In March, New York Federal Reserve president William Dudley (who also sits on the United States Federal Reserve open market committee with Ben Bernanke) travelled across to Queens to give a talk on inflation. The presentation did not go well.

Things started to go downhill as he tried to explain why he believed underlying inflation was low in the US despite the surge in food and petrol prices. Several in the audience questioned how the Fed could ignore rising grocery prices when they were such a large cost for families. Another demanded: "When was the last time, sir, you went grocery shopping?"

In response, he acknowledged food prices had risen but argued that the price of other things had gone down. He then searched for an example to illustrate his point. In an extraordinary moment, he decided to cite the new iPad as an example, saying: "Today you can buy an iPad 2 that costs the same as an iPad 1, and it's twice as powerful."

This line may have gone down well in his native Manhattan, where the iPad owners live, but not so in Queens. The audience murmured, sighed and shook their heads in an unusually emotional response. One yelled out: "I can't eat an iPad."

Official data shows the cost of living, as measured by our key inflation gauge, has increased by 9.7 per cent in total over the past three years, or about 3.1 per cent a year. This includes the impact of the GST rise last year, which the Reserve Bank has said will be overlooked when it comes to setting interest rates.

I suspect most people would argue this figure seems much lower than how things feel in reality. Given the recent trajectory of petrol prices, food prices, electricity prices and rents, many consumers would likely dismiss that 3.1 per cent a year increase as a gross underestimation.

Some may even suggest that central banks and policy-makers are out of touch with the challenges being faced by everyday people.

The disparity stems from different goods and services being included in the various inflation measures and calculations. The Fed governor was correct in telling his audience in Queens that it is underlying inflation that matters most. But the current spike in food and fuel prices highlights the fact that savers and investors need to protect themselves against rises in their cost of living, regardless of whether those costs are fully reflected in inflation figures.

Protecting against inflation remains a central theme in any debate about planning to meet future retirement needs. If inflation continues at 3.1 per cent a year, $100,000 today will be worth only $73,691 in 10 years' time. Another 10 years and it's down to $54,303 - a 46 per cent decline. So leaving that nest egg safely in the bank and living off the interest is a poor strategy.

New Zealand's savings culture must adapt to meet our own challenges and such planning requires further discussion after this week's Budget announcements.

Investors who still have a decade or two before they retire must include assets that have the potential to deliver income growth in their portfolio, such as shares. Income from a share portfolio comes from the dividends that companies pay out, in the same way a property investment provides its owner with income by way of rent.

Companies earn profits and distribute some of these profits to their shareholders by paying them a dividend. As long as the company is making profits, dividends will keep being paid, regardless of what the share price is doing. If company management is doing its job, the profits will grow over time and so the dividends being paid each year to shareholders will also rise.

A fortnight ago, I discussed some of the high-quality companies we have on our market and many of those same names illustrate this point. In 2000, Ryman Healthcare paid a dividend of 1c a share, which equated to a dividend yield at the time of 2.5 per cent.

Today this dividend has grown to 7.3c a share and the company trades on a similar dividend yield, because the share price has followed this dividend upwards. But an investor who bought a Ryman share back in 2000 for $0.40 would now be getting a dividend yield on that share of 18.3 per cent a year.

The same premise holds for many good-quality companies. Investors who bought shares in TrustPower, Auckland Airport or Port of Tauranga in 2000 would today be reaping annual dividend yields on their cost price of 26.4 per cent, 18.6 per cent and 17 per cent respectively.

Investors who have some of these shares in their portfolio have not only kept pace with inflation, but they are at least partially insulated from the interest income on their deposits having halved over the past few years.

But those who have relied solely on short-term interest rates to fund their retirement have faced a devastating decline in their income. Many investors have retired and taken this approach, expecting interest income on these deposits to fund their retirement needs.

They have been hit severely by the sharp fall in interest rates since 2008. The amount of capital needed to generate a pre-tax income of $60,000 has more than doubled over the past three years. In 2008, deposit rates were at 8.2 per cent and a sum of $730,000 was enough to generate an annual income of $60,000.

Today, with deposit rates having almost halved to 4.2 per cent, and inflation rising by almost 10 per cent, a nest egg of more than $1.5 million is now required to generate the same level of income and spending power.

Dividend growth has been the foundation of our investment philosophy for many years. Times like these, with interest rates slashed and inflation rising, illustrate precisely why we hold this view.

To deal with low deposit rates, some may turn to high-yield fixed-income to try to fill this income hole. But they should be aware that high yield also means high risk. The finance company debacle is a stark and tragic example of the risks involved in this approach.

A better strategy is to move some, even a modest amount, of capital into shares and buy a selection of high-quality companies that are providing solid dividend yields. Some see investing in shares as too risky. These concerns can be mitigated by investing in instalments, allocating only a modest proportion of your capital to shares, buying a diversified range of companies, sticking to large, high-quality companies and focusing on stocks delivering good, sustainable dividend yields.

Buying shares will, of course, expose this part of your portfolio to the volatility of the share market, but the income stream should not be as volatile as share prices. Focus on the income and share price ups and downs become less tiresome.

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Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice. Craigs Investment Partners invests in all the companies mentioned on behalf of its clients.