Inflation is like some insidious disease eating away at the purchasing power of one’s hard earned savings. It is bad enough for those saving, but it is potentially worse for those in retirement who have to make do on a relatively fixed lump sum of capital.
In New Zealand, the bank is regarded as a safe place to store one’s money and we rarely think we could lose it. However, if that money sits for a prolonged period in an on-call savings account, then its potential after-tax return may only be 1.5% (or less). If inflation is tracking at 2%, then the purchasing power of that money is going backwards. This means you are technically losing money - not in physical dollars lost but in its ability to achieve the things you were storing it to do.
The recently released ANZ Retirement Savings Confidence Barometer showed a significant drop in investors’ confidence (from 50% being confident to only 39% being confident) of meeting their retirement savings goals. The drop is due to the survey adjusting peoples’ savings targets for inflation for the first time. The results show that many people have not factored inflation into their savings plans. Twenty eight percent of those in the survey who were saving indicated they intend to increase their KiwiSaver contributions to reach the higher inflation-adjusted target. Logically, those individuals should not only increase their savings amount, but also assess whether they are with a good performing KiwiSaver provider and if they are using the right asset class fund to meet their risk profile and their longer term financial goals.
For those who are already retired, the choices are more limited. Obviously, if all the money is to be used up in the next one or two years, then retaining it in the bank is a prudent move. However, if the money is there for the next generation, or is going to be slowly eroded over the medium to long-term, then having a bigger percentage in investments with a capital gain potential makes good sense.
Growth oriented investments such as shares are often perceived as being risky and yes, they can be over the short-term. However, a prudent allocation to good quality shares (usually via a high quality actively managed fund which can achieve better diversification than by holding individual shares) can help to minimise the ravages of inflation and provide a higher return over the medium to long-term. The secret is to get the right mix of growth vs income assets to meet your projected goals and your risk tolerance. The team at Milestone has a number of quality risk tolerance measuring tools that they can use to help you define your comfort level. Once this has been defined, they can work to develop specific investment portfolios designed to achieve the level of investment return required to meet your goals.