IN recent times a number of nations have been grappling with high inflation. In Jamaica, prices of goods and services have been increasing at an average rate of 8.12 per cent each year.

It is said that inflation and purchasing power are two sides of the same coin. Inflation measures the rate at which prices increase in an economy over time and purchasing power refers to how much you can buy with your money. An article in the press recently told the tale of a Jamaican retiree who complained that reduced purchasing power was “putting strain on pensioners”. He said that the purchasing power of his pension was reduced to a quarter of what it could buy 20 years ago. But what can pensioners do?

It’s important that retirees plan carefully how their monies are invested in retirement. Special attention should be paid to the accumulated rate of inflation, and funds invested to counter inflation. This means that retirees who received a lump sum upon retirement should consider an investment strategy that will increase purchasing power of their money. Will you be able to maintain the same standard of living that you are enjoying now in 20 years? There are different factors that can impact the purchasing power of your money. Major unexpected events locally or globally can cause prices to increase and threaten the purchasing power of your money. Policy changes made by the government or regulating authorities can result in pension income losing purchasing power. Changes in an industry, for example, the energy sector, can cause oil prices to increase and potentially have a devastating impact on retirees’ ability to maintain their lifestyles.

I had a discussion with an individual recently, who retired 10 years ago. Upon retirement, she invested her gratuity of $2 million. The investment has grown by $700,000. She is disappointed that the investment growth is not keeping pace with inflation. An analysis of her investment showed a return of 3.5 per cent per year, but the prices of goods and services are increasing at an average rate of over eight per cent per year. This means her funds are behind inflation and rapidly losing purchasing power. It doesn’t pay to be risk-averse. Some level of risk is required for growth. A diversified strategy is needed. This retiree is now re-investing her funds differently in order to achieve her desired financial goals.

The challenge for many retirees is not just having a fixed income from their pension, but not having additional sources of income. It is difficult to maintain the standard of living enjoyed prior to retirement with an income that’s not increasing, while employees in the same job you had are earning far more and are able to live comfortably while benefiting from ongoing salary increases. As one retiree shared with me, “when you are in retirement the pay checks stopped but the bills keep coming”. But not only are the bills a staple in retirement, but the bill payments are also increasing due to inflation. They are no fixed bills in retirement, only fixed income.

I also had an interesting conversation with a pre-retiree who shared that he needs to be aggressive with his investment strategy, as playing it safe can’t be an option at this phase of his life. He described himself as a poor man. All his life he had cautiously saved but has witnessed the purchasing power of his money eroding.He said that “poor people put themselves in a box and don’t take any risk, but the rich man takes risks and gets richer and richer”. An interesting takeaway from the discussion is that there is no growth in a box. Growth needs room. With financial literacy, more and more people are being enlightened about investing in assets that will increase in value over time.

A diversification strategy is key in retirement and aid in preserving or restoring purchasing power. Retirees who have funds to invest should segregate their funds for short-term, medium, and long-term goals. Monies in a savings account, certificates of deposits, and other low-risk instruments are losing purchasing power as interest rates in these accounts are low and in single digits and suitable for short-term goals and emergencies. Funds should be set aside for the medium term. The medium-term investment option should consist of stocks and bonds. This strategy allows for a portion of the investment to provide conservative or fixed returns and may consist of repurchase agreements (repos), certificates of deposits, treasury bills, and medium and long-term bonds. The remainder of the medium-term portfolio should consist of growth assets, such as stocks, which may be volatile in the short term but have proven to beat inflation over the long term. The long-term investment option relates to financial goals of 10 years or more. Funds should be invested in growth stocks that will provide exponential growth in the future as the investment become less risky with time. Retirement is referred to as the “golden years”. Don’t lose purchasing power. A professional and experienced advisor can assist in designing a portfolio that puts you in the picture. According to former US President Abraham Lincoln, “In the end it’s not the years in your life that counts, it’s the life in your years”.

Grace G McLean is financial advisor at BPM Financial Limited. Contact her at: gmclean@bpmfinancial at visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at: livingaboveself@gmail.com