Stagflation — which occurs when there is high inflation, and slow economic growth, accompanied by high unemployment — can pose a risk to pre-retirees.

To reduce inflation, authorities increase interest rates. But this measure can also cause high unemployment to persist or worsen. Pre-retirement refers to the period of five to 10 years before normal retirement. How are pre-retirees (ages 50 and up) planning for retirement during this period of financial crisis? Adult workers should keep their long-term goals in sharp focus and not be deterred by the prevailing economic conditions.

World Bank’s Prospect Group Director Ayon Kose said that the developing countries’ per capita growth rate for this year as well as for 2023 will be slower than that of the advanced countries. He said developing countries are “going to be relatively poorer when you compare them with advanced economies”. According to Kose, developing countries have a high level of foreign debt and if interest rates continue to climb then these emerging economies will be in danger of stagflation.

The war in the Ukraine has heavily impacted the cost of fuel, wheat, and other commodities. Russia and the Ukraine are major producers of fuel with Russia being the world’s third-largest producer of oil. Inflation has risen in many countries to the highest level in decades. Locally, due to the Bank of Jamaica’s monetary policy, interest rates on deposits and loans have increased. This makes borrowing more expensive as the central bank seeks to make saving and investing in Jamaican dollars more attractive. relative to foreign currency and to reduce demand in the market. This will help with maintaining stability in the foreign exchange market.

Bank of Jamaica forecasts that inflation will average eight to nine per cent over the next two years. This is contingent on the current situation in the Ukraine not worsening and a reduction in the inflation rate with Jamaica’s trading partners. The economic climate, therefore, remains unstable.

But what does it mean for pre-retirees who are saving for their golden years?

Pre-retirees should take advantage of prevailing market opportunities. Automate savings and save regularly. The small amounts add up. If possible make or maintain the 20 per cent maximum pension contribution. Diversification of assets is important and can’t be overstressed. Also, put an emergency fund in place or increase contributions to your emergency fund. Funds put aside for emergencies or opportunities should be invested in instruments that give compound interest and are low risk. Invest funds in bonds or high-yielding savings accounts for short-term goals and emergencies. Also, resist any urge to reduce or stop pension contributions. A formal pension plan is key to financial security in retirement. It provides consistent income for life during the retirement years. Each contribution made now to a pension plan is paying your future self.

Investing long term and supplementing pension savings can provide a lifestyle of comfort and peace of mind in retirement. Ensure that stocks are included in the diversification strategy. Stocks have proven to beat inflation over time.

Recently, I examined a client’s account. For nine years he invested in a Balanced Portfolio account at BPM Financial Limited. This account has 50 per cent of the principal invested in stocks and 50 per cent invested in bonds. This is a pooled or managed fund (investors’ funds are “pooled” and invested in different companies). After nine years, the stocks have outperformed the bonds by five times. In a year where local stocks have suffered declines the client is pleased that he remained invested in stocks This client has now decided to have all funds from the account be invested in stocks and adds a lump sum to boost the growth for the future. He is taking advantage of the lower prices of shares in the market. When share prices decline it is similar to having goods on sale. This is another reason why pre-retirees should invest in stocks at this time. A managed fund/pooled fund or mutual fund will reduce risk and investment costs. Other benefits of a managed fund include access to a wide range of stocks in one account and the flexibility to make regular payments and ad hoc contributions to the investment. Importantly, having an experienced and professional investment manager to oversee the health of your investments will pay great dividends for the keen investor.

Many persons have not realised that when contributions are made to a pension fund the interest earned on the investment over time will be far greater than the principal that was invested. Most of the pension income will be provided from the interest earned. Stay invested. Time and compound interest are your money’s best friends.

“Little disciplines compounded over time makes a huge difference” — Orrin Woodward.

Grace G McLean is Financial Advisor at BPM Financial Limited. Contact her at: gmclean@bpmfinancial, and visit the website:

E-mail her at livingaboveself@gmail.com