COVER STORY
The squeezed middle
People who are struggling to make ends meet are not the only ones whose retirement plans will suffer from higher inflation : savers who appear to be well off will also be affected . For example , let ’ s look at 52-year-old Helen , who has a £ 150,000 pot and is saving £ 500 a month . She is justifiably pleased with her savings record and believes she is in good shape for retirement . However , 7 % inflation can do a lot of damage to a retirement pot that may only be growing at 4 % a year . If the situation persists over the 15 years to her retirement , the real value of her £ 150,000 of savings would drop to £ 96,280 .
Those nearing retirement also face difficulties . For example , 67-year-old
Anthony has a £ 500,000 pot that is growing at 4 % a year and yielding 4 % for him to live on . With a chunky pot and a good investment strategy , he seems to have his retirement largely sewn up – as long as inflation remains at the Bank of England ’ s 2 % target for the duration of his retirement .
However , with inflation at 7 %, that pot is running to a standstill and its real-world value is falling . If Anthony attempts to maintain his living standards without trying to increase his investment returns , his money will run out before he has reached his 86th birthday .
He can ’ t go back to work , so has little choice but to adjust how much he is taking from it – thereby compromising his standard of living . The alternative is that he runs out of money .
It is easier for Helen to turn her fortunes around . If she decided she could take a little more risk , and her capital grew at 7 % a year rather than 4 %, she could mitigate some of the losses created by inflation . Her 15-year time horizon to retirement gives her plenty of time to ride out any stock market volatility .
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