By Ross Marriner
Inflation is like a thief in the night. It sneaks up on you, gradually eroding the purchasing power of your money. Gerald Ford, former president of the United States, referred to inflation as “public enemy number one!” It is essential to guard against inflation when developing your financial plan.
Inflation represents how much more expensive a relevant set of goods and/or services have become over a certain period, usually over a year. The official inflation rate in South Africa, as reported by Stats SA, is currently 6.8%. This rate changes on a monthly basis and is influenced by many factors, such as the oil price, exchange rates and the change in the price of a basket of goods and services used by a “typical” consumer. However, there is not just one inflation rate that applies to all areas of our lives.
Medical inflation has almost always exceeded the published rate of inflation. The average increase in private healthcare costs since 1990 has been 10.1%. Kidney dialysis, for example, would have cost a patient approximately R180 000 in 2016 but will likely cost around R470 000 in 2026 and R1.99m in 2041.
Food prices have also changed dramatically over the years. A Wimpy hamburger and chips used to cost 35 cents in 1972. The same meal now costs around R 65. Ordering a steak at a Spur restaurant back in the 1970s would have set you back about 50 cents. Today, a 200g rump steak will cost you R 135 at your local Spur.
Once you retire, if your income does not at least grow in line with inflation, you will either experience a decline in your standard of living, you will run out of money, or you will be reliant on the State or others for financial support.
Many investors, especially retirees, tend to be influenced by the constant flow of negative information emanating from various sources. When it comes to investing, they seek out the so-called “security” of cash or cash-related instruments instead of growth assets such as equities. This strategy is likely to generate a return which countless studies have shown hardly keeps pace with inflation over time.
Although exposure to cash-type investments is normally a key component of a well-diversified portfolio, too much exposure to this asset class could be detrimental to the growth of your portfolio. If opportunities or challenges present themselves in other areas, you or the experts looking after your investments would not be able to make the necessary adjustments to protect your assets from the ravages of inflation.
Regardless of whether you are starting out in your career, are well-established, approaching retirement, or you have already retired, you would be well advised to consult with an experienced Certified Financial Planner® to develop a plan to ensure that your money outlasts you. You need to ensure that your investment portfolio is suitably diversified and invested appropriately in order to grow your wealth in real terms over time.
Rands and Sense is a monthly column written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891