Skip to main content
Back

Plan for retirement with inflation in mind

27 May 2022

How much savings do you think is sufficient for retirement? RM1 million? RM2 million? To live comfortably in silver age, your goal should not be merely to accumulate assets worth a nominal value. Inflation should also be considered to ensure an investment appreciates over the years, so its real purchasing power can satisfy your retirement needs. If an investment strategy is too conservative, the principal could be preserved at retirement, but its purchasing power may be eroded by inflation.

 

The destructive effects of inflation should not be underestimated, as even a slight increase (which compounded over the years) can lead to a heavy burden in retirement. However, its actual impact depends on changes in expected inflation and age. In simple terms, younger people are affected more because they are further away from retirement age, which means high inflation erodes their purchasing power over a longer period.

According to Manulife Investment Management’s calculations, suppose there are three investors aged 25, 45, and 65, respectively, who all retire at age 65 and have the same annual expected expenses after retirement. We found that:

  • A 40 basis points (bps) increase in expected inflation will result in a 21.1%, 13.0%, and 5.1% increase in retirement costs, respectively.
  • If expected inflation increases to 100 bps, retirement costs will increase by 53.0%, 32.6%, and 12.8%,1  respectively.

Looking at it from another perspective, the three individuals must immediately increase the corresponding amount of savings/wealth in their retirement portfolios (i.e., increase their savings) to offset the effects of inflation so that they can withdraw the predetermined amount of real income (i.e., inflation adjusted) each year according to plan.

Manulife Investment Management calculations, as of 1 February 2022.

 

It is, of course, not easy to inject a large lump sum into your retirement portfolio. If investors do not have spare or ready cash or choose to ignore inflation, the purchasing power of their assets will be heavily discounted in the future.

For example, if price levels rise at 2% per year, and the investment return is assumed to be 0% (holding cash and not making investments) and 1% (lower risk assets with an annual return lower than inflation) each year, real purchasing power (inflation-adjusted purchasing power of assets) after 35 years will be 50% and 29% less, respectively!

If the investment return rises to 2% each year, which is equal to the inflation rate, real purchasing power will remain the same throughout the investment period until retirement. Suppose the expected investment return rises further to 5% each year – in that case, your real purchasing power will increase continuously as the return is higher than inflation, and you will have gained 176% by retirement (see the following hypothetical example).

Hypothetical example: The effect of rising inflation on purchasing power

Assumptions:

  • In 2022, an investor at age 30 has RM100,000 of assets and plans to retire 35 years later in 2057.
  • In the same year, the price of daily necessities is RM100, and 1,000 units can be purchased with the assets held.
  • The price of daily necessities (inflation) increases by 2% each year.
  • There are four proposed retirement portfolios, with an annual expected return of 0%, 1%, 2%, and 5%, respectively.

Example for illustration only.

 

With inflation on the rise, if investors cannot inject more savings/funds into their portfolios but wish to avoid eroding their real purchasing power, they can consider postponing retirement.


Manulife Investment Management calculations, as of February 1, 2022.

 

In the example above, if expected inflation rises by 40 bps, investors at ages 25, 45, and 65 would have to postpone retirement by 48, 31, and 13 months, respectively, to accumulate enough savings to cover their post-retirement expenses.

Conclusion

No one can control the rise and fall of inflation or accurately predict how prices will rise in the future. Investors should understand the effects of rising inflation on retirement costs and plan according to the above examples. Therefore, it is crucial to consider inflation when planning for retirement. The growing rate of an investment portfolio (portfolio return) should keep up with or even exceed inflation. As young investors will not be retiring soon, they can tolerate a higher level of risk. Therefore, their portfolios may focus on assets with a greater potential return, such as equity funds and bond funds.

 


1. Manulife Investment Management calculations, as of 1 February, 2022. This is a hypothetical mathematical illustration only. This is under certain assumptions about real interest rates and asset class returns of the multi-asset solutions team. Figures are based on assumptions as set out, and individual circumstances and objectives may vary.

 



Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or derived from sources believed to be reliable at the time of writing but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

This material was prepared solely for educational and informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. Nothing in this material constitutes financial, investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Past performance is not an indication of future results. Investment involves risk. In considering any investment, if you are in doubt on the action to be taken, you should consult professional advisers.

Proprietary Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Investment Management.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions.

Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U). Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration Number: 200709952G). Philippines: Manulife Asset Management and Trust Corporation. Australia, South Korea and Hong Kong: Manulife Investment Management (Hong Kong) Limited in Hong Kong and has not been reviewed by the HK Securities and Futures Commission (SFC).

  • Review and rebalance: navigating waves of volatility

    Market volatility is unavoidable. So, how should investors stay calm and ride through market ups and downs? It’s important to review and rebalance portfolios, so your investment can remain on track. 

    Read more
  • Diversification

    There is no free lunch. But Diversification comes close in investing. A diversified portfolio was shown to have the ability to optimize returns with lower volatility in the long run. Divergence in the performance of portfolios can be attributed to asset allocation.

    Read more
  • 5 benefits of ESG investing

    The demand for ESG investing is surging, as investors in different life stages align their personal values to their financial goals. We list the five benefits of ESG investing.

    Read more
See all
  • How to create regular income for yourself in retirement?

    To create a regular and consistent stream of income during our retirement years, you need a prudent investment plan. Check out the various types of payout strategies.

    Read more
  • Plan for retirement with inflation in mind

    To live comfortably in sliver age, your goal should not be merely to accumulate assets worth a nominal value. Inflation should also be considered to ensure an investment appreciates over the years, so its real purchasing power can satisfy your retirement needs.

    Read more
  • "The MPF big family" ─ Bro has graduated

    "The MPF big family" ─ Bro has graduated

    Read more
See all
Important notice

WhatsApp scam alert & how to verify the status of a unit trust advisor. Click here for more information.

View more
Notice

We have migrated our website domain name to www.manulifeim.com.my.

View more
Important notice

WhatsApp scam alert & how to verify the status of a unit trust advisor. Click here for more information.

View more
Notice

We have migrated our website domain name to www.manulifeim.com.my.

View more
Confirm