I am in my early sixties and have accumulated a nest egg of savings which I am planning to rely on in retirement. Should I be worried about the impact that inflation will have on this money?
Research suggests that if inflation stays at its current level of around 2% in this country it would deflate a nest egg of €20,000 to just €16,600 in 10 years. Many of us don’t realise how quickly inflation can shrink our savings unless they’re earning a return that keeps up.
Cash savings, such as those held in low-interest demand deposit accounts, are most vulnerable to inflation’s silent squeeze. This issue is particularly acute for pensioners who have cash lump sums in the bank or are relying on their savings after leaving the workforce. Relying solely on low-return cash accounts is risky due to inflation’s erosive effects.
Even modest inflation can diminish the buying power of retirement lump sums or emergency funds meant to last years, making it vital to plan accordingly. In Ireland, historical inflation rates over the past 50 years have averaged roughly 4.35% year over year. If this rate of inflation continued then €100 today would be worth only €65 in 10 years. And the €100 would be worth just €43 in 20 years’ time.
The current economic policies of the European Central Bank aim to maintain a 2% target and if this is achieved then the decline would be less severe. In this scenario €100 will be worth €82 in 10 years, and €67 in 20 years. It is important to be aware that even low rates of inflation compound over time,
significantly affecting retirement funds. For example, a 30-year-old planning to retire at 66, experiencing a 4.35% inflation rate, would see the purchasing power of €100 today shrink to around €21.5 by retirement! The good news is that investing your pension and other savings should provide protection from the effects of inflation.
There are many benefits to having savings on deposit in case of a rainy day. However, relying on cash savings as a way to provide a retirement income may not be the best strategy, regardless of your age. Thankfully, there are investment solutions available to mitigate the impact of inflation. There are many factors to consider when choosing a suitable investment. It is important to get advice from a Qualified Financial Advisor.
Source: Independent.ie