Saving too much for rainy day can dampen retirement

Singapore

THE oft-repeated piece of advice handed down for generations is to save for a rainy day. While no one is disputing the importance of having emergency funds, the question is - just how much is enough? And is there such a thing as too much?

Bankers told The Business Times that either extremes are concerning, with excess amounts of savings potentially resulting in a delay in retirement.

The general guideline stands at about six months' worth of expenses in case of unexpected expenses or job loss.

Evy Wee, DBS' head of financial planning and personal investing, said those with dependants or are self-employed in the gig economy should have six to 12 months of emergency funds in cash or cash equivalent.

But she added: "In light of the pandemic and heightened market volatility, one question you can ask yourself is how many months it will take you to secure another job, in the event that you are laid off or you leave your job."

This is especially since the primary source of income for many Singaporeans is the jobs they are employed in.

Kelvin Goh, OCBC's head of wealth advisory, said that Singaporeans tend to take about three to six months to secure a new job, but this could take even longer in a recession.

"Having at least six months' emergency cash means not having to worry about monthly expenses while focusing on another job," he says.

While cash is advised for emergency funds due to their liquidity, Ms Wee said that they do not necessarily have to be all put in savings accounts, as there are conservative and liquid fixed income instruments available that can provide better returns, such as Singapore Savings Bonds.

That being said, UOB's head of group personal financial services Jacquelyn Tan cautioned that some financial products such as fixed deposits may be less liquid as compared with a regular savings account.

"It is important to have a diversified mix of financial solutions to help in saving for the long term, but consumers should also ensure that they can readily access part of their savings in the event of an emergency," she said.

With Covid-19 still causing uncertainties, some banks here are seeing customers squirrel away more cash compared with before.

OCBC saw an increase of 5 per cent in the average balances of customers' deposits accounts in the first half of 2021 from a year ago. For the same period, UOB saw total balances across the bank's current and savings accounts up almost 10 per cent. Meanwhile, in 2020, DBS saw emergency savings of all income groups rise amid the crisis and peak in June 2020, tapering off gradually as economic conditions improved.

The percentage of savings also differed among income groups. OCBC's data showed that retail customers tend to hold up to 30 per cent more in cash holdings compared to their more affluent counterparts.

Several factors could be attributed to this, said Mr Goh.

Affluent customers, for example, may have more exposure and access to investment opportunities, which could provide them more attractive returns than deposits, he suggested. This compares with mass market customers, who may find the security of cash holdings more appealing and also retail customers not knowing where or how to start investing.

While having ample savings is a positive phenomenon, bankers concurred that the flipside of holding too much cash has its drawbacks.

Wilson Loy, head of investment advisory and strategy, Standard Chartered Bank Singapore, pointed out that with deposit rates near zero as well as rising inflation, the future value of uninvested cash will get eroded over time.

"There is certainly an opportunity cost to holding cash compared to potentially gaining higher returns through investments or endowments," he said.

"Over time, the loss of purchasing power and compounding could possibly lead to delayed retirement if the individual holds too much cash for extended periods of time."

Holding too much cash can lead to issues down the line with longer-term financial goals, according to projections by OCBC.

For example, customers with S$50,000 saved in cash will have S$53,406 after 20 years based on average deposit interest rates.

Assuming an inflation rate of 2.5 per cent every year, S$50,000 will become a nominal value of S$81,930 over the same period.

"In other words, if you only rely on savings, your savings would lag inflation by about 35 per cent," says Mr Goh.

With many financial planning tools in the market now, customers can play around with projections and see the difference in growth of leaving cash in a deposit versus investing the funds.

Consider this scenario: a 40-year-old who plans to retire in 25 years decides to leave S$10,000 in a deposit account earning an interest of 0.33 per cent per annum. This will result in less than S$1,000 worth of interest earned over 25 years.

The same individual who instead invested his funds in an instrument with a growth rate of 5 per cent would see a jump of S$33,000 over the same period.

"While you cannot ignore the inherent price volatility for any investment, the difference in returns and its implications on how well retirement will work out cannot be more apparent," said Mr Goh.

While there is always a risk when it comes to investments, the key is to start small and do it over time. After building up emergency funds of six months, consider investing via a regular unit trust investment plan or a robo-advisory platform so as to meet your financial goals.

While there are free financial planning tools available, individuals who are uncertain can also seek advice from financial planners and relationship managers.

Managing cash is also not just about savings or investments. With interest rates likely to stay low for the foreseeable future, customers should review their finances to take advantage of the situation such as by repricing home loans to free up cash.

UOB's Ms Tan said that customers should not be looking to "time the market" to capture returns. Instead, investors should follow a "time in the market" approach and invest on a regular basis.

"This practice of dollar-cost averaging is a long-term view of investing, which helps investors to ride out short-term market fluctuations with peace of mind," she said. "With dollar-cost averaging, investors can set aside smaller sums regularly, which may be more affordable to them.

"The earlier a person starts investing and the longer they stay invested in the market, the bigger the compounding effect will be on building their wealth."

• The Money Playbook is a personal finance column that discusses how to take charge of your financial well-being.