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.
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.
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.
“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.