By: Bill Blevins
INFLATION IS such an insidious destroyer of wealth that I sometimes wonder why it is not given a wealth warning. It can be likened to a virus, slowly destroying the strength of your savings until they have wasted away.
While the days of official government double inflation digits will hopefully remain in the past, inflation should not be disregarded as unimportant, especially since there is evidence that, for some people, their personal inflation rate has in fact hit 10 per cent. High inflation is a serious threat to your financial security. Once inflation starts to climb and gets a hold it can be difficult to control.
Retirement should bring freedom from worry and that involves your finances too. You want to be sure you have enough money behind you to provide a comfortable and happy lifestyle and that the wealth you have spent a lifetime accruing will not vanish over the years. Grandparents and parents may also wish to pass on a nice financial legacy to their children and grandchildren, as well as helping their offspring with occasional living expenses. It is therefore important to do what you can to maintain the value of your money so that it has the same spending power in the future as it has today.
Many retirees prefer to feel that their money is in a safe place and opt to keep the bulk of it in a bank or building society where they know what the interest is and what the returns will be. They also feel comfortable with the fact that their capital is not at risk in a bank.
In fact, a bank or building society account, even if it is a high interest account, can be an unsafe place to keep all your savings. Inflation will steadily erode your funds and, as you near the end of your retirement, your capital could be worth up to 50 per cent less than it is today. It will buy less, your money won’t go as far and you could find yourself in financial trouble if care is not taken now.
In Britain, the official inflation figure has hit a record three per cent, the highest rate since 1997. Economic watchdogs predict that inflation will continue to rise throughout the year giving grave concern to those who try and rein in the upward climb.
The UK inflation rate is based on the Consumer Price Index (CPI), a basket of goods that often bears little relevance to what individuals actually spend their money on. The three per cent high has been blamed on the rise in the cost of rail fares, fuel and lubricants, which rose last year and there was an increase in fuel duty in December.
Culprits
Other culprits were the increased price of furniture and household goods, computer games, non-fiction books and DVDs – the latter somewhat non-essential goods, but ones you may like to buy. University tuition fees also suffered an increase of up to 50 per cent from last September.
Energywatch, the independent gas and electricity watchdog, reported in December that average gas bills have risen by 94 per cent in three years and electricity by 60 per cent, equating to combined average bills in excess of 1,000 pounds sterling.
Other analysts feel that the true public costs of increased inflation is better revealed in the Retail Price Index (RPI), which includes housing costs and the interest rate excluded from the CPI. The RPI rose to 4.4 per cent in December 2006, up from 3.9 per cent in November, the highest for 16 years. RPIX inflation, which excludes mortgage interest payments, was up to 3.8 per cent in December, from 3.4 per cent in November.
All these official figures do not show the inflation rate in real terms for you. Research has revealed that the real inflation rate for British pensioners is near to nine per cent and for middle earners 10 per cent.
The UK inflation figure is above the Eurozone inflation and is the highest of the G7 countries. It is just below the Portuguese inflation rate, which stood at 3.1 per cent for 2006. Both the Bank of England’s and European Central Bank’s (ECB) inflation rate target is two per cent.
With the UK bank interest rate currently at 5.25 per cent and the ECB’s at 3.50 per cent, you don’t really have to bother with the calculations to see that when you subtract the inflation rate the returns are not good. Capital sitting in a bank deposit account is earning you nothing and the value of it deteriorating over the years.
The key to combating the wasting effects of inflation is to place your money in structures that offer better rates of return over inflation. By all means keep a certain amount handy in a bank account for day to day living and emergencies, but the remainder could be invested wisely so that the yields are healthier and your capital has the potential to grow.
Your assets have to increase in line with inflation otherwise their value will erode. There are low risk investments available for those who don’t feel comfortable with high risk, but a careful blend of the two will provide a well balanced portfolio that is likely to yield higher returns for you than a ‘safe’ bank account and help maintain the value of your money.
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