Retirees need to understand the effects of inflation!
Retirees need a measure of pensioner inflation to be re-introduced to help highlight the dangers of inflation in retirement and to be included as part of the guidance guarantee provisions for UK retirees.
Steve Webb recently announced that retirees will be given an 'indication' of their life expectancy and despite it only being an average figure, it should help to tackle the general under-estimation of life expectancy throughout the country.
However, life expectancy should also be considered alongside inflation as the two go hand in hand.
Experience shows us that the effects of inflation are often overlooked when planning for retirement. Furthermore, we know pensioners suffer a higher rate of inflation than the much publicised CPI figure.
Pensioner inflation is higher than average UK measures because the price of essentials, food and utilities for example, have seen the largest price increases. Goods that have fallen in value, such as technology and gadgets, are generally not to the benefit of most retirees.
Research from Saga in April 2014 showed that the average annual inflation rate since September 2007 had been 3.2% but for 65-74 year the rate was significantly higher at 3.8% and for over-75s higher again at 3.9%, some 22% higher than the UK average rate.
At 3% annual inflation an income would halve in value in 23 years and at 5% inflation the same would happen within 14 years.
We are in a low inflation economy but many retirees ignore inflation at their peril. Even at low rates of inflation, the effects can be devastating and who's to say how future inflation will pan out - it wasn't all that long ago when we had double digit inflation!
Longevity and inflation are two of the biggest risks to tackle when planning retirement income. I'm all in favour of educating retirees about average life expectancy and believe for this to be meaningful, it must also highlight the effects of inflation. And to be truly beneficial, a more accurate measure of pensioner inflation would help to manage expectations, improve understanding and help retirees plan their long-term retirement income.
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