What If Pineapple Buns and Milk Tea Cost $100 When You Retire?
The world started the new chapter of 2021 with economic recovery supported by massive fiscal and monetary stimulus, with an upward trend of inflation expectations. Lawrence Summers, former U.S. Treasury Secretary, said recently that such inflationary pressures are of a kind we have not seen in a generation^. As the cost of living rises persistently, it is common knowledge that personal savings alone is insufficient to guarantee a worry-free retirement – explore ways to combat inflation is therefore critical.
This article looks into 3 things you should know about inflation as you plan for your retirement.
1) How does inflation affect our daily life?
When older people reminisce the past, they may say, “it only cost $0.5 for a bowl of wonton noodle” or “you only needed $1 to travel to the main city”. It is a vivid illustration of how closely we experience inflation in our every day life.
Take the popular Hong Kong delicacies pineapple buns and milk tea as another example. Ten years ago, a pineapple bun and a cup of milk tea together cost less than $20. Today, a cup of milk tea alone already costs $20, while the price of a pineapple bun approaches from a few HK dollars to above $10. That means, it costs almost $30 now to buy a pineapple bun and a milk tea.
Assume the annual inflation rate is 3%. 40 years later, under the influence of inflation, you would need close to $100 ($97.86 to be exact) to buy the same commodities.
In fact, as commodity prices rise persistently, the real purchasing power of money decreases. It means with the same nominal amount of money, you won’t be able to buy the same quantity of a commodity.
2) Investment seems too risky. Can’t I just live on cash?
Cash is not as volatile as stocks, so it may seem safer to hold in the short run. In the long run, however, cash is not king for it may quietly depreciate over time. Think of the piggy bank you used to keep as a kid. Had you not spent the money on toys, you still wouldn’t be able to pay for a meal at today’s prices.
While inflation is just as unpredictable as the stock market, we see an upward trend in recent years: transportation costs increase year after year, even McDonald’s is pretty punctual when it comes to raising meal prices on the first day each year. We have to find ways to increase our income to catch up with the rate of inflation, i.e. the cost of living.
3) Are inflation- indexed bonds really anti-inflationary?
Inflation-indexed bonds are linked to inflation indicators so that the principal and interests rise and fall with the rate of inflation. For instance, as indices such as the U.K. RPI, the EU HICP and the U.S. CPI rise, interest payments in relation to the principal increase by a certain percentage, to prevent any returns from being eroded by inflation. These bonds bear lower default risks as they are primarily issued by sovereign governments, such as iBond in Hong Kong and TIPS in the U.S., which makes them a reliable anti-inflationary tool.
Create a stable source of income in your retirement life
Investing in a diversified portfolio – a combination of stocks, bonds and annuities etc – is key to creating a stable and reliable source of income to combat inflation. It is also an effective tool that balances your needs to “prepare for the future” and live by carpe diem.
The original content and opinions above are provided by New Media Group and Principal has no editorial responsibility for the content of the article. This information is for general reference and investor education purposes only. Investment involves risks, and prices of fund units may fluctuate. You should not rely solely on this information to make investment decisions.