I recently sat down with a client who had 30 years until her retirement and she wanted to start saving. When I showed her the projected pot of money, one question she had was “How much will that be worth in 30 years?”. This was a very valid question and one which we are asked frequently as Financial Planners.
The policy is automatically indexed, which, simply put, means your premium goes up by either a certain % each year or, indeed, is linked to CPI (Consumer Price Index).
So, how did I explain this to the client? I asked her to visualise the basket of goods that she could buy with the projected pot today, and this indexation on her policy ensures that she can buy that same basket of goods in 30 years.
Is this an essential feature of pension planning? Absolutely. In my opinion, it is vital. And here is why.
If you look at the chart below, you can see inflation’s impact on your money over time. This graph, which was used by Goodbody at the recent IPF Investment Seminar, shows the value of €50,000 over 10 years with varying levels of inflation.
The findings are stark. Inflation is running over 7% in Ireland presently*. This chart shows that €50,000 will only be worth just over €24,000 after 10 years with a 7% inflation factor. Not mitigating against this means you get a lot less “bang for your buck” when you go to spend your money.
In summary, when you are going to the trouble of saving your hard-earned monies over the long term, it is crucial that you plan for inflation and allow the policy to index in order to counteract it.
Senior Financial Planner
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