Your investments and their returns

As highlighted above while inflation erodes away your purchasing power, it also means your savings takes a hit.

Let’s look at what this actually means with an example. At the time of writing, an average 6-month term deposit rate is giving savers a return of about 1.6% per annum and the rate of inflation is at 5.9% per annum. This means that your savings, that money you have safely in your bank account is actually losing you 4.3% per annum. In other words it is costing you money to save it.

Your investments, especially your long term investments, should be giving you a return rate above the rate of inflation so they can continue growing and compounding for you.

You don’t want to reach your well-earned retirement years to discover that your nest egg is much smaller than you’d expected because inflation has eaten it away.  In other words, you need to remain proactive to ensure you are keeping on top of inflation.

Life insurance and inflation – a double-barrelled impact

The impact on life insurance is more interesting, but it can also catch out if you are not aware. The premium for insurance is basically made up of three parts. For life insurance, the three main ones are age (each year you get older, the cost goes up), the price of the product, and CPI.

Many policies are indexed to CPI. This is a good thing as you want to make sure that the policy you bought 20+ years ago, is still ‘worth’ as much you wanted at the time you took it out.

Let’s go back to that calculator. Let’s assume you got a $500,000 life insurance policy in the first quarter (Q1) of 2000, but you did not have it linked to CPI (use the general category on the calculator). If you died today, your family will get $500,000. That might be enough, but in today’s money, that money is actually worth $816,109 (2021 Q4). That would mean your family are potentially short by $300,000 in today’s money. (The caveat here is that circumstances may have changed so you might only need less, but we are keeping this example simple).

The next part in all of this though, the double-barrelled part, is the premium. If you don’t link your premium to CPI, then your premium will not increase by as much, i.e it is not keeping up with the cost of living. In short, you will be paying for less benefit and your premium will only be determined by your age and the price of the product.

However, if you do have your life insurances linked to inflation, you can potentially see quite large price increases over the years, not just due to the CPI, but because the sum insured is increasing too.

This is why having a good adviser is really important as they will talk to you about what you want to achieve and will help you understand the cost versus the pay-off to make this happen.

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