Investors often fear many things when making investment decisions. For some, market volatility and the potential for falling investment values top the list of concerns. However, inflation poses the biggest risk to investments and is one of the key metrics that deserves your full attention.
It is surprisingly easy to become accustomed to high inflation. While it is never comfortable, we tend to adapt, complaining about rising costs but ultimately getting by. Before the 2020 pandemic, the prime interest rate stood at 10.25% but dropped to 7% as the government sought ways to support the economy. Today, many of us long for those days when lower rates freed up cash, thanks to more manageable home, car, and credit repayments.
Now, we find ourselves facing a prime interest rate of 11.75% as the South African Reserve Bank battles to curb stubbornly high inflation. At 5.1% in June this year (down slightly from 5.2% in May), consumer price inflation (CPI) is not just squeezing your monthly budget – it is also eating away at your long-term investments.
Inflation destroys capital
Investment manager Dave Foord captured this point neatly in his book Time in the Markets, where he states that “the biggest destroyer of capital is inflation”.
What he means is that the real value of your wealth declines when inflation outpaces the returns on your investments. This erosion could mean falling short of your long-term financial goals, such as retirement savings.
If your investment income does not at least keep pace with inflation, maintaining your current lifestyle becomes increasingly difficult. For instance, if inflation is running at 5% per year, a basket of goods costing R1 000 today will cost R1 050 next year. While R50 might seem negligible, even modest inflation can significantly impact your future purchasing power over time.
The impact of inflation on investments
Let us explore how inflation can erode the purchasing power of a R1 million investment over a 10-year period, assuming the following conditions:
You are retired and invest R1 million in a fixed deposit that provides a 9.5% annual return.
You withdraw the entire return (R95 000 per year) as income without reinvesting any portion of it.
Assume a steady annual inflation rate of 5% over the 10 years.
When calculating the purchasing power of R95 000 over 10 years, adjusting for 5% annual inflation, the same R95 000 would only have the purchasing power of approximately R58 321 in today’s terms in 10 years’ time.
Over 10 years, while your nominal income remains R95 000 annually, the cumulative effect of inflation means that the real purchasing power of that income significantly diminishes. By the 10th year, the purchasing power of your annual withdrawal has fallen by about 38.6% compared to the first year.
The R1 million investment, while generating a consistent 9.5% annual return, does not grow in real terms since you withdraw the entire return each year. As a result, inflation steadily erodes the purchasing power of your income, leaving you with significantly less ability to buy goods and services over time. This illustrates the importance of considering inflation when planning retirement income, as maintaining the same withdrawal rate could lead to a noticeable decline in your standard of living over the years.
Four strategies to protect wealth from inflation
In short, inflation cannot be ignored. It has real consequences that impact your long-term investment returns. Here are four strategies that can help mitigate its effects:
- Diversify your investments: Spreading risk across a mix of stocks, real estate, inflation-protected securities, and commodities can help balance your portfolio and reduce the impact of inflation.
- Invest in inflation-resilient assets: Real estate with inflation-linked leases and companies with strong pricing power can help maintain your income and purchasing power.
- Regularly review and adjust your portfolio: Stay ahead of inflation by monitoring your investments and making necessary adjustments. Consulting a financial advisor can be invaluable in this process.
- Focus on growth investments: Stocks of companies with strong fundamentals and growth potential can provide returns that outpace inflation.
Personal inflation rate vs CPI
Let us make inflation more personal. Your actual cost of living could be significantly different from the metrics used to calculate CPI.
For instance, households across the country face steep annual increases in medical aid tariffs, electricity, property rates, and levies. This means your personal expenses might be rising faster than the official CPI figure.
It is crucial to factor this into your financial planning to ensure it delivers the long-term results you are aiming for. Ultimately, the best way to counteract inflation is to find investments that produce returns exceeding the inflation rate.
Your circumstances and goals are unique, so it is difficult to offer a one-size-fits-all solution. If you are concerned about the future value of your retirement savings, please reach out so we can explore the investment options that will help you achieve your financial goals.
Megan joined the Brenthurst Wealth team in March 2026 as an Administrative and Fiduciary Services Assistant at our Val de Vie Office in the Western Cape. Prior to joining Brenthurst, Megan gained three years of experience in the retail sector, where she developed management and client service skills.
I obtained my National Diploma in Financial Information Systems from the Cape Peninsula University of Technology in 1999 and have worked in the wealth management industry since January 2000. Over the years, I have gained extensive experience in various roles, including Portfolio Manager Assistant, Planner Assistant, and Paraplanner.
Esmarelda Isaacs-Andreas joined the Brenthurst Wealth Stellenbosch office in October 2025, taking on the dual role of Receptionist and Fiduciary Administrator.
I obtained my National Diploma in Financial Information Systems from the Cape Peninsula University of Technology in 1999 and have worked in the wealth management industry since January 2000. Over the years, I have gained extensive experience in various roles, including Portfolio Manager Assistant, Planner Assistant, and Paraplanner.
Ashley joined Brenthurst Wealth in January 2025 as Office Administrative Assistant and Receptionist for the Stellenbosch Office.
René Heystek joined Brenthurst Wealth in November 2023, as receptionist and administrative assistant in the newly established George/Garden Route office.
Michelle Heystek has built a career in the financial services over the last two decades, after obtaining her B.Com degree in Financial Management in 2005. Once she joined Brenthurst in 2006, she continued her academic journey, obtaining her Certificate in Wealth Management from INSETA in 2007, followed by a Postgraduate Diploma in Financial Planning from the University of the Free State. In 2008, she earned the Certified Financial Planner (CFP®) designation.
Anelle joined Brenthurst Wealth as a Receptionist and Administrative Assistant to Brian Butchart in the Cape Town office in December 2023. She has a wealth of knowledge from working as a liaison between Financial Advisers and clients at TMA and Absa Investment Management Services (Aims) since 1998. She obtained her B. com degree from the University of Port Elizabeth in 1997.
ADMITTED ATTORNEY | FINANCIAL PLANNER & HEAD OF BRENTHURST FOURWAYS
Sanet was appointed in April 2020, joining our Cape Town team as an Executive Administration Assistant to Renee Eagar. She has been in the financial services industry since 1990. Her previous experience includes positions at Sanlam, BJM and ABSA. She spent her last 12 years working at Alexander Forbes Private Client Wealth as a Senior Wealth Management Assistant. She has received numerous accolades over the years which include but not limited to, Alexander Forbes Client Service Excellence – Silver award in 2014,2015 and 2017. Sanet has also obtained her Certificate in Wealth Management (NQF 5) in 2012 and achieved “Best Student of the Year” from Moonstone.
Maria Smit is a Certified Financial Planner® with over 10 years of experience in the financial planning industry.
