Future proof your wealth from inflation

This week, we look at why managing your wealth both before and in retirement is crucial to ensure that your purchasing power doesn't erode over time so that you can continue to live your desired lifestyle. Like so many, you have probably experienced an increase in your regular expenditure over the past 18 months and may need to withdraw more income than expected from your retirement pot. 

Inflation can significantly impact your retirement savings and income, making it important to have a plan in place to mitigate its effects. Here are some strategies to help you manage the impact of inflation in retirement:

1. Diversify your investment portfolio

Rising interest rates is good news for savers as you now receive a far greater return for cash in the bank. However, holding more cash than you need is likely unwise in the current higher inflationary environment, as interest rates remain lower than the rate of inflation. This means as prices continue to rise, your pot of money will unlikely increase at the same rate.

History shows that over the long term, having a diversified portfolio that invests in a broad range of asset classes, including stocks, bonds and alternatives, will tend to outperform cash, helping you mitigate the impact of inflation. Your financial goals and investment timeframe should help determine the right allocation to each asset class and the diversification of your wealth.

How much cash is enough? Generally speaking, holding cash is more suitable for short-term goals (less than three years), emergency funds (between 3 – 12 months of your general expenditure) and funds you need to access quickly without disturbing longer term investments.

2. Review the structure of your wealth

It is common for retirees to have several sources of income during retirement. Some, such as your state pension and defined benefit pension, offer no flexibility to make adjustments; however, they provide a necessary offset against inflation and a reliable income source.

Consider checking your state pension age and entitlement by visiting https://www.gov.uk/check-state-pension, which offers a ‘triple-lock’ safeguard to ensure it doesn’t lose value due to inflation. Depending on your previous employment, it is common to have a defined benefit pension that is another layer of secured income payable for life, which often increases with a capped percentage annually to help offset the impact of inflation.

Depending on how you accrued your wealth, you may have a range of assets, including properties, investment portfolio, cash and personal pensions. This type of flexible wealth enables an opportunity to structure your income to improve your portfolio's overall tax efficiency, which can help you save on tax, thereby ensuring more of your money goes towards your lifestyle and goals.

There are important steps to consider for those who have been pushed into a higher tax bracket, including taking advantage of your pension tax-free cash and making tax-free withdrawals from ISAs. This also may include maximising your tax allowance as a couple which could include transferring the ownership of assets into your spouse's name.

This is a complex area and working with a financial planner to take a holistic look at your overall wealth and advise on the most tax-efficient way to structure your capital in retirement is important.

3. Cash flow modelling different outcomes

While a budget is a useful tool for managing regular expenses, it does not consider how your income and expenses might change over time and the impact this might have on your lifestyle. The way to tackle this is through something called “cash flow modelling”, which provides a complete overview of your finances and helps you make decisions that your future self will thank you for.

It involves comparing your current wealth, income, expected investment return and rate of inflation versus your known financial goals and objectives. This provides us with a visual forecast of your financial future so that we can understand the likelihood of achieving your goals and aspirations.

Why is it so important? The sooner we identify a possible shortfall within your financial plan, the sooner we can model alternative scenarios to find a resolution.

We routinely use cash flow modelling with clients. By projecting their finances into the future, it allows for far more effective planning and allows our clients to see the impact that any changes they make will have on their future selves. By creating different scenarios and adding goals, cash flow modelling brings personal finance to life in a way that simple numbers on a piece of paper cannot.

Have you made the right plans for a secure financial future?

Start talking to us today about your financial ambitions, and we can help you make a resilient plan. We take the time to understand your goals and objectives to ensure our planning is specific to your needs and aspirations – helping you build a brighter financial future. We have proven experience delivering financial plans for individuals, families, trusts and companies. To discuss your circumstances in confidence, please contact Drew Nutsford directly on 0131 514 2772 or 07969 341129 or email drewnutsford@w1m.com to arrange a no-obligation meeting.