Allan Gray’s latest “GrayIssue” discusses the importance of taking “lifestyle inflation” into consideration when planning for one’s retirement.
While we realise the importance of starting early and saving consistently, we seldom take into account the impact that our evolving lifestyle has on our retirement and the ability to have enough saved to maintain the standard of living with which we have become accustomed to.
Allan Gray explains lifestyle inflation as follows:
Price inflation is a general increase in prices and a corresponding fall in the purchasing power of your money. Salary increases that keep pace with price inflation allow you to maintain a fixed standard of living over time. However, salary increases that exceed price inflation may increase your standard of living and therefore also your cost of living. You can think of this as lifestyle inflation, which is the increase in your standard of living over time. When investing for retirement, it is important to plan for future increases in prices (i.e. price inflation) and future increases in your standard of living (i.e. lifestyle inflation).”
As we grow in our career and receive promotions or increases above price inflation, so with it comes a better lifestyle, a more costly lifestyle, a lifestyle which we would want to maintain once we retire. However, if we haven’t planned correctly in our earlier years to ensure our retirement savings match our lifestyle at retirement, this would directly impact the longevity of our retirement savings and the amount we would need to save going forward.
In a nutshell, if your income is increasing over and above inflation, you need to be increasing your retirement savings to be on par.
1 March 2014 – Tax break for retirement fund investors
From the 1st of March 2014 a new tax incentive has been introduced. All non-deductible contributions will now be allowed by The Income Tax Act. This is irrespective of the retirement fund to which the contributions were made. All non-deductible contributions will be pooled and exempt from income tax on a “first-come-first-served” basis against any lump sum taken or annuity income received at retirement.