Retirement Planning Amid Inflation

The post-Covid economic recovery has seen global inflation accelerating to historical highs, which required central banks to hike interest rates multiple times and caused investment markets to become more volatile. In addition, geopolitical tensions have intensified over the past year as the war in Ukraine continues with no end in sight. This combination of events has rendered planning for retirement a challenge for retirement fund members, especially those who are close to retirement.

With inflation being on the rise in the last few years it means that the purchasing power of one's savings has been declining rapidly. There is a myriad of factors that cause inflation to increase. Amongst those are factors such as cost-push factors which are mainly related to the increase in the cost of goods as a result of an increase in the cost of production. Other factors that can cause inflation to increase are called demand-pull factors where the prices of goods increase as a result of excessive demand relative to supply.

What does inflation do to your savings, one may ask? Inflation can erode the purchasing power of one's life savings. Inflation is defined as the continuous increase in the prices of goods and services. The rise of inflation and thus the cost of living in retirement is one of the greatest concerns that keep members who are approaching retirement awake at night.

For any member of a retirement fund, it is impossible to know what level of inflation will be when they retire. Retirement fund members are encouraged to ensure they are invested in a strategy that is suited to their risk profile and term of retirement. Getting investment growth beyond inflation is important as that will help with building a margin of safety into one's investment strategy.

An effective investment strategy should account for inflation and mitigate against the risk of running out of money when in retirement. An investment strategy that has an inflation-beating objective and asset allocation may help with the smoothing of the real returns and provide diversification when there is hyperinflation.

In the current high-inflation environment, it is also important for retirement fund members, especially those who are approaching retirement, to review their net replacement ratios. This will assist them in tracking how well they are making progress on the path to retiring with financial independence.  A net replacement is measured as the ratio of a member's projected pension when they retire relative to their estimated pensionable salary in the year before they retire. This exercise results in a score which will allow a member to make the necessary adjustments to their retirement plan should there be a need to boost their savings. Some of how members can enhance their NRR score are to increase their monthly contributions, take on more investment risk, adding a lumpsum amount to their retirement savings and/or delay their retirement.

Retirement fund members also have access to tax-free savings vehicles to help enhance their retirement savings profile through tax efficiencies as all interest, dividends and capital gains are exempt from tax. A tax-free savings vehicle allows one to invest a maximum contribution of R36 000 a year, with a total cap of R500 000 over their lifetime. A tax-free savings vehicle is a good buffer to retirement savings as it will not incur any tax when one makes a withdrawal or draws an income from it.  Another vehicle that retirement fund members can use is a retirement annuity which they make monthly contributions until it is time to retire and at which point be able to draw an income. There are no limits in terms of how much one can contribute to the retirement annuity, but there is an annual cap on the amount of tax-deductible retirement savings. A retirement annuity also promotes a good savings culture as it is not accessible before the age of 55 unless one is disabled or decides to emigrate.

Whilst there are ways that one can use to enhance their retirement savings profile; it is highly recommended that they consider these options based on the advice of their financial advisor. Speak to one of our wealth advisors to help you set and meet your financial goals.