A deeper look at inflation

With UK inflation at 5.5%*, quite simply, if you are saving for retirement your money is going to have to work harder to keep its value

Let’s say you were planning to retire on savings of £500,000. If prices go up by 10% before you retire, you’ll need to save an additional £50,000 to have the same retirement you had planned for.  

This means that either you will have to save more or you will need to delay your retirement. 

Of course, you could still retire with your £500,000 but there’s no getting around the fact that it won’t be ‘worth’ as much in terms of what you can buy for your money.

  • The above graph shows that if we were to assume 5.5% inflation each year going forward, the purchasing power of £100,000 today would be just £26,223 in 25 years’ time.
  • Think that inflation can’t average 5.5% for such a long period of time? Think again. For the 30 years from 1962 to 1991, the UK Retail Price Index averaged 8.1%!

If you are already in retirement, inflation affects you too. In fact, high inflation can be a nightmare for those who have already stopped work.

Let’s say you have a yearly income from various pensions and investments of £50,000 and prices rise by 10%. In order to enjoy exactly the same standard of living your income will need to increase by 10%. 

While the State Pension and some employer pensions have some built-in protection against rising prices, they are unlikely to fully keep pace with inflation.

Retirement double whammy

Inflation brings another problem to those already in retirement. If you’re retired you potentially get hit twice. 

Not only is the purchasing power of your money reduced but if you are generally spending more time at home than when you were working,  it’s likely to mean an increase in energy bills (and we know that current energy prices are rising sharply).

Effectively, inflation creates two issues, your money is ‘worth less’ and yet you are paying more for the cost of living. 

So how can you help combat the effects of inflation?

Investing gives your money the chance to grow which can help offset the effect of inflation.   

But the term investing can often put people off or it conjures up visions of high stakes and either winning big or losing everything. 

However, in reality, there are many different ways to invest and many different levels of risk and reward so there are many ways your money can work harder for you in the fight against inflation. 

*Source ONS as of 23rd March 2022

Further reading

Expat retirement planning: Beware the silent assassin

Can I afford to retire?

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About Ross

▪️Ross has been a financial adviser for the past 26 years.

▪️He specialises in working with British expats over age 50 who are looking to optimise their finances for retirement.

▪️He is qualified as a financial adviser both in the UK, as a Chartered Financial Planner®, and in the EU, as a European Financial Planner®.

▪️Ross has been an expat himself for 22 years and is married with 2 children.