The Ravages of In ation Andrew Wood

Most people are actually oblivious of the eect in ation has on their nancial lives. If you need an income of $50,000 per annum today and in ation runs at a at 4% per annum, by 2031 you will need $111,129pa. In 2041 it will be $165,674pa. These gures represent signi cant increases which are often disbelieved by expats. In fact they are true. In Net Worth 7 Jun 2010 Do You Have Adequate Retirement Provision and 14 Jun 2010 Will You Outlive Your Pension Pot? we looked at in ation, growth and the cost of time delays which can so seriously damage and deplete your retirement provisions. Apart from the essential task of making sure you have provided sucient reserves for your retirement, have you considered two other major factors which are in the background and are constantly ravaged by in ation? These are the ongoing cost of living and the returns you are able to achieve on your nest egg. The cost of living is constantly rising whilst the investment returns you achieve are often diminished by that invisible stealth factor - in ation. In the 45 years from 1945 to 1990 in ation averaged an annual 6.48%. It was particularly high in the post war years of 19471949 and again in 1978-1982. During the entire 45 year period the cost of living increased a total of some 1,743%. If you look backwards at your own personal situation, try to recall what your salary was when you rst went to work? The older you are the smaller that gure will be. Try also to put in perspective the costs of something like a loaf of bread or a bottle of milk back then and what these are today. These facts will start to make you realise just how signi cant in ation is on all of us. In the past twenty years we have been relatively lucky with in ation. Up to 2007 we had periods of less volatility, steadier economic growth and lower in ation than in periods prior to 1992. However, there has still been a substantial impact on our overall cost of living. At an average rate of 2.3%pa our total overall living cost has increased more than 58% for the period 1992 -2011. We also nd that, as expats, we tend to purchase imported goods wherever we live and these are more often than not subject to higher in ation than local goods because of the fuel price impact on transportation costs. So, as expats in Thailand many of us will have seen our real cost of living more than double in this period. If you were retired and living on $50,000pa back in 1992 your cost of living will have increased to at least $78,866 today and in many cases far in excess of that. Where will you nd this additional income to live? What are you able to do about this? More importantly did you take some advice about this and did you factor in ation into your retirement calculations? Many expats seem to think that if they can retire on say our magic $50,000 today it will still be $50,000 in ten and twenty years time. The compounding increase in our cost of living not only makes it necessary to provide for the increases we will experience but also that each further year equals a higher amount we need to accumulate. For many retired expats in Thailand their income is based in their home base currency and this has further been depleted in value by the strengthening THB against other major currencies on the past six years. There is no magic wand which can x the de cits you are currently suering. Budget spending reductions or increases in income by perhaps working again are often the only way that you will be able to continue and survive. For others yet to see this phase of life a strong lesson can be learned. You need to understand the economics of retirement planning and what in ation can do to ruin your plans. We have looked at the some of the statistics over the past 65 years and consider them quite startling: The table below shows an in ation adjusted amount of what you would have got back if you had invested $1,000 into stock markets and/or bank deposits in 1945

Year 1945 1955 1965 1975 1985 1995 2005 2010

Equity Investment Result $1,000 $1,340 $2,290 $1,890 $4,640 $10,834 $15,314 $13,486

Bank Deposit Result $1,000 $870 $940 $830 $530 $562 $704 $726

It is really surprising to see the results and the dramatic eect that in ation has over the long term. It is also very apparent that mere bank deposit rates have not kept pace with in ation over the past 65 years. Equities, on the other hand, have outperformed in ation over all but the years 2001/03 and 2008 which were exceptionally poor years for equity markets. The above has been based on the world index and the average of UK, USA and European in ation and bank deposit rates. Whilst these latter measurements are probably re ective the equity results are based on the world index. Investments can produce very dierent results from this index depending on the geographical areas, sectors and industries in which you are invested. However, the world index is a good benchmark. This also proves the point that time in the markets really does pay o rather than trying to time investments in and out of the equity markets. If we project further forward for say 20 more years and use some conservative gures, the results would continue with the same trends. We have Pegged in ation at 4%pa and bank deposit rates at a very generous 5%pa. Equity market growth rates of say 7.5%pa are actually considered unadventurous. The combination of these parameters over the next 20 years would provide the following projections:

Continuing results from 2010 Equity Investment Result $13,486 $16,017 $19,023 $22,593 $26,833

Start from scratch with new $1,000 Equity Investment Result $1,071 $1,272 $1,511 $1,794 $2,131 Bank Deposit Result $996 $1,047 $1,100 $1,157 $1,216

Year 2010 2015 2020 2025 2030

Bank Deposit Result $726 $763 $802 $843 $895

Year 2010 2015 2020 2025 2030

What these calculations tell us is that to make your nancial future secure in the long term, equity based investments are likely to pay o far more handsomely than cash deposits. In order to plan properly you will be wise to see a professional nancial adviser who can counsel you and assist with such planning. He will take into account all your hopes and aspirations, including the commitments and dreams you have for the future factoring in ation into all his calculations. A good professional will be on hand and able to help you with all your peripheral needs whilst you stay in the business of living life. These peripheral requirements are often maligned or misunderstood by many expats who often consider them insigni cant - until its too late! Planning for all the eventualities is the best way for you to face them in the future.

Questions for Andrew can be directed to PFS International on 02 653 1971 or via email at enquiriesthailand@fsplatinum.com Alternatively, connect with Andrew on Linkedin http://www.linkedin.com/in/andrewwoodpfs Andrew Wood has been an expat in Asia for 32 years and is an Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a signi cant contribution to the PFS library of nancial service articles dating back over seven years. These articles which cover the complete A-Z of nancial planning are available to readers on request.