How rising inflation can put your retirement plans at risk and why working with a planner can help

In the past few months, you’ll have likely noticed that the cost of living has risen substantially. Whether you’re considering your weekly groceries or your monthly energy bills, it’s apparent that the price of many goods is increasing rapidly.

According to data from the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose by 10.1% in the year to July 2022. This is the highest level it has been in around four decades.

Over time, prolonged high levels of inflation pose a real problem for your long-term financial plans, especially for retirement. So, read on to find out how it could affect you and why working with a planner can help.

Inflation erodes the real value of your money over time

To put it simply, inflation is a measure of how much the cost of goods and services changes over time.

A little bit of annual inflation can often be a good thing, as it helps to keep the wheels of the economy turning. After all, when something you want may be more expensive tomorrow, it encourages you to go out and buy it today.

But when inflation rises too high, it can pose a problem for households as they may not be able to absorb the rising costs. That’s why the Bank of England (BoE) has an annual target of 2%.

However, global events, such as the war in Ukraine, have recently caused inflation to rise substantially beyond this level.

Over time, high levels of prolonged inflation can pose a problem for your finances, as if your wealth doesn’t grow as fast as the cost of living does, then your money is losing value in real terms.

The best way to illustrate this is with the BoE’s inflation calculator, which can highlight how rising costs can affect your wealth.

For example, goods and services that cost £1,000 in 1991 would have cost £1,857 in 2021 due to an average inflation rate of 2.1% over that 30-year period. As you can see, even a small annual increase can add up over the course of several decades.

Given that your retirement could last for a similar length of time, it’s important to be aware of how a period of high inflation can be challenging for your finances.

During periods of high inflation, your investments need to work harder for you

One of the biggest ways that inflation can affect your progress towards your long-term goals is that it erodes the value of your cash savings. This can make it much more difficult for you to build up wealth for retirement.

Having an emergency fund can be hugely useful as it helps you to overcome any financial bumps in the road. For example, if you have to pay an unexpected bill, it can be comforting to know you have money on hand to cover it.

That being said, it can be easy to hold too much of your wealth in cash. When economic forecasts look uncertain, it’s only natural to want the security that a large emergency fund can give you. But due to the effects of rising inflation, this can actually hurt your long-term prospects.

According to market data from Moneyfacts, as of 25 August, the highest interest rate offered on an easy access savings account was only 1.86%, which is significantly lower than the rate of inflation. This means that over time, your money is losing its buying power.

On top of this, high inflation can also make it harder to build your wealth through investing, as it reduces the real growth of your assets. This can pose a serious problem when preparing for retirement.

For example, if an investment increases in value by 11% over the course of a year, then on paper it seems like a strong level of growth. However, if inflation rises to 10% over that time, then your asset has only actually grown by 1% in real terms.

Working with a planner can help you grow your wealth in real terms

If you want to enjoy a comfortable retirement, seeking professional advice can really help you.

When you work with a financial planner, we can help you to build a portfolio that aims to grow your wealth in real terms. This can help to ensure you’ll have enough to comfortably reach your long-term goals.

Furthermore, we can also offer you valuable advice about how much of your wealth you should hold in cash, so you can minimise the impact of inflation on your finances.

Working with a planner can help you to take control of your money, giving you greater confidence that you’re on track for the retirement you want.

Get in touch

If you want to know more about how you can protect your wealth from inflation, we can help. Please call 01992 500261 or fill in our online contact form to organise a meeting and we’ll be in touch.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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