Inflation is not Thanos, chill
It will not wipe out 50% of your assets, well not in the time-span whereby it matters at least. Many people are more afraid of inflation than the Avengers are of Thanos, because it's inevitable, and it will (seemingly) reduce one's purchasing power significantly.
It's not that bad.
For this article I am going to base it on inflation data published by the Singapore government from the following website:
Regarding data I am going to mention, for ease of reference I have made a table here:
https://docs.google.com/spreadsheets/d/1jQrFEePFNdS8R3TFJ-LRYhT1y3lv8V-Mrr1HYFkkfo4/edit?usp=sharing
So, few points we are going to mention
1. Your purchasing power will NOT diminish that quickly.
It would only erode by, assuming inflation is at 2% (FYI it's lesser) and for an arbitrary 25 years,
1/(1.02^25) = 0.61
Essentially $100 of purchasing power now will be worth approx. $61 in 25 years time, not exactly end of the world (not even equivalent to Thanos' 50% wipe, that would take roughly 35 years). So yes while inflation reduces your purchasing power, even if you don't do anything to beat inflation in 25 years, well, you can simply reduce spending by about 40% and you will be just fine.
Let's have an example. Mr. B have $1million in financial assets right now, yielding him 4%, which is $40,000 per year, $3,333 per month. In 25 years, this amount would still be worth $2,000 present value. Not the end of the world, still higher than CPF payouts in fact, you just have to gradually reduce spending over time.
2. Recent years inflation is much lesser than that of many years ago
If you would take a look at the data, an average cumulative annual growth rate (CAGR) of Consumer Price Index - All items (CPI) is 1.8%, which means inflation is at 1.8% annually over the past 16 years. Pretty close to our 2% estimate.
However, in the recent 5 years, excluding the 2020 Covid crisis, which means that our economy is pretty much functioning normally, the all-item CPI is only growing at 0.26% CAGR, with some years having negative inflation instead - 2015 and 2016. (Table 2)
What this mean is that assuming inflation is no longer that high because our economy is reaching a saturation point, things are NOT expected to increase in price as quickly as when our economy is growing and population is booming, obviously. While more of a personal opinion, I believe that lower inflation rates are actually here to hold as jobs are increasingly competitive, things are getting unaffordable, and younger generations are having lesser and lesser kids.
If you notice, the highest inflating sectors are Education, Food, and Food services, at 2.84%, 1.6% and 1.66% respectively. Some other factors, such as Housing & utilities are actually deflating.
All item CPI is derived based on the general household consumption weighting shown here:
(https://www.singstat.gov.sg/modules/infographics/consumer-price-index)
While spending habits differ from family to family, if one were to use the latest 5-year inflation of 0.26%, in 25 years, your purchasing power will only reduce by 9%, that is easily survivable by reducing cost a little bit here and there. Suddenly inflation isn't that big of a deal anymore right?
But 0.26% is far too low to be reliable, 0.5% inflation would only cut your purchasing power by 16%, which like I said, if you are worried about inflation diminishing your money so much such that you won't be able to retire, it's a pretty unfounded concern. If you can't survive on 16% lesser money to spend, then you probably will not be living very well now anyway. So work for it first, don't blame everything on inflation.
Because I am cool I have made a very simple calculator (in the Calculator tab) of the sheet below, where you can download and input your own expenses to calculate your expected inflation %.
https://docs.google.com/spreadsheets/d/1jQrFEePFNdS8R3TFJ-LRYhT1y3lv8V-Mrr1HYFkkfo4/edit?usp=sharing
3. What if suddenly inflation returns to much higher levels again?! That would be disastrous for retirement!
This is the part where I tell you to invest in financial assets. Most financial assets, by default, have a pseudo-built in counter to inflation. How does this work? Let's think intuitively, inflation comes from increase in prices of
- Food
- Housing
- Education
Basically things we buy, things that are flowing in the economy, things that (ding ding!) are sold by companies whose share you can easily own. Real estate stocks such as REITs will definitely appreciate as property prices increase*, consumer goods stocks such as Sheng Siong will definitely appreciate if your milk and maggi mee prices increase*, and well, banks are lending to every business so obviously they will be increasing* as well.
By having substantial exposure to equities, you will basically be getting real returns from whatever the company is giving, plus they naturally counter the effect of inflation, cool right?
*Share prices are obviously affected by a multitude of other factors, but inflation would only serve to appreciate the prices Ceteris Paribus.
So inflation is not Thanos, don't be a worrywart and assume it will kill off all your purchasing power all that sudden. If you are concerned about beating it, find the
Equities.