How your retirement portfolio could be wrecked by inflation, and what to do about it

If you’re planning your retirement portfolio, you need to take steps to deal with the effects of inflation.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I remember hearing a tale once about a gent buying a round of drinks for all the folks in his local bar. “I retired today at the age of 60, and I don’t have to work another day in my life,” he said, overjoyed at the prospect of a long and happy retirement. 

Then some sourpuss spoiled the fun. “You can afford drinks now, but how much money do you really have and how well off will you be if you live for another 20 or 30 years and watch the value of your cash being eroded by inflation?

With life expectancy increasing, most folks retiring in their 60s these days should easily last until their 80s, and often beyond. But will their cash survive that long too?

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

A potential killer blow

UK inflation has been around 2% for a few years, but the crashing value of the pound has so far pushed that up to nearly 3% and it could well go higher. 

If we continue to see prices rising at 3% per year, in 20 years time every £100 you have today will be worth £54 — and in 30 years it will have dropped to just £40. How would you cope today if prices of everything suddenly doubled and you still only had the same amount of cash at your disposal? 

You might think 3% inflation unlikely in the long term — but over the past 10 years it’s averaged 2.8% And even at a steady 2%, every £100 you have now would be worth only £67 in 20 years, and just £55 in 30 years.

What should you do?

You’ll be getting interest on your money, so you’ll be a bit better off. But even if you can live on the interest alone and not touch your capital, that’s really not enough. What you need is to cover your costs of living from your investment income, and grow your capital in line with inflation so that your future income retains its real value.

The surest way I know to do that is to invest in high-yielding shares, but more importantly shares in companies with a progressive dividend policy — committed to growing dividends at least in line with inflation.

Moss Bros Group is one example I looked at recently, after it lifted its 2017 dividend by 6.1% while reinforcing its progressive dividend policy. That’s way ahead of inflation, so you could take some inflation-adjusted income and keep the rest to reinvest. Oh, and it provided a very nice 6% yield — and the share price has nearly doubled in 10 years, so you’d be preserving your capital too.

Another example is property investor CLS Holdings, which recently switched away from repurchasing its own shares and to a progressive dividend policy. The latest yield was only 2.6%, but over your retirement decades it’s long-term rises that matter — and hikes forecast for the next couple of years are well above inflation and should yield 3.2% by 2018.

Look for cash cows

Other good retirement investments, in my view, are those that generate oodles of cash, have modest capital expenditure requirements, and can pay most of their earnings out as dividends — insurer Direct Line with its big special dividends springs to mind.

If you can put together a portfolio yielding 4% or 5% per year in dividends, focused mainly on companies with strong cash flow and progressive dividend policies… well, I think that’s the best way to head into retirement.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

At $184, I reckon this S&P 500 juggernaut is still on sale

Our writer sees Amazon (NASDAQ:AMZN) as an attractive S&P 500 stock to consider while it is priced 23% lower than…

Read more »

Investing Articles

Cheap FTSE 250 shares to consider buying right now?

These FTSE 250 growth stocks had weak starts to 2025, and face short-term uncertainty. But their long-term valuations could be…

Read more »

Investing Articles

As stocks dive, is this a rare chance for ISA investors to build generational wealth?

Globally, stocks have pulled back significantly following the announcement of tariffs by the US president. Is this an opportunity for…

Read more »

Investing Articles

2 ultra-cheap shares to consider right now!

These cheap UK shares offer considerable growth and income potential over the long term, reckons our writer Royston Wild.

Read more »

Investing Articles

Legal & General Group shares go ex-dividend on 24 April – time to grab that 9% yield?

Harvey Jones holds Legal & General Group shares and is already looking forward to the next bumper dividend from this…

Read more »

Young female analyst working at her desk in the office
Investing Articles

3 FTSE 100 dividend stocks to consider buying while they’re on sale

Paul Summers reckons canny investors should think about snapping up quality, dividend-paying stocks while they're going cheap

Read more »

Investing Articles

2 cheap passive income shares to consider buying right now

The passive income we can earn from the UK stock market looks set to climb this year, and could even…

Read more »

Investing Articles

Down 15% in a month, this FTSE 100 dividend share offers investors a stunning 10.8% yield

Harvey Jones plucks out a FTSE 100 dividend share that offers frankly a quite staggering yield and is now a…

Read more »