Inflation and interest rates and their effect on your savings and retirement plans

The battle is to keep ahead of inflation and interest rates

The need for income growth is the greatest, the younger a person is. That’s because of the effect of cumulative inflation increases with life expectancy.

For example, if we assume an inflation rate to average 4 per cent per year long term, then after ten years a sum of money is worth about 68 per cent of its original value. After twenty years it is 46 per cent and after thirty years, 31 per cent.

Of course, with a higher inflation rate your money will depreciate at a faster rate, while with lower inflation your money will depreciate at a slower rate.

How to survive a low inflation and interest environment?

You need dividend growth to beat low(ish) inflation and interest!

How to create an inflation proof source of
income in retirement?

Some investment and pension advisers recommend that retirees keep at least some of their money in a diversified stock portfolio, particularly in the early years of retirement. In particular shares with a history of rising dividend payments or the income funds that invest in them.

Instead bonds (or the income funds that invest in them) and annuities - the mainstay of most retirement portfolios - tend to offer fixed payouts, which can be quickly eroded by inflation.

Assuming that you are willing to accept the risks of holding individual shares you need to consider dividend growth stocks.

These companies not only provide you with an inflation adjusted stream of income over time, but also with capital gains, which preserve the purchasing power of your intial purchasing amount.

Inflation on the Rise!

In Janury, 2011, annual consumer price inflation (CPI) rose to 4 per cent. January represents the eleventh month in a row that CPI has been over the threshold of 2 per cent.

Inflation in Britain has been surprisingly stubborn over the past year, and is running well above comparable rates in the eurozone and United States.

In comparison, the average increase in wages, which on average are just 1.9 per cent higher than a year ago, means almost all employees are suffering from a significant fall in their standard of living.

Importance of inflation and interest rate

With low interest rates, rising living costs and expenses are cutting into our disposable incomes and leaving us progressively worse off while any savings will be eroded away.

With the Bank of England bank rate frozen at 0.5 per cent -and not many current accounts or even 'savings' accounts paying this er even less than that- savers have lost almost 4 per cent during the last year in terms of reduced perchasing power.

".....after taking inflation into account all cash savings accounts
are currently paying a negative rate of interest!"

This means, as prices across the basket of goods used by the Office for National Statistics have risen 5.3 per cent in the last year, that what you could buy with £100 a year ago, now costs £105.30

Currently, there are NO savings accounts out there that can help you take on the threat of inflation. In due, course, we intend to publish a comparison table including savings account interest rates.

Long Term Problems for Savers!

UK savers also face long-term problems, such as ongoing higher living costs, the risk of unemployment, and fewer people paying into personal pensions or planning for retirement.

Instead, they are using their money to just keeping themselves afloat. And, if possible, even paying off excessive debt. Curtailing spending and conserving cash.

This is good news as more and more people start to realise that they have to change their spending habits, and without realising it, they are taking the first steps in building wealth and becoming an aspring early retirement investor!

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