We were on the verge of the greatest retirement crisis in history and COVID-19 just triggered it. In the decades to come, globally, we will witness hundreds of millions of people slipping into poverty in their retirement years, not because they lost money in the stock market, but because they are savers.
If you are a retiree or planning for retirement, you should be concerned. Retirement with financial freedom has never been so challenging. The purchasing power of your retirement funds is deteriorating rapidly, and the speed of decline will accelerate in the future. The traditional safe investment assets are no longer safe, making it harder for you to keep up with inflation.
The younger generation faces a difficult challenge too. If you are in your prime earning years, the speed of your wealth accumulation will be far slower than your assumptions. You will face lower income growth because in the future the skillset that you acquired today will probably become obsolete faster than ever. And unlike any previous generations, you will neither have social security payments nor stable pension funds to sustain your living expenses after you retire.
The worst part? You may not even be aware of what is really happening. Here are 5 ugly truth about the retirement crisis which you will be facing in the coming years.
#1. Inflation is a lie
The global pandemic and the lockdown have been especially cruel for retirees and near-retirees. Many have lost jobs and have been forced to tap into their retirement accounts earlier than they expected.
But this is just the tip of the iceberg. The real danger is that the value of your retirement fund is plummeting at a speed beyond your imagination.
We all have some vague ideas of inflation, but have you ever questioned why inflation must exist?
We were taught that inflation is part and parcel of our lives. We were taught that because we are earning more over the years, we should be willing to pay more for goods and services, which in turn causes the prices to increase.
However, have you ever wondered why in the past 20 years, the price of coffee increased four-fold and yet we are paying a quarter of the price for a smartphone which is many times more powerful than the old one?
Have you ever wondered why many central banks have set an inflation level as a target, instead of rising wages as a target?
The hard truth is that inflation was not always the norm. Rather, it was often a planned strategy by the central governments to debase their currency and write off their debts at the expense of the debt holders. And in case you haven’t figured it out, the money in your bank’s savings account is an IOU. You are actually the bank’s debt holder.
If you understand the history of finance, you will realize how ignorant and naive people are when they talk about the US’s policy of unlimited quantitative easing.
Quantitative easing was not invented by the Fed, not even the Bank of Japan as some people have claimed. It has been used many times in human history. From the ancient Roman’s manipulation of coinage to China’s ancient banknote Jiaozi, central governments have been using inflationary debasement, similar to quantitative easing today, to fund their military and economic obligations. And the universal consequences of all these examples are inflation, war, and the collapse of the empire!
#2. Wealth growth is illusionary
One thing most people have difficulty comprehending is that inflation is not just an increase in prices, but it is also the loss of purchasing power of the country’s base currency.
One way to look at how much value our currency has devaluated is to compare it with gold. Why?
If you say someone is taller or shorter, it’s always relative to another person. Gulliver is a giant compared to the tiny inhabitants of the island country of Lilliput, but he is the tiny one in the hand of the giant farmer of Brobdingnag.
If you want to know a person’s real height, you need a measurer. Gold is the measurer.
In the past 20 years, the price of gold (in US dollar terms) has increased from US$255 to US$1770.
If we look at gold in Singapore dollar terms, it has gone from S$445 to S$2461.
What does that mean? It means that the US dollar has lost 78% of its value and the Singapore Dollar has lost 82% of its value in the past 20 years. Yes, Singapore has had to debase its currency because we export more than we import.
If we annualized the numbers, the USD has depreciated at an average rate of 7.9% per year, and the SGD has depreciated at an average of 8.9% per year.
Some people may argue that while inflation is unavoidable, at least people’s wages have been increasing over the years to neutralize the effect.
So my question to you is, “Did you receive a 10% salary increment year on year over the past 20 years?” In other words, are you earning 5.5 times more than what you earned 20 years ago?
I know some of you did, but many of you didn’t. Why not?
The reason is that while inflation is universal as a whole in the economy, the distribution is unequal.
It is unfair, but the fact is that the speed of the increase in wages and prices has not gone up universally nor at the same rate. The impact has not been uniform across all sectors. And this process produces undeserving winners and losers, which is the root cause of wealth inequality.
#3. Savers are losers
The biggest losers are typically prudent savers. I have met many people like this. They work hard, spend consciously, and take responsibility for their finances. When it comes to investment, they don’t speculate, they roll over their fixed deposits, purchase savings bonds or insurance and religiously contribute to their pension plans (such as CPF). But sooner or later they will come to realize that their wealth has not increased at the same rate as people around them.
The problem is that, as I mentioned in this article, it has become increasingly difficult to obtain a decent yield. Plus, money is losing value at a faster rate than the low-interest rates that investors can get from banks and bonds.
