Diana Clement: How are your retirement savings faring against inflation?

Inflation is pulverising many people’s retirement savings. Photo / 123RF

OPINION:

Inflation is causing a cost of living crisis. It’s also pulverising many people’s retirement savings.

Inflation is sitting at 7-plus per cent currently. Fortunately, everyone from the Reserve Bank of New Zealand to bank economists are expecting the inflation rate to ease.

Even so, if the new normal settles back at 3 per cent or 2 per cent by 2025, rather than the 1 per cent we became used to, retirement savings could take a huge hit.

In simple terms, inflation eats away at cash-based investments such as term deposits and makes life more expensive, meaning less spare cash to save.

One of the big issues, says AMP NZ managing director Jeff Ruscoe, is people not taking financial advice and choosing to invest their capital in term deposits and similar conservative investments.

On the surface, term deposits are “safe”. The problem is that even with interest rates on term deposits rising, they don’t keep pace with inflation.

Take a lesson from history. The world went through a decade of inflation from 1970 to 1980. People who relied on term deposits and fixed rate bonds saw their savings eaten away.

Many were earning 2.5 per cent to 4per cent in the bank, while inflation averaged 11.5 per cent for the decade. That meant a lot less in the retirement pot when they finally clocked out of work for the last time. Or if they’d already retired, a big chunk of their capital was eaten up by inflation, not living the retirement dream.

We aren’t likely to hit 11.5 per cent inflation in the foreseeable future. But Ruscoe cites statistics that after 15 years, even at 2.5 per cent inflation, your spending power has fallen by 31per cent.

“So if you are 50 today, and you want to continue to live a lifestyle like you do now, you’re going to need 31 per cent more money by the time you get to retirement to live that lifestyle.”

Whether they’re 25 or 55, people saving for the future need to ensure their KiwiSaver and other investments are sufficiently weighted for growth to outpace inflation.

Those already in retirement need to think carefully about their investments in inflationary times, says Ruscoe,

“Trying to make sure that your returns are keeping up with inflation is super important.

“By investing in term deposits [retirees] fix their income, and it doesn’t go up with inflation. So you’re always going backwards in that space.”

A woman turning 65 today can expect to live around 23 years, and a man 20 years according to the Statistics New Zealand “How long will I live?” calculator.

The trick is that most people aren’t going to spend their retirement savings in the first five years of their retirement, and don’t need to withdraw everything to put in term deposits as some do.

Ruscoe says a diversified portfolio with a portion in growth funds allows the capital to keep growing, instead of being eaten up by inflation.

That involves keeping a portion of retirement savings invested in growth assets, which should fight the effects of inflation. As prices increase, so too usually does the value of investments.

There are no guarantees that financial markets will do that. Over the long term, however, it is generally expected that they will outrun inflation.

Leave the planning to the experts, says Ruscoe. “I believe people need to get away from the DIY approach and get some proper help to match their investment plan to their spending plan.”

He cites the example of a road trip. “If you were heading off on a road trip into a country, you didn’t know, you would sit down and map out a plan.

“That’s the same with retirement planning. You know, if you don’t make that plan, you will just arrive, and you might not arrive at the right time and place.”