How inflation can dent retirement savings

The effects of inflation are obvious to most in day-to-day life. It’s hard to ignore a spike in your weekly grocery bill, especially on a limited budget. Hence the now well-worn term ‘cost-of-living’ crisis.

But inflation affects finances in other ways, too, and not always in the way one might expect. The impact on retirement income and savings is a good example.

If your nest egg is generating returns in line with – or better than – inflation, that’s generally not a bad thing. 

However, depending on the way your retirement savings are invested, that is not always the case. In fact, Australians who rely on equities to generate returns have been hit hard by inflation. This has led investment management firm Challenger to recommend those Australians consider varying their portfolios.

Challenger’s newest white paper encourages a diversification of market-linked portfolios to include guaranteed income streams. This should include a CPI-linked income stream to provide inflation protection. CPI-linked income streams are designed to automatically adjust for inflation, based on the Consumer Price Index.

Inflation effects – short term versus long term

Challenger’s head of retirement income research, Aaron Minney, said it was important to understand that managing inflation required different approaches before and after retirement. The ability to do so in retirement is limited, even with long-term returns from equities, he said.

“Cost-of-living spikes tend to be short term,” Mr Minney said. “That is manageable during the accumulation phase as there is time to recover.”

While equities have historically had returns higher than inflation, these can require a long timeframe – as long as 16 years.

“Retirees do not have this luxury, meaning they are at heightened risk to the impacts of inflation and need a hedge in their retirement portfolio that can protect the income,” Mr Minney said.

Challenger’s white paper advises that income streams heavily linked to the market can result in extended periods of reduced lifestyle. But the paper, titled Protecting retirement income from inflation, says incorporating a guaranteed income stream can offset such a downturn.

Those who had not already done so were feeling the pinch, Mr Minney said.

“The fall in inflation from multi-decade highs is good news for our economy,” he said. “[But] many retirees continue to struggle with cost-of-living because of the cumulative impact inflation has had on their financial position.”

The importance of diversifying – and advice

Mr Minney said the effects of inflation reaching a multi-decade high recently also highlighted the importance of getting proper advice. This was backed up by another recent report published by Challenger, the 2024 Challenger Retirement Happiness Index.

The report incorporated the results of more than 1000 Australians aged over 60. It found 65 per cent said the rising cost of living impacted their confidence about having enough money to retire. The survey also found 72 per cent would be happier if they had a guaranteed income. 

Despite this, many Australians were still not seeking advice on how to achieve this, Mr Minney said. “There is a clear need for some form of professional financial advice,” he said. “Yet we found only one in five Australians over 60 are currently receiving it.”

Have you considered the possible negative effect inflation could have on your retirement savings? Do you have a financial adviser with whom you discuss such matters? Let us know via the comments section below. 

Also read: How to use your home equity to invest in real estate

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Andrew Gigacz
Andrew Gigacz
Andrew has developed knowledge of the retirement landscape, including retirement income and government entitlements, as well as issues affecting older Australians moving into or living in retirement. He's an accomplished writer with a passion for health and human stories.
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