Not active in investing is not an option

Assuming someone has cash of $1,000,000, what should that person do with the money? Let’s say he is not comfortable with taking on risks of investing. He may consider placing all $1,000,000 in a fixed deposit of one-year tenor earning a promotional interest rate of 1.08% p.a. (Note: This is not risk-free.) At the end of one year, he will get interest income of $10,800. This works out to $900 per month, hardly enough to live on if the person is also retired. In addition with inflation rate running at 4.5% (for 2012), the purchasing power of $1,000,000 is further eroded by inflation.

This is the reality of low interest rate environment having an adverse impact on investors.

Let’s carry this scenario further assuming same conditions for future years (ie low interest rate environment with inflation). He will need to draw down on $1,000,000 yearly to spend. How long can this amount last if he withdraws $4,000 per month (conservatively to supplement interest income)? On a simplistic scenario, the million dollars can last for 20 years. If your age now is 60 years, the money runs out at age 80 years. What happens after that? He probably has to sell other assets to continue to have money.

This leads me to the topic of this blog. If one does not think of seeking out investments (other than safe options), then money cannot last long.

Copyright © 2013, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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