Up, Up and Away? 5 Tips for Managing Inflation in Retirement

In my recent post, What is your retirement philosophy, I highlighted one of the risks of retirement planning as inflation. In your working or business life, you are able to counteract the impact of inflation through increased wages or increased profits. Once you have retired, you no longer have this protection against inflation.

Despite inflation being constant and contained for several years at approximately 3%,  the long term impact on inflation of recent economic stimulus measures (Swim Between the Flags ) is unknown. With retirement possibly lasting for 30 to 50 years, having a retirement plan that considers the impact of inflation is vital. An annual inflation rate of 2% or 4% over a period of time can erode your purchasing power. For example, $1,000 today at an inflation rate of 4% will be worth only $375 in 25 years time.

Here are my recommendations to help you manage the risk of inflation on your retirement plan:

  1. Prepare a transition plan
    If you are unsure of how you will spend your days in retirement, then I recommend a transition plan to help you transition from one life stage to the next. A transition plan will enable you to * decide how you will fill the void that leaving your business or work created * plan other things such as where you will live and what you can do in retirement that provides you with a sense of purpose and makes you happy. You may also realise that there is a new career for you or that easing into retirement is a better option rather than having your working life coming to an abrupt end. By having a well thought out transition plan, you will be able to determine with greater certainty how much money you will need to fund the activities you enjoy in retirement.
  2. Update your investment strategy.
    Your investment strategy should be updated to take into account the potential impact of you outliving your capital due to the effects of inflation. The right asset allocation is important – as is diversification within the asset classes – to enable you to maintain your purchasing power over time. You must weigh up the risk of outliving your money with other investment risks such as volatility and losing your capital. Which assets classes will provide you with a real return against inflation with the least amount of risk? Most asset classes will be impacted by a sudden increase in inflation, therefore it is important to invest for the long term and in asset classes that can recover from the impact.
  3. Consider income and capital protected products.
    To counter-act the risk of inflation, you may need to increase your exposure to growth assets over and above levels that you are comfortable with. This may also increase the corresponding retirement risk. Where possible, use financial products to protect the income you need in retirement and protect your capital. This will provide you with a buffer against the impact of inflation whilst removing the market based risks of losing your capital. It is important that you understand any financial products you are purchasing, the risks, the costs and any potential disadvantages.
  4. Calculate your lifestyle essentials.
    Budgeting can help you determine what is essential for you to live, and what funds you need for luxuries. You are then able to use different investment strategies and products to maintain your lifestyle essentials and more growth orientated strategies to combat the impact of inflation. The less you draw out in the earlier years of retirement, will allow you to have additional funds invested for the longer term to counter the compounding affect of inflation.
  5. Be flexible.
    A retirement plan will provide you with a strategy at a point in time, based on numerous assumptions, and will provide you with a roadmap. However, it is important to review and adjust your retirement plan on a regular basis as your circumstances, legislation and investment markets change. It may be possible to enjoy those luxury items as investment markets increase. Don’t set and forget.

Inflation is one of the biggest risks to your retirement plans and potentially more damaging than a share or property market crash.  Periods of recovery generally follow a crash, whereas deflation is rare and the effects of inflation are usually permanent.  A strategy to counteract the impact of inflation on your retirement plans may involve a combination of the various options discussed above that are suitable for you. Planning and allowing for inflation will maximise the probability of you being able to enjoy the retirement you dream of – What is my “why”? If you would like us to review your strategy to cope with an increase in inflation or assist with your retirement plan, please contact us on 0499976058.

 


General Advice Warning: Any advice on this site is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making any decisions.


General Advice Warning: Any advice on this site is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making any decisions.