Sitting on excess liquidity for long-term goals like retirement may not be optimal given the diminishing effects of inflation on the purchasing power of money over the long run. Investing early, subject to one’s risk tolerance and objectives, can help individuals harness the power of compounding to grow their portfolio over time and build up their retirement coffers.
The average Singaporean household has more than a third of their financial assets in currency and deposits
With an average personal savings rate of over 30%1, a culture of saving is deeply rooted in Singapore and for good reason. Savings provide a sense of security as it can act as a bulwark against unexpected setbacks such as unemployment or inevitable life events such as retirement.
Digging deeper, the average Singaporean household holds about 35%2 of their financial assets in currency and deposits, according to data from the Department of Statistics Singapore as of 31.12.2023. Meanwhile, investments in shares and other securities form just around 17% of financial assets2.
Mobilising funds to help manage the impact of inflation
While ready access to money is important for near-term expenses and emergencies, accumulating excess liquidity may not be optimal for longer-term goals like retirement, due to the diminishing effects of inflation on the purchasing power of money3.
As discussed in “What if … things keep getting more expensive?”, if the nominal value of money does not keep pace with the general rise in the prices of goods and services, then the real value or purchasing power of the dollar has diminished.
As an example of this macro trend, consider the return on 1-year Singapore Government Securities Treasury Bills (SGS T-Bills), rolled over annually. Over the last 15 years ending 31.12.2023, the annualised real or inflation-adjusted return of 1-year SGS T-Bills would have been negative, as illustrated in the chart below4. This suggests a loss of purchasing power in the long-run4.
Over the same period, various asset classes such as equities and fixed income have generally presented positive real returns that may help manage the impact of inflation. However, this comes at the risk of volatility, exemplified by the wider range of real returns over good and bad years, which can vary significantly across various asset classes.
Finding a balance
Striking a balance between having sufficient funds to meet near-term needs and investing for longer-term goals is critical. Having sufficient liquidity serves as a cushion for near-term spending demands and as a safety net in the case of emergencies.
The appropriate allocation would vary from person to person, and is typically determined by one’s private circumstances, objectives and preferences, although there are some useful rules of thumb. Helpful information can be found in the Basic Financial Planning Guide published by the Monetary Authority of Singapore (MAS), in conjunction with the Association of Banks in Singapore (ABS), Association of Financial Advisers (Singapore) (AFAS) and Life Insurance Association (LIA). The following points from the guide are more directly related to emergency savings and investments:
Investing may help to manage the diminishing effects of inflation, preserving the purchasing power of money and growing the real value of one’s financial coffers over time. Furthermore, an investment portfolio that is diversified across various asset classes like equities and bonds may help reduce volatility while tapping into opportunities for income and growth.
Investing invariably entails some degree of risk, making it crucial to determine the right balance that aligns with one’s objectives, investment horizon and risk tolerance.