Believe it or not, inflation has remained our constant challenge since the great recession of 2008 that ravaged the entire global economy. Ever since then, we have experienced a constant surge in prices in every aspect. Inflation reached new heights during the recent pandemic. So, in the simplest way, inflation is the price rise of all the goods and services in an economy. But one thing is for sure inflation is here to stay and it can fluctuate to an unexpectedly high level or it can also dip down a bit, but it will be there. As a result, whenever an individual is planning to save some of their earnings for whichever purpose in the future, the inflation factor always works within it Say a person makes a fixed deposit at a certain interest rate for two years. He or she may have done so to buy a new smartphone. But when the person makes that fixed deposit, it’s crucial to factor in inflation because if the inflation rate remains unexpectedly high over those two years, the person may not have the expected funds.
The same applies when creating a retirement plan, which is a more serious future economic endeavor for a professional. It is essential to remember that the value of 100 HKD today will not be the same 20 years from now. The amount of goods you can buy with 100 HKD now may significantly decrease even in 2-3 years. For example, if someone in their 30s starts a retirement plan aiming to accumulate 10 million HKD over the next 30 years, the value of that 10 million HKD at age 60 will be different than today. There is only one reason behind this, the great evil “inflation.” As a result, it’s important not to overlook the role inflation plays in retirement planning. In this article, we will focus on the various ways inflation can affect retirement savings and disrupt expectations.
Why Inflation Matters
The steady surge in the prices of commodities and services over time is normally known as inflation. It is a crucial economic notion. But, why does it matter so much for our daily and long-term lifestyle? To determine how far will your savings stretch over time, inflation will play a crucial role. The cost of living gradually increases over time, especially in different metro cities. The value of your fund may decline if it doesn’t grow at a great pace that keeps up with inflation. This generally suggests that your retirement assets can buy far less in the future than they do today.
For example, with an average inflation rate of 3%, the cost of living could double over the next 24 years. It ultimately requires proper planning to ensure your retirement savings can be sustained with your desired lifestyle as expenses rise.
Not just day-to-day expenses, but long-term economic commitments like housing expenses are also affected by inflation, as these can dramatically increase over time. In general, retirees only depend on fixed-income sources (e.g. pension) and that is why they will find difficulty in managing their household expenses and others with rising costs. Hence, including inflation-adjusted savings in your portfolio, such as real estate, stocks, or inflation-linked bonds is helpful to mitigate these issues. By accounting for inflation and planning ahead according to that, retirees can easily protect their available savings, and assure they could easily maintain a flexible standard of living during their retirement. It is also necessary to regularly visit your economic strategies that help you to adapt to economic conditions and changing inflation rates.
Strategies for safeguarding retirement savings
Some relevant strategies will make some big differences in terms of protecting your savings from inflation. This initiative is effective for you to adjust your retirement plans according to your future economic needs. Here are some promising ways to combat inflation’s impact on your savings.
1. Rebalancing Savings Goals Before Retirement: Always keep inflation in mind when you set your savings goals. Rebalancing your bank account based on the ongoing and future inflation rate would be an ideal strategy for you. That’s because there will be enough savings during your retirement that you can spend your rest of the life comfortably and without any concerns. Contributions need to be reviewed regularly and in all possible increments so that the contributions will at least keep up with rising costs. This is ahead of inflation and can ensure a much more comfortable retirement.
2. Growth-Enabling Assets Management: Another approach to combating inflation is by capitalizing on assets that have growth potential. While more conservative savings, such as bonds or fixed-income accounts, are secure, they cannot keep up with inflation. There are a few growth-enabling assets that offer returns over time through stocks or real estate. The balance between risk and return should be tailored to each individual’s economic conditions.
3. Inflation-protected savings: These inflation-linked savings include government bonds, are designed to bring returns that rise along with inflation. They can be one of the useful constituents of your portfolio when it comes to safeguarding your purchasing power. Even after not being high growth generators, they still provide peace of mind because your savings do not lag behind the inflation.
The significance of regularly revisiting the retirement plan
Inflation-proofing your retirement plan is not about setting it and forgetting it. It requires regular adjustments and reviews as both your economic situation and inflation rates change. Keeping an eye on your portfolio’s performance, inflation trends, and your future expenses, you can make changes to your retirement savings, allow yourself to change before inflation takes a permanent toll on your retirement savings.
The impact of inflation on retirement savings is very significant, yet often underestimated, when you are going to plan for your future. After becoming aware of how inflation affects your purchasing power and including strategies to safeguard against its consequences, you can ensure that your available savings are adequate for a stress-free retirement.