Earning 3% from Singapore T-bills may not last or be enough 

THE yield one can get now from the risk-free Singapore six-month Treasury bill (T-bill) is lower than a few months back. The cut-off yield on the latest issue, with issue date of Dec 10, was 3 per cent per annum, against the 3.74 per cent per annum for the six-month T-bill issued in late June.

Still, the six-month T-bill’s yield today is rich compared to early 2022, when the annual yield was below 1 per cent. 

Putting money in risk-free Singapore dollar fixed deposits or T-bills can be attractive for retirees. The Singapore currency is strong and the nation’s fiscal position is robust, unlike many countries where government spending is ballooning, and the fiscal deficit is growing. 

Moreover, interest is credited automatically, and funds can be rolled into a fresh fixed deposit placement or T-bill issue upon maturity. 

However, is earning, say, a nominal annual return of 3 per cent worth shouting about if annual inflation exceeds 3 per cent? In 2023, the all-items consumer price index in Singapore rose 4.8 per cent year on year. The consumer price index for all items was up 2.9 per cent year on year in the first half, and 2.2 per cent on year in the third quarter.

Inflation

Take a couple living in a fully-paid up, owner-occupied home, who are debt-free and need to fund monthly outgoings of S$7,500 when they retire at 65. 

Assume the couple receives S$4,730 a month under CPF Life from age 65, having set aside S$308,700 each in their CPF Retirement Accounts at age 55 in 2024. They also have S$2 million in capital at age 65 that earns 3 per cent per annum.

The couple’s monthly income works out to S$9,730 or nearly 90 per cent of the 2023 median monthly household income from work of S$10,869, including employer CPF contributions, among resident employed households. In this instance, the couple will be able to cover their expenses, plus invest surplus cash in T-bills or fixed deposits initially. 

Still, inflation’s effects can be pernicious. If annual inflation is 4 per cent, the couple will experience negative annual net cash flow after eight years. The capital sum will fall below S$2 million after 15 years and under S$1.5 million after 22 years.

Perhaps the long-run annual inflation rate will be sub-4 per cent. Still, one could be wrong to expect long-term annual inflation of sub-2 per cent, given fragmenting supply chains, an ageing population, higher defence spending and costs linked with transitioning to a greener economy.

Moreover, with Singapore’s tight labour market, elderly persons reliant on human capital intensive services might face higher inflation relative to the general inflation rate. Add to that spending necessary to cover unforeseen contingencies. 

Reinvestment

The other major risk to funding one’s retirement through the low-risk path of T-bills or Singapore dollar fixed deposit is the reinvestment risk. While a fixed deposit that matures after three, six, 12 or 18 months can be rolled over automatically, the interest rate may change depending on market conditions. Money from T-bills that mature may also get reinvested in new issues at substantially lower yields.

Assume the couple above faces annual inflation of 3 per cent and earns 2 per cent per annum from monies in fixed deposits/T-bills. At the start, monthly income works out to S$8,063 or 74 per cent of median household income of S$10,869 and annual net cash flow is positive.

However, the couple will experience negative annual net cash flow after three years and the capital sum dips below S$2 million after six years.

Fixed deposit rates and T-bill yields could decline over much of 2025 if the US Federal Reserve cuts interest rates further.

Sure, some investors are highly averse to the possibility of capital losses and thus shun equities and corporate bonds. Also, many retirees may have low risk tolerance, given their short runway to recoup losses. Indeed, incurring capital losses is not just financially painful; they can create friction within a family and exert a mental toll.

Bonds and equities

However, while T-bills and fixed deposits have their allure, it may be wise to raise capital allocation to high-quality equities and bonds.

Buying a Singapore dollar bond of a high-quality corporate issuer which matures in a few years and offers an annual yield of close to 4 per cent can mitigate the reinvestment risk of putting money in fixed deposits or T-bills.

Purchasing a Singapore-listed stock at an entry annual dividend yield of 5 per cent can provide recurrent income that possibly grows over time. However, dividends paid by listed groups might fluctuate. 

Essentially, one will need to do some homework to analyse an entity’s business prospects before buying its shares. One may also need to constantly monitor one’s stock portfolio and make adjustments based on new information.

Nonetheless, doing work to manage personal investments should not be seen as a burden for retirees. Monitoring political, economic and corporate developments as well as societal and technological changes can keep them engaged and mentally sharp. Furthermore, getting some stress from market gyrations might benefit one’s health.

Maintaining a high quality of life in a global city like Singapore is challenging for retirees, especially with rising life expectancy and inflation possibly being stubbornly high. Indeed, one could work until the late 60s and still need to fund living expenses for three more decades purely on passive income.

Retirement can conjure images of days spent playing golf or lounging at the beach or volunteering for meaningful causes or travelling. Also, many people will celebrate being free from job-related commitments.

However, one likely needs to work hard at investing and embrace some risk, so one’s investments generate enough to help ensure the retirement years are golden, particularly if one hopes to leave a financial legacy to loved ones.