How does inflation affect your retirement planning you might be wondering?
Well remember when a Coke used to cost under R5? How much do you pay for one now? That is inflation.
You are spending a lot more now for the same product you bought years ago. Inflation refers to the rate at which the prices of goods and services rise. Different goods and services experience rising costs at different rates, so an average inflation rate is used to describe the affects of inflation. The two main points how inflation effects your retirement are:
- It reduces your savings
- Your budget will have to be adjusted
While inflation does not reduce the money you have saved up, it does reduce what you can buy with that money. As the costs of living increases you can buy less and less with the money you have today. Your biggest problem is that the interest rate your savings account is paying is probably a lot less than the rate of inflation, this means that the cost of goods and services is climbing much faster than the interest you might be earning from your savings account.
So what must you do? You must incorporate inflation into your planning. You cannot presume that the amount you have saved up today will be enough to last you in the years to come. Bonds, money market funds, and bank savings accounts alone, which people will tell you are relatively safe places to put your money, may not provide enough growth to outpace inflation. You’re going to have to most likely invest in other plans which include stocks and other investment types, in order to add a level of growth to your portfolio that can keep you ahead of inflation. The inflation rate in South Africa is on the up as you can see in the graph provided below so you might need to buckle up your seat belt and be prepared for a bumpy ride…
Inflation is one of those financial facts of life. You cannot do anything about it, and you do not know what it will be in the future. However, you should make an effort to at least be aware of inflation trends, factor a realistic expectation into your thinking, and take steps to protect your finances just in case the inflation rate rises above your investment returns.
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