Inflation in Retirement – The Scary Facts

Last week’s announcement by Statistics SA that year-on-year Consumer Price Index (CPI) inflation had risen to 5% in June prompts a deeper look at how inflation affects people drawing an income from their retirement investments as opposed to salaried workers, whose income generally keeps pace with inflation.

While financial experts warn of inflation risk, and sound financial planning makes allowance for it, the long-term destructive power of inflation cannot be over-emphasised, even when the rate is relatively low.

South Africans tend to think of inflation as less of a problem today than in the past, and to a certain extent that is true. Since 2000, the South African Reserve Bank has followed a policy of inflation targeting – attempting, through the manipulation of interest rates, to keep inflation within a narrow target range. For many years the range was 3-6%, with a midpoint of 4.5%, but at the end of last year the range was adjusted downwards: the SARB’s new target is 3% with a tolerance band of 2-4%.

The SARB’s inflation-targeting policy is widely seen as having been successful in taming the beast, or at least reining in its wilder impulses. But it is not entirely effective. The annual inflation figures since 2000, when the mid-point target was 4.5%, show considerable variation. According to Stats SA, in the 25 years from 2001 to 2025, average annual inflation was above the upper 6% mark in seven of those years, with particularly serious spikes in 2002 (at 9.2%) and 2008, the year of the global financial crisis (at 11.5%).

So as inflation climbs to 5%, above the new upper target limit of 4%, it’s a good time to consider inflation scenarios for people who are entering retirement, bearing in mind that there may be spikes along the way.

With increasing longevity, it’s no longer a stretch to imagine a retirement lasting 30 years. People retiring aged 60 have a relatively high chance of living until 90. While a 30-year retirement may still be uncommon for people retiring at 65, it is nonetheless prudent to plan for that long, especially if there are two of you – while both of you are unlikely to reach 95, one of you may.

So with a 30-year retirement in mind, let’s go back 30 years and imagine you were retiring then. An internet search revealed the following prices for goods in 1996, with today’s rough prices in brackets alongside:

• McDonald’s Big Mac burger (without chips): R7.00 (R60)

• Paperback novel: R35-R40 (R350-R400)

• Pick n Pay whole chicken (unknown mass): R11.29 (R80)

• Kerrygold butter (250g): R3.95 (R95)

• Omo washing powder (1kg): R8.69 (R40)

• Kelloggs All Bran flakes (500g): R7.69 (R65)

• Milk (1L): R2.15 (R20)

• Large eggs (6): R2.15 (R23)

• Sunflower oil (750ml): R3.69 (R37)

• John West solid tuna in oil (200g): R4.69 (R30 for 170g)

As you can see, some prices (Kerrygold butter, for example!) have risen more than others, but generally we are looking at a factor of about 8-10 times.

Taking CPI inflation over the period (according to the Stats SA average annual figure for each year), goods to the value of R100 in 1996 would cost R516 today, a factor of about five times. However, the CPI basket contains a wide array of line items, including housing, utilities, and transportation. Thus it is apparent that food and grocery inflation has come in higher than CPI over the long term.

Annualised* inflation since 1996 is roughly 5.6%. What can we expect going forward? At an annualised CPI rate of 5%, goods to the value of R100 will cost R432 in 30 year’s time, meaning a rand then will be less than a quarter of today’s value. At an annualised rate of 4%, a rand will be about a third of today’s value (R100 of goods will cost R324), and if the SARB controls inflation at its 3% target rate, it will be about five-twelfths of its current value (R100 of goods will cost R232) in 2056.

For more on why you cannot rely on the CPI figure in your planning, see “Your Personal Inflation Rate May Differ from CPI”.

*Annualised: taking the average using the geometric mean.