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How to Prevent Inflation From Creeping Into Your Retirement Plans

Surprise! Or maybe not. Inflation is the top concern globally across 15 countries for the 11th month in a row, according to an IPSOS report published in February 2023. Among the 29 countries surveyed, Singapore ranks third, with 63 per cent saying it’s an issue they care about.

So, should we be worried? The short answer is, yes.

Inflation can undermine purchasing power and erode the value of your savings and investments, making it more difficult to reach your retirement goals. This coupled with the fact that we are all living in the most expensive city in the world (along with New York), based on the Worldwide Cost of Living (WCOL) 2022 survey by the Economist Intelligence Unit (EIU), and the outlook suddenly looks pretty bleak.

What is Inflation?

Let’s break it down into simpler terms and tackle this issue step by step. For a start, there are two main types of inflation: core inflation and headline inflation.

Core inflation is an inflation indicator that excludes food and energy prices. Because these prices are frequently volatile, eliminating them provides a more accurate representation of the underlying inflation trend. Although core inflation tends to be smaller than headline inflation, it can still have a major impact on your retirement funds and plans.

The term “headline inflation” refers to inflation that includes all commodities and services. It is the most widely used indicator of inflation, although it can be deceptive because of unpredictable food and energy prices. Although headline inflation is often higher than core inflation, it might provide a more accurate picture of how much your cost of living is rising.

Undoubtedly, inflation is a complex issue, but it is important to understand how it can affect your retirement planning. With that, you can then take steps to protect your savings from inflation and possibly increase your chances of a comfortable retirement.

Inflation and retirement planning

The impact of inflation on retirement planning can be significant. If costs rise, your savings will have to grow faster to keep up. If they do not, your purchasing power in retirement will suffer.

Here are some examples of how inflation can impact retirement planning:

Rising cost of living

Inflation can lead to an increase in the cost of goods and services, which can make it more difficult to fund a comfortable retirement. A simple example would be the cost of kopi – S$0.40 back in the 1990s and S$1.20 now. The hard truth is that this amount will only continue to go up down the road.

Reduced purchasing power

If your savings do not increase at a faster rate than inflation, your purchasing power will decrease in retirement. In short, this means that you may not be able to maintain your current standard of living. Perhaps you currently own a car but with the sky-high COE prices recently, this might be out of your reach as you approach your silver years.

Aside from that, while our public transportation network is becoming more advanced, so too is the cost for travelling within the island. Gone are the days of S$0.60/S$0.65 bus/MRT rides. We’re faced with the realities of at least S$1.50 (and increasing) commutes.

The ability to ‘outlive’ your savings

With higher levels of inflation, you may need to withdraw more money from your retirement fund monthly or yearly just to maintain your standard of living. This can potentially increase the risk of outliving your savings.

Effect of inflation on an item that costs $10 today

Interest rateCost after 10 years
Cost after 30 years
2%$12.19$18.11
4%$14.80$32.43

Inflation-proof your retirement funds

The impending inflation is not all doom and gloom. There are still ways you can plan ahead and inflation-proof your savings towards retirement! These are a few things you can do:

Start saving early

The earlier you start saving, the more time your money has to grow. You might be thinking, but I cannot save a huge amount monthly. It’s ok! Just remember, contribute as much as you can. Even if you can only contribute a small amount each month, it will add up over time and you can see the power of compound interest kick in.

Source: Business Insider

Invest wisely

Choose investments that have the potential to outpace inflation. Historically, certain assets like stocks, real estate, and commodities have shown the potential to outpace inflation over the long term. Diversifying your investment portfolio across different asset classes can help hedge against inflationary risks.

By consistently saving and investing a portion of your income, you can potentially benefit from the compounding effect and long-term growth of your investments. Regular investments can help offset the erosion of purchasing power caused by inflation.

Pro-tip: Use Planner Bee to calculate your retirement goals today

Rebalance your portfolio regularly

This will help to ensure that your investments are still aligned with your risk tolerance and investment goals. Additionally, it is always good to maintain a well-diversified portfolio that includes a mix of assets, such as stocks, bonds, and cryptocurrency. This can go a long way to help mitigate the impact of inflation as different asset classes may perform differently during inflationary periods, reducing the overall risk to your savings.

Read more: Can You Hedge Against Inflation by Investing in Gold and Precious Metals?

Stay informed and review your financial goals

Keep track of economic indicators and inflation rates. Review and adjust your financial plan on a regular basis to ensure it aligns with your long-term goals while factoring in the potential inflationary risks.

The silver lining for your silver years

Understanding and accounting for the impact of inflation on retirement planning is crucial for ensuring financial security for retirement. It is unfortunate that inflation slowly but surely erodes the purchasing power of our money over time, affecting living expenses, savings and investment returns.

However, the true pity would be failing to consider inflation, which can result in a significant shortfall in retirement funds and a diminished standard of living.

By implementing strategies such as saving early, investing, diversifying and rebalancing portfolios, you can better protect your savings from the erosive effects of inflation.

Regular evaluations and adjustments to financial plans, as well as being educated about economic indicators, can also help retirees adapt to changing market conditions and maintain their chosen standard of life.

Ultimately, by proactively addressing the challenges posed by inflation, individuals can enhance their retirement planning and secure a more comfortable and financially resilient future.

Read more: 3 Effective Ways To Hedge Against Inflation

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