Solving the inflation equation (without higher grade maths)

In high school , maths was not my friend. It was more a casual acquaintance until what is now grade 10 (giving away my age there), when it became my actual nemesis.

Years later, I discovered that not only am I dyslexic, but I also suffer from dyscalculia. The dyslexia was easier to work out, because I can’t spell. Turns out inverting numbers is also a good indicator... of dyscalculia.

(This is our secret because I am an award-winning financial journalist and, you know, that means numbers)

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But I learnt to cope. I use the =SUM command in Excel, and until I found percentagecalculator.net, I simply asked my dad. Hi dad. I say I learned to cope, but maths is still hard for me.

And my problems with math mean that doing important sums like those involved in retirement investing can be a little intimidating. I’m sure I’m not the only one who’s intimidated by those numbers, so maybe what follows can help you feel more Higher Grade and less Maths Lit when it comes to your retirement finances.

The first important number = Inflation

The consumer price index tracks how rapidly inflation eats up the buying power of our money. On the (remote) off chance that this measure goes down month-on-month, it doesn’t mean my groceries became cheaper. It just means that the rate at which they got more expensive slowed.

And it still means that I have less money at the end of the month. Or, more accurately, too much month left at the end of my money.

I get that medical aids increase in cost each year at a pace faster than inflation. Sometimes two-fold. And I know that, when inflation goes up, interest rates come down to not only help keep the cost-of-living increases in check but also to help stimulate the economy, regardless of what the South African Reserve Bank says its mandate is.

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It gets trickier when Statistics South Africa releases data prints that work off nominal prices. Which is when the agency strips inflation out of something, such as the price of a loaf of bread. Useful if you want to see some other indicator, such as how much extra companies are charging, but also not useful at all.

Let’s take your salary as an example here. A 5% nominal salary increase might actually be a loss in real terms if inflation is higher than 5%. Get it?

It's similar when you're looking at the performance of your retirement investments. You have to factor inflation into the picture. If your investments are returning 10% per year, but inflation is at 5%, you're only really getting 5% more buying power, aren't you? Knowing whether I'm on track with my retirement investments is the first step in feeling more confident about retirement. You can too. Use the 10X retirement annuity calculator to do those sums. And then read on to simplify the more advanced maths stuff.

Other important numbers = Investment Fees + Drawdowns

It's worth recapping that. If your retirement investments return 10%, but inflation is 5%, they’ve only really returned 5%. Because although the amount of money you have has increased by 10%, everything you buy with that money has gone up by 5%. So you’ve got 5% growth left. And then, you need to pay investment fees. Now you start to see the difference between paying less than 1% in fees with a company like 10X, vs 2.8% in fees (or more!) somewhere else.

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What’s more, if you’re a retiree, you still have to factor in your drawdowns (i.e. the money that you draw as an income from those investments). When you add those ‘costs’ together (inflation + fees + drawdowns), and that number is higher than the total returns your investments are making, you’re losing money, and are at risk of depleting all your retirement savings prematurely.

Wow, that escalated quickly.

What is it they say? Lies, lies, and statistics.

Ok, how do we balance this ‘Golden Equation’?

First, let’s write the equation out. In retirement, you want your returns to be greater than or equal to the sum of your fees, drawdowns and inflation. Or:

Returns ≥ Fees + Drawdowns + Inflation

My usual investment rule of thumb is to put as much as possible away and hunt out returns at double inflation. And that’s a good rule for me to have at my life stage, as long as I am paying low fees (I’m not drawing income yet, as I am sadly not retired).

When I do start moving closer to retirement though, I need to understand percentages better. It’s later-life-defining.

If, at retirement, my returns are 10%, inflation is at 5% and my fees are 1% (for arguments sake), I had better make sure I can live off 4% of my capital every year. Or, If I can’t, I need to make some part-time work plans or do up the spare room and join Air BnB.

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If my fees are higher, a sustainable drawdown gets lower, which means less money. Again - see how important small savings in fees are?

So is 4% of whatever enough to cover my costs and buy me a Magnum every now and again? Well, exactly how much is ‘whatever’? How much do I actually need to have put away? And when do I think I will die – assuming my much-loved cat doesn’t kill me? Why don’t I have a crystal ball?

So it's good that besides the retirement calculator here, 10X has people who understand economics, can do math, and have helped thousands of South Africans retire better. You can chat to them, at no cost to you (and I have), which is great, because even with inflation, no cost stays no cost.