Is high inflation deflating your retirement savings?

The world has sneezed – so have your retirement savings caught a cold? Well, if you’re pinning your hopes on term deposits to get you through, you can be sure that they’ve definitely got the sniffles.

There are lots of interwoven factors – Covid; the war in Ukraine; the soaring price of commodities – and suddenly, inflation has gone through the roof. Inflation is the purchasing power of your money. In terms of every-day life, that means that the $100 in your wallet doesn’t go as far. It doesn’t buy as much stuff.

And in terms of your retirement fund, if you are keeping all your savings in a term deposit rather than alternatives like managed funds, you are actually going backwards. With an inflation rate of almost 7% and term deposit rates of around 2%, you’re going backwards quite fast.

“Term deposits are good for short-term storage, but the rates are always going to sit below inflation,” cautions Glyn Lewis-Jones of Motueka’s Castle Trust Financial Planning. He sees far too many people who are at or nearing retirement age with their savings devaluing in term deposits. If you’re not proactive, this loss compounds over time. “After four or five years, that’s a nightmare.”

But surely the government will come to the rescue and solve the inflation issue? Glyn’s matter-of-fact response is that it can’t. “It can’t fix the problem, because inflation isn’t caused here, it’s caused worldwide.” “It can fiddle round the edges and treat the symptoms by, for example, increasing benefits, but the New Zealand government on its own can’t cure the problem.”

He says that although we can’t solve the issue of inflation, we can be proactive about how it affects us personally, by making sure that anything more than we’re immediately spending is invested in a place where it can go up in value.

If you are nearing retirement, do not rest on your term deposit laurels. Glyn says it is prudent to seek advice about how to stop inflation from slowly deflating your savings. “Rising inflation is yet another reason to get your finances sorted,” he says. Call in to see the team at Castle Trust, on Motueka’s High Street, to make a plan that will keep your savings in robust health.