Inflation is the rate at which prices of goods and services increase in an economy over time. When prices of goods and services increase the value of the dollar falls.

For many retirees, it is a challenging time to be in retirement. Faced with a high cost of living and a fixed income there seems to be no relief on the horizon. Rising inflation rates has become a global phenomenon and developing nations, like Jamaica, are hard hit.

Food and energy prices have pushed inflation rates in the United States to the highest it has been in 40 years. In May 2022 the inflation rate stood at 8.6 per cent per annum. Inflation in the UK is also at a 40-year high. Inflation in the UK rose to 9.1 per cent in May 2022 in an atmosphere of rising cost of petrol and high food prices. Locally the Bank of Jamaica reported that inflation target remains at 4-6 per cent, but the inflation rate recorded was a high of 10.9 per cent in May 2022. The economic climate of elevated inflation is expected to continue into 2023.

Reduction in purchasing power

The current economic conditions have seen declines in the value of retirement funds. The purchasing power of the near-retirees’ income is buying less and less, while the value of pension funds contract. Pension contributors are concerned about how they will cope in retirement if the size of their pension funds contracts. Employers, plan sponsors, and employees will, therefore, have to examine their pension fund investment mix. Employees are concerned now more than ever before about their pension contribution. They grapple with questions about whether they should have maximised their pension contributions or express regret that they started their retirement journey too late.

Some ponder on past mistakes, such as spending their pension contribution refunds upon changing jobs instead of investing for the future and failing to invest in stocks earlier in their working lives. The power of compound interest would provide the necessary buffer during periods of economic crisis. Investing for decades in stocks will allow the exponential growth in fund value to absorb economic shocks in times of market turmoil.

Some new retirees, meanwhile, are reeling from the triple effect of declining stock markets, low interest rates on bonds, and unrelenting high inflation. It’s a troublesome time for all retirees as they are spending more to buy less goods and services.

A World Bank report addressed the challenges faced by developing countries with numerous “overlapping crises”, such as the ongoing impact of the pandemic, climate change, price increases, food security, a looming debt crisis, and war in the Ukraine. The World Bank plans to implement far-reaching programmes to assist the most vulnerable in developing countries. In Jamaica the authorities are pursuing the public sector review and Finance Minister Dr Nigel Clarke is optimistic that thousands of public sector worker will benefit from better take-home pay. It is hoped that with higher remuneration government employees have the opportunity of obtaining increased pension benefits.

How should pre-retirees and retirees respond?

Now is the time for seniors and pre-retirees in the government service to review their pension contributions and increase their saving and long-term investments. Pre-retirees and seniors in both the public sector and private sector should ensure that stocks are included In their investment portfolios for the likely years they will spend in retirement. Stocks have better growth potential than bonds for the long term and are ideal to supplement fixed pension income in a high inflation environment. Keep your emotions in check when it comes to investing in stocks. Always remember that stocks are your best protection against inflation. It’s important to understand that, like natural storms, financial storms in the stock market don’t last. Your investment will weather the storm. Preparation is key. Delay retirement if possible or secure a part-time employment. Reduce spending and debt as much as possible and automate savings.

Retirees are probably the hardest hit at this time. There are, however, retirees who are not totally dependent on fixed pension income and have extra cash to spare due to a lifetime of long-term investments and divestment strategies. Retirees who are dependent on fixed pension income may consider delaying travel or vacation and avoid extra spending at this time. For retirees who invest in stocks, now is not the time to panic and sell. Withdrawing funds from the stock market during a decline will sabotage future growth as more retirees are living longer and the cost of living is getting higher. Withdraw funds from your short-term instuments, for example, money market accounts and bonds. Amid the stormy economic climate, seek the guidance of a professional and experienced financial advisor to assist in navigating the crisis.