100% sure regarding whether to proceed.

It was doing well and people often say – “Don’t cut your winners so fast! Let it make as much as possible first.”

But I sold it anyway because I wanted to secure the gains the investment has already made.

And I am glad I did it.

Because right now in 2020 – I have the ability to deploy those gains to some good investments which are currently undervalued thanks to the pandemic.

Am I 100% confident that I will make the right choice?

Not really.

But being a property agent who handled more than 740+ transactions throughout my career – has certainly given me more edge compared to most other property buyers.

Conclusion

No one has any clue on what they’re doing and most of us are all just trying to figure it out as we go along.

I can’t tell you how many times I’ve looked at people and been like, wow, they are so good and confident in what they do.

But behind the scenes – they are actually just as clueless as everybody else.

I think most people, if they’re really honest with themselves – are so much just winging it as they go along.

We just naturally look to other people to make sure that we’re doing the right thing and we’re on the right path.

But inflation is as sure as death and taxes if you were to ask me.

As time passes – one thing for sure is that prices will always go up.

Buying a movie ticket when I was young was a rare $5 treat for me about 20 years ago. Now it costs easily 3x as much.

You have to take measures to account for this eroding value of your liquid assets.

That means an investment strategy that can capitalize on market upsides with built-in protections for your portfolio to ensure that inflation as well as significant losses don’t erode your retirement nest egg.

With today’s volatile markets and highly interconnected marketplaces, the potential for losses is a very real threat to your financial future.

The goal, after all, is to make sure you don’t run out of money in your lifetime.

If you are keen to explore options for your property portfolio – feel free to drop me a whatsapp message with your questions.