Will inflation spoil your retirement?

In the last few weeks, the financial press has become excited about inflation and it seems that markets have started to worry that inflation may begin to rise.

It is, of course, worth remembering what the UK inflation figures actually are, as this does provide some important context:

  • CPI rose by 1.6% in the 12 months to April.
  • CPIH (which includes the cost of owning a house, but not house prices) rose by 0.7% over the same period.

So, it’s still much lower than the Bank of England’s target level, and nothing like it was in the 1970s (annual inflation reached 24.9% in 1975!).

However, the markets have been spooked and the press seems certain that inflation is going to rise. How might your retirement be affected if inflation did start to rise?

The obvious effect is that prices will rise and that your income and capital will be able to buy less of the things you want. For many people, that might mean that the amounts available for legacies and discretionary expenditure will reduce.

But it’s worth remembering that, as you age, the amount you consume tends to reduce, as you move through the three phases of retirement (“Go-Go”, “Slow-Go” and “No-Go”). So whilst the price of things may be going up, you might be buying fewer things, and, as a result, you might not feel less well off. It’s similar to what many people experienced on furlough – they had less income, but they had less to spend it on. The effect of rising inflation is unlikely to be as bad as you might think, therefore.

Less obviously, there tends to be a link between investment returns and changes in inflation levels. Markets worry that rising inflation will lead to rising interest rates, and that usually results in a reduction in asset prices – particularly assets which don’t generate much, or any, income.

A combination of falling investment values and rising prices is definitely not a good thing.

However, good financial planning should come to the rescue. We can stress test your retirement plan, looking at your expenditure, assets and income; we can use data for inflation and investment returns going back to 1915, and see how your retirement plan would have fared, had you retired at any time since then. So, we can demonstrate whether your plan would have worked if your retirement had started in 1967, just as inflation began to surge out of control. The period since 1915 includes two World Wars, and several stockmarket crashes, as well as the 1970s inflation crisis.

Sussex Retirement Planning Ltd – What is cashflow planning? from CashCalc

When we put together a retirement plan for our clients, we include stress testing as part of the standard service; it’s an essential component of any plan, and is designed to give you a clear picture of the risks you might be taking, and to give you the peace of mind you need.

If you would like us to stress test your retirement plan, please contact us.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner


This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

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