One of your biggest risks in retirement is going to be inflation, the rising cost of living. 

If you retire at say age 60 or 65 it is highly likely that you will still be alive come age 90 or 95 which means 30 years living as retired.  

On average, prices for the cost of things you use and buy will treble over this period. This means something that costs £100 today may cost £300 in 30 years’ time. 

Let’s look back at some actual prices from 30 years ago in 1993: 

  • Petrol 45.9p per litre. 
  • Pint of beer £1.54. 
  • Pint of milk 34p. 
  • Loaf of bread 75p. 
  • Red top newspaper 25p. 
  • Average house price £51,210. 

So, you may have done the maths. You may have saved £1million for your retirement, you plan to spend £30,000 per year in retirement and over the course of 30 years will have some left over spare when you die. You keep it all nice and secure in your bank account. 

The problem is that about halfway through your retirement you are going to be needing to withdraw around £60,000 from your pot just to buy the same things you did before.  

This is likely to mean your money running out before you do. At this point it could mean selling your home, having no where to live and certainly not leaving anything behind for your loved ones. 


Combating the rising cost of living in retirement 

Thankfully, there is a solution.  

When you invest your retirement savings in global equities, you are buying and then owning shares in the great businesses of the world. You become an owner of the businesses you buy from every day.  

A large chunk of these businesses pay out their profits to investors via something called dividends.  

Dividends can be re-invested, buying you more units or shares in these businesses or paid straight out to your bank account without impacting the number of units or shares you own.  

The average annual UK inflation rate over the last 97 years is 4% and has been as high as 23% in one calendar year. 

The average dividend growth rate of US stocks (we use US stocks as an example because it forms over 50% of global equities) has been 3.7%, nearly the same rate as UK inflation.  

This means that dividends alone could protect you from inflation in retirement. The income you use from dividends has proven to grow at nearly the same rate as the rising cost of living.  

So, in the example we used earlier of £1million funding £30,000 per year. If dividends covered the £30,000 in year one you may find they also grow to cover the £60,000 needed halfway through your retirement.  

Dividends work beautifully to protect against inflation because if you think about it, if more pounds are needed to purchase a good or service, more pounds are then paid for that good or service. Which means the business has more pounds to pay out to investors.  

Now, I’m often asked, “should I just focus on investing in dividend paying stocks then?” 

My answer to this would be no because you would be cutting yourself off from a tremendous amount of growth.  

The long-term average total return from the US stock market is around 10% per year. Which is more than twice the rate of UK inflation.  

Dividend growth only makes up around a third of this total return, the other two thirds is made up from these great businesses improving their value and with it the price of their shares. 

This extra growth is money that can be used to increase your retirement spending so you can do more or have more money you can leave behind for your loved ones.  

If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.