Retiring to Sunny Europe from the Gulf? Beware Inflation

Date Posted:Thu, 24th Feb 2022

Retiring to Sunny Europe from the Gulf? Beware Inflation

By BBG Dubai member Jason Porter

 

Inflation is surging in both the EU and the UK. Since even low levels can affect your savings over the long term, now is the time to review your savings and investments to establish if they are suitably structured to provide protection from this threat.

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”.

This quote by American author and humorist Sam Ewing may make you smile, but it is a good example of the impact of inflation over the passage of time and underlines a serious threat to our long-term financial security.

Ronald Reagan used a more hard-hitting description:

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”.

Many people do not realise how damaging inflation is to their wealth over the longer term; it is easy to become complacent after years of low levels. But it is surging in many countries, including Spain and the UK, causing concern among savers and retirees. In fact, you should always take inflation seriously as even low levels affect your wealth and retirement income over time – you may not notice the effects each year until it is too late.

The impact of inflation on savings

You cannot just consider inflation rates on their own, you need to compare them to your income. If your savings generate a lower return than inflation, the real value of your money is falling and your income will buy less than it used to.

Put very simply, and ignoring the impact of compounding, if your bank account pays 1% interest but inflation is 2%, after ten years you will have 10% more money but the goods and services you purchase will cost 20% more. In real terms, you’ll effectively be 10% poorer. The more time passes, the more damaging it is.

As an illustration, a personal annual rate of 4% would reduce the spending power of 100,000 (euros or pounds) to around 67,000 after ten years. After 20 years it will have lost around 55% of its value and after 30 years your 100,000 would have the purchasing power of around 30,000 today.

Local inflation in the Eurozone

Across the Eurozone, the annual inflation rate reached a record 5% in December 2021, up from 4.9% in November. A year earlier, the rate was -0.3%. For the EU as a whole, it was 5.3%. The highest contribution to the annual euro area inflation rate came from energy, followed by services, non-energy industrial goods and food, alcohol & tobacco.

The lowest annual rates were registered in Malta (2.6%) and Portugal (2.8%).

In Spain consumer prices rose 6.5% in December – just 12 months previously it had negative inflation at -0.6%. It first hit 2% in April and has been climbing steadily since. The main culprit was electricity fees, but food also rose significantly in 2021. The ‘base effect’ was also a factor, which means that the figure from 12 months previously was unusually low.

Cyprus has also seen a reversal of fortunes, with consumer prices accelerating over 2021. It had negative inflation in December 2020, at -0.8% but 12 months later it was 4.8%.

France tends to have lower inflation than the EU average and was 3.4% in December. A year previously it was 0%, but it reached 2% in August and has been slowly climbing since.

Protecting your retirement savings from the impact of inflation

Hopefully, inflation will soon fall back to comfortable levels but, as mentioned earlier, even low levels will affect you by eroding your spending power year after year. You always need to plan to protect your savings from inflation.

To generate returns that outstrip inflation, you need to invest in assets that historically generate returns in excess of inflation over time. Reduce risk to your capital by working with a wealth management adviser to follow a disciplined investment process:

• Establish your goals and time horizon.
• Determine your attitude to risk.
• Construct a suitable, well-diversified portfolio to achieve your investment plan and objectives.
• Use quality investment managers.
• Review your portfolio annually to keep it on track.
• Be patient and stick with your plan – it is time in the market, not timing the market, that is likely to help you achieve your longer-term goals.

If you already have investments but without a carefully designed strategy tailored to your particular situation and appetite for risk, or have not reviewed them recently, look at your financial affairs to confirm if they are suitably structured to provide protection from potential future threats like inflation and taxation.

You need a tax-informed investment strategy with the potential to provide capital growth higher than inflation and where your money is legitimately protected from unnecessary taxation. This can be achieved with a diversified investment portfolio, based on your objectives, circumstances and risk profile, held within a tax-efficient arrangement that is compliant with your country of residence.

Please refer to www.retiringtoeurope.com and www.blevinsfranks.com for the latest on how Brexit affects Britons moving to Europe.

Jason Porter is a Director of specialist expat financial advisers Blevins Franks and head of the company’s European Emigration Advisory Service: Residency Guides | Blevins Franks