How can I hedge my retirement investments against inflation?


Understanding inflation and its consequences is of utmost importance to an investor or an ordinary citizen in the current economic climate. PHOTO | SHUTTERSTOCK

In the current economic climate, how can we safeguard our retirement savings from inflationary pressures that may erode their real value over time? 

Understanding inflation and its consequences is of utmost importance to an investor or an ordinary citizen in the current economic climate.

Inflation is the gradual rise in the cost of goods and services in a country within a specified period. Over the last three years, and as per the records held by the Central Bank of Kenya (CBK), the inflation rate has been averaging 8 percent. An 8 percent inflation, therefore, means that every year, you must add an equivalent amount to buy the same basket of goods.

Picture this: Five years ago, Sh1,000 could buy you cooking oil, sugar, rice, and perhaps some groceries. However, now, the same amount can only buy you a 2kg packet of sugar and 2 litres of cooking oil. This demonstrates how inflation affects us all.

As an investor, it is wise to consider ways to hedge your retirement income from inflation, thereby maintaining the value of your money. Below are some strategies you may consider employing to get ahead of inflation.


As an investor, avoid putting all your eggs in one basket. Diversification entails allocating money to different asset classes with varied risk and return profiles. For example, you could consider dividing your pension income among stock, fixed income, or alternative investments. The essence of diversification is to ensure that you have enough returns that will offset the increasing inflation rate and, at the same time, give you growth for your money. Therefore, do not be keen on maintaining only one asset class but rather be open to various investments.

Portfolio rebalancing

Portfolio rebalancing entails changing the weights of the different asset classes in your investment basket. Investments perform differently during various seasons, so carrying out a performance analysis over time is crucial. If your pension is institution-managed, reach out to your trustees to understand your investment performance and how that will influence the asset allocation over time.

However, be keen not to remove assets with a short-term downturn yet have the long-term potential to grow. At the same time, dispose of assets that seem to be doing well in the meantime but whose value is expected to dwindle significantly in the near future. Be very strategic about your holding position, which should align with the asset performance and the market reviews.

Growth investing

Growth investing entails investing in stocks or companies that demonstrate high growth potential. Fundamental and technical analysis is an excellent way of establishing the possibility of a company’s survival in the long run. Technical analysis looks at current and past trends and how the company has been performing to forecast future price movements.

Fundamental analysis has a 360-degree view of the company, including its strategy, share price, leadership, products and services, and reviews to determine a security’s growth potential. Once you conduct your fundamental and technical analysis, Ideally, go for undervalued companies as they are likely to be valued appropriately in the future, and you will gain from the valuation.

Fixed-income investments

Have you heard the term “time value of money”? The time value of money means that a shilling today is worth more than tomorrow. You may desire the security of having hard cash, but you will lose its value. Therefore, saving money in fixed-income investments such as the money market, fixed deposits, call deposits, treasury bills, and bonds is a good idea. The fixed-income asset class assures you of income over time in terms of interest, thereby shielding your money against inflation.

Alternative investments

Alternative investments are asset classes that do not fall under the traditional investments category, such as cash, bonds, and treasury bills. These assets include real estate, private equity, commodities, and precious metals. Most alternative investments offer a safe haven for investments as they are not always affected by interest rates. For example, real estate appreciates over time, and the growth could be sufficient to counter inflation.

Although getting into private equity could be risky initially, one can get into a promising venture that could even triple their initial investment. Instead of over-relying on traditional investments, consider adding alternative investments to your portfolio.

Foreign investments

Foreign investments are an excellent way to hedge against inflation and currency risk. The value of the shilling has been depreciating over time, and it is currently trading at Sh153 for each dollar, interest rates have also been rising. This is a risk for the local investments, which continue to lose their value over time. However, investors with some foreign investments are smiling all the way to the bank due to the high currency exchange rate.

Offshore investments serve as a safe haven for investors as they tend to increase in value during market turbulence, and you may want to explore that option. You could also choose to hold hard currency in dollars and pounds to safeguard your money from losing value in the current economic times.

Retirement benefits preservation

The Retirement Benefits Act gives provision for employees to get up to 50 percent of their retirement savings once they leave an employer. This allowance is exciting and can be tempting, but it is detrimental to your retirement savings in the long run. Pension schemes invest in income-bearing assets tailored to the employee’s needs, thereby hedging your income from inflation.

Withdrawing your income early means that you lose out on potential income growth, and you could get into investments whose returns are too meagre to counter the growing inflation. Maintaining your retirement savings even after switching jobs is advisable to avoid inflation.

Although you may feel confident enough to make your financial and investment decisions, consider seeking the advice of a professional. Seek the services of a financial expert who understands your income, current and future needs, time horizon, risk profile, liquidity needs, personality, and retirement goals to align your investments sufficiently.

Constantly check on your financial advisor to understand how the market is doing and how that would potentially affect your retirement savings and adjust accordingly.

The writer is an investment analyst at Zamara and can be reached via [email protected]

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.