How inflation can affect retirement and what to do

Inflation is a general increase in prices of goods and/or services and simultaneous fall in the purchasing value of money. [iStockphoto]

Financial independence is a goal we all strive towards achieving. The new found material emancipation when one starts earning may cause one to forget that this is the ideal time to begin planning for your retirement.

Ideally, one should maintain same lifestyle they had in their productive years after retiring. There is no reason why one should lower their standard in their sunset years.

However, for this to happen, one needs to methodically plan out the financial aspect. It is at this stage of planning that the risk of inflation should be incorporated.

Inflation is a general increase in prices of goods and/or services and simultaneous fall in the purchasing value of money which means one has to dig deeper into their pockets to pay for these. Inflation may occur progressively over a period of years or sporadically over a few months.

A report released by the Kenya National Bureau of Statistics (KNBS) noted that year on year inflation rose sporadically in just a few months. It was at 6.4 per cent in April 2022, 7.1 in May 2022, 7.9 in June 2022, 8.3 in July 2022 and at 8.5 per cent in August 2022.

It was a turbulent increase in inflation and a rude wake-up call to Kenyans about to retire as they realised their retirement savings would not sustain their lifestyles.

Evidently, one cannot outrun effects of inflation. The solution is to plan a lot more during one's productive years so that one has sufficient funds for their upkeep.

Your wants and needs are bound to evolve as you edge closer towards your retirement. During one's productive years, their wants and needs usually revolve around working towards owning a rent-free and/or mortgage-free home, educating one's children to university, investing their money and so on.

However, after retirement, it is argued that one may decide to travel more, or get a more comprehensive health cover. Say for example someone who is employed is contributing 10 per cent of their income towards retirement, which is supplemented by their employer and other income earning ventures, this may seem sustainable in the long run assuming one never withdraws from their retirement account.

Taking inflation into consideration may look something like this, assume that the inflation rate over a certain period is say 5 percent every year, (This figure may change over time so it is important that one keeps tabs on the news), this therefore means that your current cost of living in your retirement years will be 5 per cent more.

As such, one needs to overbudget for their retirement to increase their chances of retiring comfortably. What may seem like an insurmountable of money now may be peanuts in a few years. That is the tragedy caused by inflation. Failing to invest in other ways of making money after retirement is truly living incautiously. During your productive years, one should consider innovative ways of making money. These include, investing in long term investments such as interest earning shares and real estate.

-The writer is CEO Enwealth Financial Services Ltd