Did you know that money is stolen from your bank account each month?
Inflation impacts our life in small doses which makes it easily overlooked from one year to the next, however, over time, it has earnt its reputation as the silent killer.
Since the global financial crisis of 2008 cash deposits have lost around one fifth of their purchasing power whereas global developed equities have double in value even if you invested at the height of the market in late 2007.
Which is riskier to your long-term financial goals? Cash or Equities?
Cash has an important role to play in any coherent financial plan and we would recommend holding between 3 and 6 months expenditure as a buffer against life moments.
Outside of holding cash for short term emergencies it is important to understand that whilst investing in the stock market inevitably comes with risks attached, the risk of simply holding in cash and doing nothing is that you won’t have enough in retirement, or you will simply run out of money.
Inflation can leave you with a false sense of understanding about how much you will need in the future.
An inflation rate of 2% seems like a small figure and can even be perceived as an irrelevant amount but when you multiply this reality over ten years it translates to 20% or 20 pence on a pound. In other words, a £50,000 salary today will require you to earn £59,754 in ten years if you were to experience a compounding inflation rate of 2%.
… remember that you are saving to replace your future income not your current income.
If you make £50,000 today and plan to retire in 20 years, you will need to have £72,840 of income to live the same lifestyle. It is then important to understand that in 20 years you will need £108,237 to live the same lifestyle your £50,000 is providing today. So, when you are thinking about how much money you need to save, remember that you are saving to replace your future income not your current income.
Inflation is a consistent risk to the real value of your investments. For the last decade or so we have become used to historically low levels of inflation. To get a great visual on the power of inflation click here – the data goes back to the year 1209!
So, how do you overcome the debilitating effect of inflation on your retirement plans?
You need to make sure that you plan your investment strategy with a view to preserving the real value (i.e., the after-inflation value) of your assets. An intelligently invested combination of stocks, bonds, and alternative asset classes will cope admirably with this risk. To find out how, click here
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