Why inflation hits retirement income hardest

inflation hits retirees harder

Retirees may see their income halved in real value if the current period of surging inflation continues, research has found.

The Consumer Price Index (CPI) is sitting at 7.8 per cent over the previous 12 months, and predicted to top eight per cent by the end of the year.

While this puts pressure on virtually everyone, it’s likely putting the most pressure on retirees, says investment group Challenger in its Inflation risks and retirement income innovations report.

The report found that based on an inflation rate of five per cent (well below current levels), the real purchasing power of a retiree’s savings are halved in 14 years.

Read: Inflation rises more than forecast

Add in ever increasing life expectancies and retiree incomes are taking a hit.

Aaron Minney, author of the report and head of retirement income at Challenger, says the impact of the inflation crisis on retirement incomes will be much worse than the last one in the 1970s.

“Retirees have become silent casualties of the surge in inflation, and many must now rethink their whole approach to wealth management,” Mr Minney says.

“Given retirees have to make their money last, on average, for around 24 years compared to 13 years in the 1970s, finding a solution is critical to the health of the economy.”

The report found that even modest inflation can have an oversized impact, with a rate of just two per cent a year translating to a 25 per cent drop in the real value of retiree income over the same 14-year period.

Read: Aussies delaying retirement by five years, survey finds

What can be done?

The challenge for retirees is to not only generate higher than inflation returns, but also manage income if inflation is higher than expected.

Mr Minney says retirees need to place their retirement savings in an investment that benefits from higher inflation or automatically adjusts through being indexed to the CPI.

These may include financial products such as short-term CPI-linked bonds, real assets like infrastructure and real estate or a guaranteed lifetime annuity also linked to the CPI.

Ashley Owen, chief investment officer at advisory firm Stanford Brown, says hedging against inflation in retirement is a matter of getting the mixture of growth and defensive asset classes just right.

Read: An annuity could help you increase your Age Pension

“The defensive (debt) assets are usually favourites with retirees because they offer advantages of regular, relatively reliable income, and usually relatively stable capital values,” he says.

The downside of their relatively stable capital values and income is that capital values (and future income) do not provide any protection against inflation.

Mr Owen says there is still a need to take on a certain amount of risk in retirement if your assets and investments are going to keep up.

“People investing for periods of more than a few years (which includes almost all retirees) still need high quality, diversified ‘growth’ assets in their portfolios.”

How has inflation affected your nest egg? Is it time to rethink your strategy? Let us know in the comments section below.

Written by Brad Lockyer

Brad has deep knowledge of retirement income, including Age Pension and other government entitlements, as well as health, money and lifestyle issues facing older Australians. Keen interests in current affairs, politics, sport and entertainment. Digital media professional with more than 10 years experience in the industry.

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  1. I have been retired for 12 years, and my Superannuation account pays me monthly at a comfortable rate and the balance of my account is higher now than when I set it up (despite the big drop during the pandemic). I do not need to worry about shares, investments or property management. I have a Commonwealth Seniors Health Card that gives me great discounts..

  2. So inflation runs higher than returns on investment income, meaning retirees who saved go backwards. This was always likely to happen.
    Better to spend and enjoy it while you can, keep a small nest egg and get the full age pension which is indexed like I have.
    Set yourself up with everything you will ever need, be debt free and the pension together with the concessions and freebies that go with it provides a comfortable life.
    In Australia there is no need to save a lot for retirement just make sure you fully own whatever you require beforehand.

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