On the other hand, people who speculate and use excess leverage are better off. In Singapore’s context, people who chose to “flip properties” (before the global financial crisis) and allocated all their wealth into properties have amassed most of the wealth that the society produced.
In recent years, with the strict cooling measures, people are flocking into REITs and there is a new term called “REITirees” nowadays.
As a result, there is a misallocation of capital, which not only created asset bubbles but also increased income inequality in Singapore.
We all know that a bubble will burst sooner or later. If we look at what is happening in Hong Kong, it is not hard to understand this. While ultra-rich property tycoons are sitting on enormous wealth, an average Hong Kong citizen cannot even afford a decent house. This will eventually result in civil unrest and redistribution of wealth.
Singapore benefited from the foresight shown by the government during the HDB housing schemes, but we are not immune. Even with the “two-key system” of protecting past reserves and the Government Security Act to prevent the leaders from imprudent borrowing, we are being dragged into this black hole of flooding paper money, the currency war.
#4. You can’t escape a currency war
If you refer to the two charts I shared earlier, you will notice that the SGD was devalued in almost the same manner as the USD.
There were three currency wars in the past century, and we are likely going into the fourth one. Currency wars will continue to be fought over the relative values of the euro, dollar and yuan, and this will affect the destinies of the countries that issue them as well as their trading partners, such as Singapore.
Given the dominance of the USD around the world, most currencies are being dragged into the devaluation, either willingly or unwillingly.
I have explained in this article why the Dollar has dominated for the past 100 years. But it doesn’t mean that the situation will last forever. In fact, the voice of “de-dollarization” has grown louder over the years. With the Chinese yuan being a potential candidate to challenge the USD as a reserve currency, the US-China trade war was unavoidable.
People tend to mistaken a long term abnormality into normality. The truth is, the USD has not always been the dominant currency in the world. In the past 1,500 years, various reserve currencies have risen and fallen. The most recent ones in the past two hundred years are the British pound from the UK and the Dollar from the US.
Many people refer to the 1929 Great Depression as an economic disaster for the United States. But what they don’t know is that this crisis helped solidify the USD as the controlling currency of the world.
After the gold standard was subsequently abolished, the world was at the mercy of dollar printing. That is why when the USD moved to unlimited quantitative easing, it dragged a large part of the world along with it. Some countries tried to resist, but they did not end up well. As this topic is very complex, I will discuss it more in the future.
But if you understand the above idea about the relationship between inflation and printing money, then you will know that even without additional production, a country’s stock market price can still increase if there is a corresponding devaluation of its base currency. It is just simply revalued by the new exchange rate.
In other words, the higher the inflation rate, the higher the expected stock price. We have witnessed this in the early 2000s with the stock markets of India and China.
#5. A bigger bubble will burst in your golden years
On the investing front, if you are cheering the US Fed’s unlimited amount of money pushing a “V” shape recovery with the US stock market, you may not be aware of what is looming ahead on this road. Easy money and dollar devaluation are two sides of the same coin, and currency wars are part of the plan.
The hard truth is that many global pension funds are insolvent and they have no money to pay you, so they will continue to devalue the currency to write off their promises to you. Yes, you get the same cheque, but it is at a lower value.
The only way for them to get out of this pandemic is through inflation!
And the risk is not just the devaluation of one currency against another or the rise in inflation. It is also the loss of confidence in paper currencies and massive flight to income-generating assets which in turn will create a bubble that is doomed to burst in your golden years.
It does not matter whether you have invested in fixed deposits, stocks, bonds, or real estate. You need to understand that everything you own is valued against a currency. Once the currency collapses, everything collapses altogether.
First of all, you need to diversify your wealth globally in different asset classes and currencies. You don’t have to change your currency to the Chinese Yuan, buy a gold bar or purchase a property in Australia. If you know how to use financial instruments, there are enough to help you achieve the same objectives at a low cost.
Secondly, you need to learn to challenge your own beliefs. Many people have a false belief in certain financial concepts because they are bombarded by western media daily. It doesn’t mean the journalists are intentionally cheating you. But they are just sharing their own beliefs in their value systems. The impact from the US’s stewardship of the dollar is obvious to the Chinese, Arabs, Russians and the Europeans, but it may not be so apparent to the Americans themselves, the “financial experts” who only read the Wall Street journals and you, who read their reports.
Whether you like it or not, the road to an easy and comfortable retirement is not going to be easy, but it is not without hope. You don’t need to be a financial expert but you need to be aware of these common retirement pitfalls.
After all, it is your life and your retirement. You can choose to sit back and do nothing, or you can take action to stop the looting.
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