This month has seen inflation rise again to 3.4%. When you’re working, inflation can feel manageable. However, once you retire and start taking an income from your pension or savings, inflation can have a far greater impact.
Planning ahead for this is essential. By understanding where inflation is most likely to affect you in retirement, you can start building a resilient financial plan and avoid unnecessary stress in the future.
Key costs to consider in retirement
- Increased living costs – Many retirees may spend more time at home and find that their household bills, particularly heating and energy, increase. With the current cost of living crisis, we have seen sharp rises in energy and food costs. These increases, and any future similar scenarios can have a significant impact on retirees’ planned outgoings.
- Medical expenses – We’re lucky to have universal healthcare through the NHS. However, it doesn’t cover everything. As you get older, healthcare costs can rise and may include the need to consider long-term care, whether at home or in a residential facility.
- Family support – Retirement doesn’t always mean that your financial responsibilities stop. You may be supporting your family with costs such as:
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- University fees
- House deposits
- Supporting children and grandchildren
- Older relatives’ living costs
- Economic fluctuations – Inflation erodes purchasing power over time, particularly for essential items such as food, housing and energy. For example, the average UK house price has risen from around £28,838 in 1985 to approximately £284,691 in 2024. Even modest inflation, compounded over decades, can significantly reduce the real value of your retirement income.
What you can do about it
With careful financial planning, these risks can be mitigated.
- Pensions and retirement income – Understanding how your pension income responds to inflation is crucial. Some pension annuities increase annually, whilst others remain fixed. You might have taken out a drawdown policy, where your income may not be keeping up with inflation. Relying solely on one income source can leave you exposed, so having a mix of retirement streams is often beneficial.
- State Pension – The State Pension is currently protected by the Triple Lock, meaning it increases annually by the highest of inflation, earnings growth or 2.5%. However, future policy changes can’t be ruled out. It’s important to know your State Pension age and whether you’ll receive the full entitlement based on your National Insurance record. This can be done at Check your State Pension forecast – GOV.UK
- Investment Strategy – A diversified portfolio can help protect against inflation and market volatility. Holding a balance of equities, bonds, and cash can provide growth potential while managing risk. This can help to ensure your money lasts throughout retirement.
- Tax efficient planning – Making use of tax efficient vehicles such as pensions and ISAs can significantly improve long-term outcomes. A financial adviser can also help you plan around pension allowances and potential Inheritance Tax liabilities, ensuring your money works as hard as possible for you.
- Emergency Fund – An accessible emergency fund can provide a vital safety net. It should cover three to six month’s worth of expenses. This will allow you to deal with unexpected costs without needing to access your investments or relying on credit.
- Regular reviews – Retirement planning isn’t a one-off exercise. Regular reviews ensure your plan remains aligned with your goals, spending needs, and the economic environment. Working with a financial adviser can help you adapt to changes whilst staying on track to live the lifestyle you want.
At Origen, we help ensure your income needs and plans remain robust in the face of inflation and unexpected costs. Our goal is to guide you confidently into retirement so that you can focus on enjoying it.
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