Inflation and How it Affects Your Retirement

designbythink 2018, Quarter 4 Newsletter 2018

Inflation and How it Affects Your Retirement

IT is critical to understand INFLATION as it will impact your retirement significantly.

Simply put, inflation is a rise in prices relative to money available. In other words, you get less for your money than you used to.

Here’s an example:

The price of a chocolate bar.

If your pension cannot keep up with inflation, your ability to live comfortably after retirement will consistently reduce.

Saving the maximum that you can every month and having other vehicles in which to save will go a long way to helping you retire comfortably.

It is important to note that unless you have saved a minimum of 15% of your income per month for 40 years your chances of retiring comfortably are significantly reduced.

Currently you can save a whopping 27,5% of your salary in a tax-efficient way, but most of us are only paying the minimum of 15%.

Whatever decision you make today and when you resign – your old age is entirely in your own hands.

You buy a chocolate bar for 50c. A year later, you go to buy the same chocolate bar and it is 55c. You still have only 50c, but the price of the chocolate bar has gone up. We can say that inflation is at work. The price of that bar has been inflated.

People usually refer to inflation when they talk about the prices of more expensive items, like cars and houses. But inflation also affects things like groceries, house supplies, mortgage payments and rent.

When inflation increases and our salaries don’t, it means we have to spend more of our money to buy the same things that used to cost less.

you must ensure that your pension will be able to keep up with inflation.

If you are behind in your savings
here are a few things you can do:

1 Make Additional Voluntary Contributions (AVCs). The form is available on Imbizo.
2 For TCOE you can increase your contribution to the pension fund via the Modelling Tool which opened in October 2018.
3 Take out a Retirement Annuity (RA) with an insurer – this is your own private pension fund and operates on the same rules.
4 Open a tax-free savings account – you can save a maximum of R500 000 over your lifetime and it will grow with compound interest.
5 Save in a unit trust – it buys your shares in a fairly safe portfolio along with those of all the other participants in the trust.
6 Save in a money market or fixed deposit – remember you are trying to earn more interest than the CPI (consumer price index).
7 Pay off your bond and then use all this money to SAVE, SAVE, SAVE!