Many investors could be in for a nasty surprise when they discover how damaging the menace of inflation could be on their savings. They need to plan for the effect inflation will have on their savings and ensure that they make use of a suitably diversified portfolio of investments to enable their savings to grow in real terms over time.
The official inflation rate is reported by Stats SA. It changes on a monthly basis and is influenced by a number of factors such as the oil price, exchange rates and the change in the price of a basket of goods and services used by a “typical” consumer. However, there is not just one inflation rate that applies to all areas of our lives. According to a report commissioned by Old Mutual, the average motor vehicle inflation rate in South Africa since 1990 has been 5.8%. For example, a mid-sized family motor vehicle that would have cost you R260 000 in 2016, will most likely cost around you R455 000 in 2026 and R1.05m in 2041.
The average increase in private health care costs since 1990 has been 10.1%. What would have cost a patient requiring, for example, kidney dialysis in 2016 approximately R180 000, would cost around R470 000 in 2026 and R1.99m in 2041.
The same research found that a hamburger, which used to cost 30 cents at a well-known chain of family restaurants in the 1970s, now costs around R75. Ordering a steak back in the 1970s would have set you back about 50 cents. You will now have to pay around R115 for the same meal. Instant coffee used to cost 25 cents at the local supermarket. For the same item, you will now be charged over R80.
Once you retire, if your income does not at least grow in line with inflation, you will either experience a decline in your standard of living, you will run out of money, or you will be reliant on the State or others for financial support.
Many investors, especially retirees, tend to be influenced by the constant flow of negative information emanating from various sources. When it comes to investing, they seek out the so-called “security” of cash or cash-related instruments in place of growth assets such as equities. This strategy would lock in a return which countless studies have shown hardly keeps pace with inflation over time.
Although exposure to cash-type investments is normally a key component of a well-diversified portfolio, too much exposure to fixed deposit investments could be likened to going on a three-year long blind date. If opportunities or challenges present themselves in other areas, you or the experts looking after your investments would not be able to make the necessary adjustments to protect you or take advantage of other available opportunities.
Regardless of whether you are starting out in your career, are well-established, approaching retirement, or you have already retired, you would be well advised to consult with an experienced Certified Financial Planner® to develop a plan to ensure that ensure that your money outlasts you, by taking the effects of inflation into consideration.
Rands and Sense is a monthly column, written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891