Are you in danger of letting your expat retirement plans fall prey to a financial assassin?
It is always prudent to have a reasonable amount of cash on deposit to cover emergencies and short term expenses.
However, having too much of your portfolio in cash can lead to, at the least, a loss of purchasing power in retirement and at the worst, you running out of money in later life.
Why? Due to inflation.
Inflation: The retirement killer
Inflation is simply a general rise in prices. It means that your current money will buy less in the way of goods and services in the future.
For example, if you have GBP250,000 in cash today – based on inflation at 2.5% – your money would allow you to buy the equivalent of £243,750, i.e.£6,250 less, next year.
Do that for 5 years and it adds up to a new BMW 3 Series.
These figures aren’t “pie in the sky” either. In the UK, inflation has averaged 2.57% per annum since 198. There have been times when it has been much higher.
There are other countries in the world, where inflation is considerably higher than the UK.
Normally, this is offset to a degree by higher local currency deposit rates.
However, if you have retired in such a country and keep your cash in GBP, you are faced with a “double whammy” of low interest rates and much higher increases to your cost of living.
What can you do to prevent inflation ruining your retirement plans?
There are three things that you can do to stop the financial assassin that is inflation.
Work out how much cash you will actually need to fund your lifestyle for the next 6-12 months.
This is your emergency fund. It should provide you with a feeling of security. Be realistic, think about what would happen if you were unable to work due to illness or lost your job.
The above is based on the assumption that you are still working and generating an income.
If you have already retired, or are going to retire in the next 6-12 months, then this figure would need to be higher.
Keep this money somewhere that is safe and easily accessible.
It won’t earn you any interest and that’s ok. That’s not the point here. The important thing is for this money to be available when you need it.
Invest the rest
The best way to combat inflation is to invest your money. Build an investment portfolio that is simple, well diversified and low cost. Then stick with it.