Inflation Threatens Retirement in Spain

Soaring inflation has been a major news item for some months and record inflation rates are hitting countries worldwide. The main contributors to rising inflation have been the staggering surge in the price of oil and rocketing food prices. Oil prices have not just affected the fuel in your tank or the cost of an air flight but they have a roll on effect in many areas including manufacturing and services.

Spanish fishermen, taxi drivers and truckers have all staged disruptive protests over the price of fuel which has put their livelihoods at risk. Similar workers in other European countries have also demonstrated their anger and called for government assistance to help them through the crisis.

Inflation in the Eurozone hit a record 4% in June (latest figures available at time of writing). It was the highest rate recorded since the Euro was launched nine years ago and double that of the European Central Bank’s (ECB) target rate of “below but close to 2%”. If you think that sounds bad enough, inflation in Spain hit a 13-year high of 5%. A year earlier, Spanish inflation was just half this rate and stood at a more acceptable 2.5%.

According to the Spanish Institute of National Statistics (INE), transport has been the main reason for the rise in inflation over the year due to the substantial rise in the price of fuels and lubricants for personal transport equipment. Food and non alcoholic beverages came next with housing in third place because of the increase in heating fuels.

Spain’s Finance Minister, Pedro Solbes, commentated that the inflation report was “not good news”. Solbes had earlier anticipated that Spain “should end the year with inflation close to 4%.”

The latest Euro inflation figure caused the ECB to step up its interest rate a quarter point to 4.25%, the highest interest rate for seven years. Both the ECB and the Bank of England (BoE) have said that inflation rates would remain above target through to 2009 and advised against hiking salaries to cope with the situation as higher wages would stoke inflation.

The governor of the Bank of Spain, Miguel Angel Fernandez Ordonez, who is also a member of the ECB’s governing council, had warned that Spain faced the danger of a wage-price spiral due to wage indexation clauses in union work agreements.

The UK is also facing record high inflation with June’s inflation figure coming in at a 16 year high of 3.8%. The BoE had kept interest rates on hold at 5%. Its preferred level of inflation is 2%.

Many people are finding it hard to make ends meet. It is not just those on salaries who are seeing their income levels fall below their expenditure. Retired people usually only have their pension income to live on and whatever savings and investments they have managed to make. What may have seemed like a good income forty or fifty years ago when they began contributing to a pension pot could have fallen in value dramatically due to inflation. When it comes to actually taking a pension it may not be enough to provide the kind of living standard they had expected.

Reaching retirement is a significant stage in a person’s life and often brings significant lifestyle changes too. It may be that you are planning to move to Spain on retirement. Whether or not you do or remain in the UK, retirement is a point when you should review your financial situation and plan ahead. People today can live twenty or thirty years in retirement. Your investments, savings and pensions need to be looked at closely to make sure that you benefit from the most they can offer.

Inflation is probably the biggest threat to your financial comfort and survival, followed by taxation. Not only does inflation shrink the spending power of the cash in your pocket but over a twenty to thirty year period inflation can erode the value of your wealth by between 50% and 70%. You just need to think about how much items cost thirty years ago and how much they are today to realise how frightening this can be.

Many retired people like to keep their money “safe” in the bank. The stark truth is that banks are not the safe havens they have seemed to be. Banks are no longer solid institutions of reliability and respectability as recent bank crises have revealed. But perhaps more importantly, cash in the bank is vulnerable to high inflation and exposed to taxation. Even though capital held in a bank is usually protected, it does not have the opportunity to grow. On top of that, interest is taxed which can virtually wipe out the returns.

For instance, in Spain bank interest rate at 4% is swallowed by the inflation rate of 5%. The interest earned is taxed at 18%. Bank interest in the UK at 5% with inflation at 3.8% means you are earning a paltry 1.2% interest on your savings. For a basic rate UK taxpayer this is taxed at 20%.

Bear in mind that official inflation rates are misleading and are often lower than an individual’s personal rate of inflation. Official inflation rates are based on a set “basket of goods”, usually containing basic and necessary items and some fashion purchases of non basic items that are popular at the current time. Not everybody buys all these items, though, and some people, and categories of people, spend the bulk of their money on other things. Research has revealed that a retiree’s rate of inflation can be two of three times above the official rate. It is interesting to note that both the INE and Eurostat, the European Commission’s statistical agency, places Europe’s “basket of goods”, the Harmonised Index of Consumer Prices (HICP), as 5.1% in Spain.

A proven way to fight inflation is to set up a portfolio containing assets that are well diversified across a wide range of countries, currencies and industrial sectors. Your portfolio should comprise a broad mix of equities, property, bonds and cash. A portfolio such as this can be structured for your specific requirements, such as long-term capital growth, income if required and to provide for your heirs. It will be designed to combat the long-term eroding effects of inflation and to lessen the impact of taxation as well.

If you are planning on moving to Spain make sure that you talk to a financial adviser who is fully aware of investment and tax mitigation laws and procedures in both Spain and the UK. You will receive the best advice for your particularly circumstances and you should arrange a consultation preferably before you leave.

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