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Will the cost of inflation impact your retirement funds?


2 min read

Will the cost of inflation impact your retirement funds?

With three decades of unusually low inflation in the UK, it is no surprise that the return of double-digit figures has led to market volatility.

Chris Ronan
Chris Ronan

The unexpected rise of inflation to 10.4%1 last month has both surprised the market and put extra pressure on consumers.

We will all have keenly felt the shortened reach of our pound, with a measure of inflation on the weekly shop reaching 18.2% in February 20232 and domestic electricity bills up 66.7% in the 12 months3.

This is particularly so for retirees who may be concerned about their ability to cover higher living costs. For many retirees their main source of income is their pension or savings and investments. However, retirees often have multiple income streams some of which may automatically increase with inflation.

The state pension will rise of 10.1% on 10th April 2023 in line with CPI rises from September to September4. It won't help cover all of the extra cost which retirees may be seeing, but it can go some way to help with rising grocery bills.

However, if prices are rising faster than your income you may be required to draw from your capital, and this could be unsustainable over the longer term. If you have a known requirement for funds from your portfolio it is best to discuss this with your Investment Manager as early as possible, so that they can manage your portfolio accordingly. This is particularly important at the moment, as we expect continued market volatility in 2023.

It is also worth taking some time to reassess your short-term spending and accessible emergency savings pot. The latter should be able to provide immediate funds for an unforeseen spending requirement and having a pot of around 3 to 12 months spending is important. You may want to consider the certainty of your income streams when assessing the size of this pot.

One silver lining to the higher inflationary environment is that savings accounts are now paying higher levels of interest. Even so, interest rates are significantly behind inflation in the UK and although the market is volatile, equities have been shown to beat inflation over the longer term. As such a diversified portfolio spread across asset classes is key when balancing the need to preserve the real value of your wealth whilst providing income to help fund retirement.

Volatility can cause uncertainty, but it is also a source of opportunity. Working with an experienced professional can provide crucial support throughout turbulent times when facing investment decisions.

Past performance is not a reliable indicator of future performance. Your money may go up as well as down and you may receive back less than you invest.