Does inflation matter to one’s retirement plans? Richard Collinson “reads the runes” on what might lie ahead…and how we can make sure our plans stay on course.

It seems like a long time ago that inflation was a concern to the economy. Since topping out at 4.46% in 2011, it’s been bumping along at just above or below the Bank of England’s target rate of 2%… until now. That, in turn, has enabled the BoE to dial down interest rates in order to boost the economy and help homeowners with their mortgages.

However, according to all the media reporting, we are now heading into a period of relatively high inflation, fuelled by higher commodity prices around the globe, supply chain issues and the combined impacts of Brexit and Covid.

In October 2021, UK inflation hit 4.2%: double the 2.1% seen just three months earlier. The Bank of England’s new chief economist, Huw Pill, only recently suggested that inflation could reach 4% by the end of the year – a figure already out of date – and might be over 5% by early next year. Other forecasts indicate a peak of 6% in 2022.

We are certainly seeing evidence of all of this in fuel and electricity and gas prices, as well as the cost of a range of groceries, dining out and many other areas where we spend our hard-earned money.

In it for the long term?

Now, many people are saying that this is a short-term phenomenon, but I for one am not so sure. Certainly, fuel and energy prices may settle lower when the supplies of oil and gas recover. But other factors may well indicate a more prolonged period of high inflation.

Shortages of labour brought about by the return home of many migrant workers and the reduction in the numbers of workers not returning to the jobs market following lay-offs during the pandemic would suggest higher wage growth – a supply and demand issue – leading to further rises in the cost of goods and services.

In addition, the Bank of England’s default antidote to inflation – higher interest rates – also leads to higher borrowing costs for mortgages and other loans, commercial and domestic… thus, at least in the short term, leading to further inflationary pressures. If savings rates stay well adrift of inflation, that can have a particularly deleterious impact on some of our investments.

Planning ahead

We have enjoyed a prolonged period of low inflation and low borrowing costs which, it was thought, would be the new normal. So, time for a re-think.

If inflation were to stay at or above 5%, the consequences could be pretty unpleasant for retirees – especially those whose incomes don’t always mirror inflation. I would, however, suggest that this is unlikely.

But how can we get a handle on what all of this means for our retirement? Fortunately, this is where RetireEasy comes to the rescue, because it allows you to model any future inflation rate into your plans, demonstrating where there might be shortfalls in the future and allowing you to plan accordingly.

Moreover, it models up to 40 years ahead and uses the average inflation rate over that period, taking out the inevitable peaks and troughs and enabling you to look at the bigger picture.

You don’t necessarily need to assume the worst case: the Government’s target is 2% and the Bank of England is required to explain themselves if it differs significantly from that. You might estimate a 2% level if you think the authorities can achieve that, adjust it upwards if you feel that’s unfeasible, or downwards if you believe that inflation during the next 40 years will actually be lower.

Either way, by choosing RetireEasy LifePlan Premium, at just £7.99 per month, you can model and compare different assumptions so you will know, whatever the outcome, how your finances will perform in retirement.

And remember you can save money by selecting the Annual payments option.