Retirees Unhappy With Declining FD Rates during Covid. What to do?

One thing that Covid has impacted severely is the global economy and interest rates. In Singapore, our fixed deposit rates are closely linked to the interest rates in the United States. We can expect the interest rates to hover just slightly above zero percent for the short and medium term. For seniors depending on fixed deposit interest to make ends meet, this is bad news. Without taking in more risk, what should seniors do?

  • If you want to stick with fixed deposits, then it is time to pay attention to how banks tier up their interest rates. Below is the DBS fixed deposit rates from DBS bank (Sep 2 2020). If you look at 12 months, a $20,000 fixed deposit gets you 1.15% p.a. but a $500,000 gets you only 0.15% – surprised? That means that when your fixed deposit matures or if you are looking at placing a new fixed deposit, you have to study the charts to maximise your interest rates. If not, you will be penalised when your fixed deposit gets automatically rolled over at almost zero percent in some cases!
  • Look at fixed deposit promotions offered by banks – other than the Big 3 – ie. UOB, DBS and OCBC. Foreign banks and finance companies generally offers a higher fixed deposit rates with their promotions – but keep in mind that you should only do business with entities that are regulated by the Singapore Monetary Authority. The downside is that you will be required to actively manage your fixed deposits by not letting them auto-rollover and moving the monies around. Most promotional rates require “fresh funds” from another bank. If you want to play this game, you have to be prepared for some hard work!
  • Another place to look for better interest and is still safe will be Singapore government or quasi-government bonds. Typically, there would be almost minimal risk of losing your principal if you hold the bond to maturity, but if you have to sell the bond, the price may be higher or lower than what you have paid. The bad news is that to look for a better interest rate, you will have to buy bonds with very long maturity. For example, the best yield for this class of bond (on bondsupermarket.com Spet 2, 2020) is only 2.84% returns if you hold to maturity in 2050! PUB, LTA and HDB bonds maturing between 10-15 years yields between 1.39% to 1.56%, if held to maturity. You should remember that bonds are not as liquid as fixed deposits and comes with transaction costs, and the price will fluctuate based on market risk free rates in Singapore. The positive side is that it is a safe instrument that can offer you a fixed interest rate over a long period. Fixed deposits terms often do not exceed 24 months.
  • Putting money into your CPF account today may strangely be the best place to get the highest risk free interest rate. Ordinary account has a minimum legislated interest rate of 2.5%. The current floor for Special and MediSave Account​ is 4%, and the same goes for Retirement Account. Of course, there are complex rules that apply to each account and how and when they can be used. See https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-interest-rates.

At this point in the pandemic, I would not recommend equities or REITS even in large blue chip stocks – unless you have a significant appetite for risk. Even blue chip stocks on the SGX have been under a lot of stress – look no further than Singapore Airlines. Please resist the temptation to go after yield and sacrifice safety. As a retiree, you may not have the luxury to make up your nest egg with more salary nor will you likely have the long time horizon to wait for the market to recover. No pandemic in our world’s history even comes close to wrecking the global economy at such an unprecedented speed as Covid-19. Likewise, there is no guidance on how long it will take to recover. So it is not the time to roll the dice with risky investments!

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