Silent squeeze of inflation the hidden threat to retirement planning as it eats away at our nest eggs

Irish Independent

05-05-2025

The issue is particularly acute for pensioners who have cash lump sums in the bank or are relying on their savings after leaving the workforce.
Research carried out by online savings platform Raisin Bank found that if inflation stays at its current level of around 2pc in this country it would deflate a nest egg of €20,000 to just €16,600 in 10 years.
The bank said inflation was a ­hidden threat to post-retirement planning.
If inflation continues at the historical level it has been at for the past 50 years then €20,000 today would be worth just €13,000 in the next 10 years.
The Ireland head of Raisin Bank, ­Eoghan O'Hara, said: 'Many Irish retirees receive lump sums or maintain cash savings accounts to help fund their lifestyle, cover healthcare costs, or prepare for unexpected expenses.
'But few realise how quickly inflation can shrink those savings unless they're earning a return that keeps up.'
Mr O'Hara said that if left unprotected, even modest inflation can diminish the buying power of retirement lump sums or emergency funds meant to last years.
He said workplace pensions are ­designed for long-term growth and can include inflation-linked elements.
But cash savings, such as those held in low-interest demand deposit accounts, are far more vulnerable to inflation's silent squeeze.
Inflation measures the rise in the cost of living over time.
Even at a modest rate, inflation reduces the real value of your savings, making it vital to plan accordingly
In Ireland, historical inflation rates over the past 50 years have averaged roughly 4.35pc year over year.
The current economic policies of the European Central Bank aim to maintain a 2pc target.
Mr O'Hara said: 'Even at a modest rate, inflation reduces the real value of your savings, making it vital to plan accordingly.'
Statisticians at Raisin Bank used historical inflation rates and calculated that €100 today would be worth only €65 in 10 years. And the €100 would be worth just €43 in 20 years' time.
However, under the 2pc target scenario, the decline is less severe.
In that case, €100 will be worth €82 in 10 years, and €67 in 20 years.
Mr O'Hara said this demonstrates how even small percentage differences compound over time, affecting retirement funds.
He said that for those in their 30s and 40s, the challenge to retain value when building up retirement savings is even greater. With 26 to 36 years until retirement, inflation can dramatically alter expectations.
A 30-year-old planning to retire at 66, experiencing a 4.35pc inflation rate, would see the purchasing power of €100 today shrink to around €21.5 by retirement.
Mr O'Hara said taxation also plays a role in reducing post-inflation gains.
In Ireland, Deposit Interest Retention Tax (Dirt) further diminishes real returns on savings accounts.
When adjusted for tax, returns on low-yield savings can fall below inflation, leading to a loss in real value.
This makes tax-efficient investment options within pension schemes even more critical, he said.
Relying solely on low-return cash accounts is risky due to inflation's erosive effects.
Instead, pensions and investments should be structured to deliver real, or inflation-adjusted, growth, Mr O'Hara said.
Raisin Bank said average historical Dirt-corrected savings rates for term deposits are a full percentage point higher than the rates for demand deposits.