One of the nice things of being in a community of bloggers is the occasional opportunity to host a guest blog. This guest post, by Stacy B Miller is about Inflation – Does it kill your retirement savings silently?
Inflation is like diabetes. Just like diabetes affects different organs of your body, likewise, inflation eats up your retirement savings silently. Irrespective of the place you’re in, you’re bound to be affected by inflation, especially after retirement.
In the initial 10 years of retirement, even if there is normal inflation of 3.5% every year, you have to raise your income by more than 40%. Otherwise, you’ll be losing your money. So if you’re earning £50,000 now and you’re able to cover your expenses with that money, then it’s good. But will it be enough to cover your expenses after 10 years?
The honest answer is ‘no.’ You’ll need £70,000 to cover your same expenses. In the next 20 years, you’ll need £100,000 to buy the same foods, medicines, clothes, and accessories. The worst part is, you may not be fit enough to do a job and earn money at that point of time.
How much can retirees lose due to inflation?
Retirement benefits are usually not indexed for inflation post-retirement in many countries. So, a sharp rise in the inflation rate would lower the worker’s actual benefits several years after his retirement.
In the UK, the basic and single-tier state pension are safeguarded by something known as the ‘triple-lock guarantee.’ This implies that the state pension rises every year by the greater of annual CPI (consumer price index) inflation usually declared in September, average earnings growth of 2.6%.
In April 2019, the state pension rose by 2.6% due to the ‘triple-lock guarantee.’ The pension rose to £168.60 per week in 2019. The increase was across all sectors, NHS, police, and teachers.
The teacher’s pension increased by 4%, the NHS pensions by 3.9%, and the police pension by 3.65%. The government increased the pension to make sure that pensions increased in the same line with inflation and earnings.
Apparently, it seems that retirees in the UK won’t suffer financially due to inflation. But this isn’t actually true. The UK government switched from RPI (retail price index) to CPI (consumer price index) as indexation of pensions 2 years back. Some retirees were content since they felt that their pension would increase as per the inflation. However, they missed out on a vital point.
The consumer price index increases a lot slower than the retail price index since the latter includes housing costs. This implies that the state pension including the public sector pension will increase more slowly than before. The government has to spend less money on pensions now.
Now, what about the private pensions?
There is no such relief here either. The amount will increase more slowly as many private pensions are linked to inflation. Plus, they have also moved from RPI to CPI. So retirees receiving private pensions will feel the pocket-pinch as well.
It is said that the government’s move has reduced a retiree’s income by 1% every year. According to financial experts, this 1% drop could eliminate 25% of an individual’s retirement income.
It has been 2 years since the shift from the RPI to CPI has taken place. The sad part is most people don’t understand the difference between the two. They don’t even know how these things affect retirement savings in the long run. Truth be told, many people don’t even understand the connection between inflation and pension. As such, they fail to comprehend the decreased buying power due to inflation.
Conclusion
Inflation doesn’t have an immediate impact on your retirement savings or financial life. But over the years, you’ll realize that inflation is a silent killer that erodes your income. So don’t relax and sit idle after your retirement. After 10 years, your retirement savings may not be enough to meet your expenses due to inflation. You need to create a smart financial plan and take steps to increase monthly income for fulfilling your lifestyle needs. This includes putting food on the table, buying clothes, paying insurance premiums, getting rid of debts, buying medicines, and so on.
Depending on where you live in the world, senior citizens may have more expenses than younger people. Some senior citizens may have to spend more money on an extremely expensive sector, which is healthcare, others will have all of their healthcare costs paid for by their state’s healthcare service. However some may find themselves having to pay for social care at home, depending on their financial circumstances. And, the cost of healthcare and social care, like inflation, is increasing with each passing day.