Most people intellectually understand inflation, ...
Most people intellectually understand inflation, but not emotionally.

I often hear people say they received a pay rise but when I dig deeper I find out it was by 2-3%.
 
Don’t get me wrong, it’s better than the alternative. But the reality is that not getting a pay rise is like getting a pay cut.

If you earn $100,000 and inflation runs at 3% for the year, you need to earn $103,000 next year just to afford the same lifestyle.

What does this mean? Inflation could well be the biggest destroyer of your retirement savings.

The example above demonstrates what effect a ‘pay cut’ of no increase over one year has. What about over the long term?

If your retirement income needs are $60,000 in today’s dollars, assuming inflation of 3%, you will need $80,635 in 10 years’ time to afford the same lifestyle.

In 20 years, this figure will be $108,367. In 30 years, it will be $145,636.  In 40 years, you would need $195,722 just to live the same lifestyle as $60,000 now.

The average 50-year-old couple will have a joint life expectancy of over 90 (i.e. one of them will live past the age of 90).

This is why your retirement savings need to keep growing.  It’s not out of greed or so that you can afford luxuries. It’s because your retirement income needs will quadruple by the time the time you’re likely to pass away.

This tells me 3 main things:
  • A comfortable amount of retirement savings is a moving target.
  • Retirement savings need to grow in retirement to afford increases to income.
  • A fixed income strategy (i.e. having most of your savings in term deposits) is a sure way to be wiped out over the long term.

As a financial adviser, I don’t fear share market volatility. I live in fear of the day in 30 years’ time when a client comes to see me and says they can’t afford to live on the return their retirement savings generates.

I know it won’t help them to remember they used to be able to live on the same income just fine when they first retired.

​Written by Dallas Davison.
Published by Dallas Davison. March 26, 2019