When planning for retirement, many people focus on how much money they have saved. However, just as important is what that money will be able to buy in the future. This is where inflation comes into play.
Inflation is the gradual increase in the cost of goods and services over time. While a few percent each year may not sound significant, inflation can have a major impact on your retirement savings over the decades leading up to retirement and throughout your retirement years.
For example, if inflation averages 3% per year, something that costs $100 today could cost more than $180 in 20 years. In practical terms, the same amount of money buys less as time goes by.
Let’s say you have $500,000 saved for retirement and leave it sitting in cash earning little or no interest. While the balance may remain $500,000, its purchasing power will steadily decline. After 20 years of 3% inflation, that $500,000 would have the equivalent buying power of only around $277,000 in today’s dollars.
Inflation can also impact retirees who are drawing an income from their savings. If your retirement income remains the same each year but the cost of groceries, fuel, insurance and healthcare continue to rise, your standard of living may gradually decline.
One way investors seek to combat inflation is by investing in assets that have the potential to grow over time, such as shares, property and diversified managed investments. Historically, these asset classes have generally delivered returns above inflation over the long term, although they do carry investment risk and can fluctuate in value.
For those still working, regularly reviewing superannuation contributions and ensuring investments are appropriately aligned with long-term goals can help improve the chances of keeping pace with inflation.
The key takeaway is simple: retirement planning is not just about accumulating money. It’s about maintaining purchasing power. Understanding the impact of inflation and developing a strategy to help your savings grow can make a significant difference to your financial security and lifestyle in retirement.
Disclaimer: The information contained in this article is provided for general guidance only and does not constitute financial, taxation, legal, or other professional advice. While every effort has been made to ensure the accuracy and completeness of the information at the time of compilation, it may not address the specific circumstances, requirements, or objectives of you and/or your business