Ronald Reagan called inflation “as deadly as a hit man”. And, for any investor, it really is the biggest enemy you face.

Usually, you don’t notice it. Even though you know that R1,000 today will buy you less than R1,000 did five years ago, this normally happens in a slow, stealthy way.

Right now, things are different. Everyone is talking about inflation, because it is having a very real impact in a short space of time. Petrol price increases and higher food prices are forcing many people to cut back on their spending.

Inflation doesn’t usually work quite so obviously. Most of the time, it only has big effects over many years. And that is what makes it so dangerous for investors – most of the time, you don’t notice it.

In its 2022 Long-Term Perspectives publication, Old Mutual called this the “inflation illusion” – the fact that because inflation creeps up slowly, investors don’t notice how destructive it is being.

But just think about these numbers from Old Mutual: a basket of goods that costs R1,000 today, would have cost R792 just five years ago. Ten years ago, you would have paid R604 for the same things. Fifty years ago, you would have needed to spend only R14.

That shows just how powerful inflation is. And for every investor, whether you are saving for retirement or drawing an income because you are already in retirement, you have to make sure that what you are getting is beating inflation.

Because otherwise, in reality, you are getting poorer.

Growing your money

While you are still working and accumulating a retirement pot, your wealth is only growing if the return you are getting is higher than inflation. If it is lower, you are really losing money in real terms, even if, on paper, it seems to be going up.

If, for example, inflation is 6%, a return of 5% won’t be enough. Even though you will have more money year by year, it will be worth less.

To be growing your wealth at a healthy rate, you need a return of at least 10% or 11%. At these rates –  4% or 5% above inflation – you will be comfortably growing your retirement capital to ensure that you can afford your standard of living in the future.

But it’s important to remember that to earn those sorts of returns, you do need to take a certain amount of risk. There is no investment that will guarantee you 11% per year for 30 or 40 years with no chance of ever losing money.

You need to be patient, because in some years you will see returns much lower than that. Sometimes, they may even be negative. But a well-diversified and balanced portfolio will also have very good years, and so be able to grow at those sorts of rates on average over the long term.

Growing Your Income

Once you are in retirement, the equation changes a little. You now have two important considerations.

The first is making sure that you still have a long-term mindset, because your money has to keep growing ahead of inflation for a few more decades.

A mistake many people make is thinking that once they are in retirement, they can’t take any risk. They only want “safe” investments like fixed deposits.

But the problem with these “safe” investments is that they almost never keep up with inflation. That means that you are really losing money year-by-year. And if you live for another 20 or 30 years, these “safe” investments can really be very risky as inflation eats away at them.

The second consideration is to make sure that the income you are getting goes up year after year. It has to at least keep up with inflation so that you can maintain your standard of living.

For example, if you are comfortable with a monthly income of R10,000 today, and inflation is at 6%, you will need R10,600 a month next year to afford the same things. In 10 years’ time, you will need R17,900.

As Old Mutual points out: “If your retirement income does not at least grow in line with inflation, you will either experience a decline in your standard of living or you will run out of money. At a 6% inflation rate, a fixed monthly retirement income of R10 000 a month today will decline in real terms to about R1 700 a month after 30 years.”

This is why the inflation rate should be what everyone measures their investment performance against. The return on the JSE or how much a particular unit trust goes up doesn’t actually affect anybody directly.

What does impact everybody is inflation. Those who don’t beat it, will be getting poorer. And that is why it really, really matters to every investor, and is the most important measure of whether you are getting the returns you need.