$2 million or $3 million was a lot of money – back in the days when $100 would feed a family of week. At our current cost of living (the core inflation rate in 2023 was 4.2 per cent), it means you’re barely one step ahead of middle-class. Give it a decade or so, and you might find your planned “lavish retirement” is arguing whether you can afford to go to Bali without living two weeks on Maggi mee. The thing about single-digit millionaires is that the slide can be slow and imperceptible at first, and it’s downright insidious:
1. Ignoring inflation rate risk
A good number of single-digit millionaires didn’t get there by sophisticated financial management, stock trading, or other Wall Street chicanery. For every one that does, there are dozens more who simply saved money, avoided credit, lived within their means, etc.
The problem is that interest rates don’t always keep up with inflation, as we saw in the past few years. Even with rising interest rates, fixed deposits and savings bonds tend to top out at about 3.5 per cent per annum; and again, core inflation has been higher at 4.2 per cent.
(Core inflation also doesn’t consider luxuries like private housing and transport. So if those are part of your life, inflation – based on sheer Consumer Price Index – would be around 4.8 per cent)
This gets even worse if your money isn’t growing at all (e.g., you put it in a standard account with an interest rate as low as 0.125 per cent, or possibly even no interest).
Over a 10-year period, at an inflation rate of 4.25 per cent, a static sum of $3 million today will have the purchasing power of just $1.978 million.
Over a 20-year period, it has the purchasing power of just $1.3 million, less than half the purchasing power of the original amount, and so on. Remember, you don’t even need to be spending this money; just the act of leaving piled up in a corner is enough to cause all this.
If you don’t bother to track this, then you may find that your retirement fund or legacy planning is lot smaller than you expect, later in your twilight years. So it’s generally a good idea to target a portfolio which – in your younger years – can beat inflation by around two per cent. A qualified expert can help you build a balanced and diversified portfolio for this.
2. Getting accredited before you’re ready
Unless you take steps to change it, you’re considered a retail investor. That’s not a bad thing, since MAS is pretty protective of retail investors – there are all sorts of rule about what toxic financial products you can’t be exposed to. But these restrictions also stop you from delving into certain high-risk, high-return products; things like EM high-yield bonds, BTC spot ETFs, or others alphabet-soup products sold by Wall Street movie villains.
But you can take steps to be an accredited investor, if you:
- Have a personal income of more than $300,000 per year, over the past 12 months
- Net personal assets that exceed $2 million in value (of which your home can only account for up to $1 million)
- Net financial assets of more than $1 million
Now if you qualify for something schemes, like premium banking, look out. That’s when the sharks start to circle, and someone may try to convince you to get accredited. That way, they can sell you on investments that MAS wouldn’t retail investors touch.
This is how single-digit millionaires end up going way over their risk appetite, and involved in investments they can’t even explain. Once you’re accredited, it’s assumed you’re sharp enough – and capitalised enough – to handle risky products; whether or not that’s actually true.
3. Going all-in on a single asset
We like to stick to what we know. So if you run a business, the temptation is strong to sink the bulk of your wealth (if not all of it) into that business. Some people do this for their property, buying condos that account for two-thirds their portfolio, while others hyperfocus on one industry (i.e., everything gold related, or bond-elated) because that’s what they know best.
This sort of focus can lead to stronger gains over a shorter period; if you really do know real estate, for example, you might make more focusing on it versus spreading money among stocks, bonds, and others.
The problem is the lack of diversification this created. If you’ve sunk everything into the value of your property, for example, then a real estate downturn can wreck the entirety of your plans, as opposed to a portfolio with non-property assets like unit trusts or savings bonds.
Given that Singaporeans love private housing, the most common flaw here is to use your condo or landed property as a one-way bet on future appreciation.
4. Lack of liquidity
So you have $3 million, and you owe $3 million on your property. You should pay it all off now, and save on interest right?
Not quite. Some forms of low-interest debt are better to keep around, if they preserve your liquidity. If you pay off the entirety of your property, and you end up having no money left, then you (1) have no way to cover costs during emergencies, and (2) can’t use the money for new opportunities.
If you do need money in these circumstances, you might then have to turn to borrowing; and that can lead to high-interest credit card debt, or other unsecured lending.
Likewise, locking up all your cash in deposits with long maturity dates can cause losses. If it turns you out need the money for an emergency, you typically forfeit the interest accrued up to that point (e.g., if you liquidate a five-year fixed-deposit on the fourth year, you may lose up to four years of accumulated interest as a penalty). On top of this, if you turn to loans instead of liquidating your assets, you tend to get saddled with high interest debt (about six to nine per cent per annum, much higher than most portfolio growth can match).
It’s a good idea to keep at least some part of your portfolio in cash, or accessible cash holdings; this allows you to cover emergencies, without going taking on high-interest debt or derailing your investments.
5. Spending beyond the returns on your wealth
As the old saying goes, spend the interest, not the principal. If you’re getting around three per cent of $3 million in dividends, coupons, or various payouts per year, you shouldn’t be spending more than $90,000 per year.
(That includes the cost of necessities like insurance and loan repayments, so it would be $7,500 per month or lower)
If you start spending the $3 million, over and above what it brings in, your payouts will start to shrink. You also need to remember that inflation (see point 1) is in play, so your purchasing power is degrading over time.
This is where financial maturity kicks in, and why people don’t like to leave huge sums to their children all at once. To some mindsets, it’s intolerable to keep to a budget of $6,000 to $7,000 per month, when they can see the $3 million they have just sitting there.
There’s an old saying that going broke happens slowly at first, and then very fast
This refers to the slide into poverty. It begins “slow,” with the accumulated impact of inflation or debt. It then follows a long period of gradual decline, if no action is taken to fix or maintain the portfolio.
When a catalyst occurs, like job loss or a medical emergency, the portfolio then gets liquidated and losses rush. This is the “very fast” part, when it feels like the loss of a million dollars seemed to happen overnight.
The key here is taking action during the slow part: bail the water out of the sinking ship while you still can. If you do that well enough, there may yet be time to recover. For help on this, you can reach out to us at Single Digit Millionaire.
