Inflation Illusion

Old Mutual Balanced Fund manager, Graham Tucker, explains in an article published on Fin24 how many investors suffer from something he calls ‘inflation illusion’. This essentially means that many people aren’t completely aware about the effects of inflation or how much it will impact their savings over time.

For example, the average inflation rate of vehicles since 1990 has been 5.8%. This means that a medium-sized sedan that cost ZAR260,000 in 2016 will likely cost ZAR1.05m in 2041. At the same time, the cost of sending your child to a top private school is increasing at an inflation rate of 9.2%, which means that a year’s tuition and board can be expected to cost about R1.81m by 2041.

High increases in the price of private health care and food will also occur as a result of high inflation rates. To give you an idea, a report by Old Mutual Investment Group’s MacroSolutions boutique highlights how a Spur burger that only cost 30 cents in the 1970s was priced at ZAR72.90 in 2016.

It is, therefore, important to take into account the impact of inflation on your investment returns. Tucker emphasises that “if your retirement income does not at least grow in line with inflation, you will either experience a decline in your standard of living or you will run out of money.”

If you budget for a fixed monthly retirement income of ZAR10,000 a month, this will only actually be worth about ZAR1,700 a month in 30 years’ time – taking into consideration an annual inflation rate of roughly 6%.

It is, therefore, important to be aware of the long-term compound effects of inflation. If you’re feeling uncertain about anything, arrange a meeting soon to ensure that you have planned carefully and invested to achieve inflation-beating returns that will secure your future goals.

Posted in Blog, financial planning.