Hopeton Morrison, ContributorThe damage to the economy caused by hurricanes Ivan, Emily and Dennis all within a 12-month period would have shaken a stronger economy than Jamaica's. But news of the higher-than-expected inflation from as credible a source as the Bank of Jamaica seems to have put paid not just to a new memorandum of understanding next year but also the much-anticipated social contract between the Government, unions and the private sector.
Rising inflation is the bane of governments across the globe. It is primarily within that context that financial planners increasingly speak to the twin concepts of investment risk and longevity risk. As you accumulate money towards a life of financial independence, you are exposing yourself to the possibility that your bonds, stocks, real estate, and other investments could lose value.
Longevity risk is the real possibility that you will outlive your savings especially when matched against the statistics that we have bandied about in these columns week after week. A 65-year-old male now has a 30 per cent chance of living into his 90s, a 65-year-old woman has a 41 per cent chance and there is a 60 per cent chance that at least one member of a couple both age 65 will live into the 90s.
The implications on your chance for lifelong financial independence are profound. At some stage in your life, if you live long enough, you will start withdrawing funds from your nest egg. It is here that inflation becomes the biggest deal of all because it must be factored into your withdrawal strategy, hence withdrawal risk. A retiree for example who withdraws a similar amount from her nest egg each year will find herself unable to buy the same levels of goods and services this year that she bought last year because of inflation. To be able to purchase at the same level next year then she must increase the dollar amount from her portfolio by at least 15 per cent.
CONSUMER PRICE INDEX
The latest call for a reconfiguration of the basket of products that form the Consumer Price Index based on which rises in prices are weighed and measured came from financial analyst Errol Gregory last week. The Statistical Institute of Jamaica responded that it will review the basket and release its recommendations early in 2006.
Even very modest inflation has a profound impact on the value of your savings and more so on persons who no longer work. The rule of 72 is a simple but reliable guide to the impact of inflation. The formula is to divide 72 by the annual rate of inflation and this will tell you how soon prices will double. So in our case here in Jamaica, if annual inflation of 15 per cent this year on the back of double digit inflation last year becomes the norm over the next few years, we could well see the prices of goods and services doubling by 2010.
Within this high inflation environment, it is important that you delay tapping into your nest egg for as long as possible after 65. And even when you break that nest egg, your single most effective strategy against longevity risk is to start with as low a withdrawal rate as possible to better your odds of having enough money to last you into your 90s.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com
