Apr 30, 2022

Our insights

Planning for retirement on your own is a daunting task and can be challenging enough without an unknown variable such as inflation thrown into the equation.

Inflation reached 3.5% in Australia in December 2021 and is expected to climb higher.

It has been fuelled by the breakdown of domestic supply chains due to COVID, commodity shortages as a result of the conflict in Ukraine and the Australian government’s debt levels soaring beyond $1 trillion.

But just how much will it impact retirees and what, if anything, can be done about it?

What is inflation?

Inflation is the measure of change in prices.

The most common indicator of that change is the Consumer Price Index (CPI) which takes an average basket of goods and tracks its price quarterly.

Today’s dollars

When you plan for retirement, most calculators will ask how much money you will need each year in “today’s dollars”.

By using the past as a guide to the future, it will then calculate how much you might need say 25 years from now.

The problem with that is that the average inflation rate in Australia over the last 25 years has been a relatively friendly 2.4%.

Even at that rate, the average rise in the cost of goods over those 25 years is a hike of 80%.

Hence if maintained for the next 25 years, a $3.90 loaf of bread today would rise to $7.00 by 2047.

But a steeper rise is on the cards in the immediate future with inflation already sitting at 3.5%.

If that inflation rate was maintained over 25 years, that $3.90 loaf would rise to $9.20 with average prices leaping 136% over the duration.

A yearly inflation rate of 4.5% would equate to a 200% rise in prices and bread costing $11.70.

All of a sudden, today’s dollars aren’t going that far tomorrow! 

The annual inflation rate in the U.S. hit a 40-year high of 8.5% in March hence we need to prepare for worse to come.

Retirees hit hardest

Retirees always suffer the most in times of high inflation, especially those on lower or fixed incomes or those who don’t have a defined annuity.

That’s because their money has to stretch further for non-discretionary spends such as food and energy. 

Those on a pension tend to struggle because indexation rises rarely keep pace with actual inflation.

In March 2022, a 2.1% rise was applied to the Age Pension, the biggest increase since 2013, giving singles an extra $20.10 a fortnight and couples an extra $30.20.

But it was still 1.4% shy of the December, 2021 inflation rate of 3.5%.

Super struggle

If you’ve planned well, you’ll have a nice super fund to ease you into retirement.

But a surge in inflation is likely to bridle those returns.

That’s because the future earnings of many companies are reduced when inflation rises, so reducing the value of shares.

Projections for the remainder of the financial year have most super funds delivering only a 5% return. 

However, caution is advised if you are considering switching your super from a balanced to a lower risk option.

This could significantly reduce your nest egg.

It is worth remembering that over the last decade, average returns for balanced funds have delivered better than 8% per annum.

That is well above their performance objectives and well above capital-stable fund options which linger around the 5% return.

How retirees can protect themselves

There are always strategies you can consider to tackle inflation and talking to an experienced financial advisor is crucial.

These may include buying an annuity or other financial products designed specifically to counter the effects of inflation. 

Moving cash out of banks and into more attractive short and medium term investments may be wise. 

Investing in broad funds or select stocks likely to benefit in a period of high inflation can also be beneficial.

These stocks usually include utilities, healthcare, the energy sector and consumer staples.

Retirees should also consider cutting back on any non-essential spending and consider how else they may be able to tighten their purse strings until the financial outlook becomes more favourable.

Retirement Income Covenant

The Australian Government has put in place the Retirement Income Covenant (RIC) which comes into force in July 2022. 

It requires super trustees to develop a retirement income strategy for their members to improve the financial outlook for all Australian retirees.

This strategy will specifically consider and manage inflation risks and include the Age Pension.

Get advice today

If you’re retired or approaching retirement age, this won’t be the first time you’ve seen high inflation.

But you might only get one chance to put mechanisms in place to protect your wealth rather than watch it quickly erode.

Calder Wealth Management are financial planning experts who can help your savings go further and ensure you aren’t blindsided by a rapidly changing financial climate.

At CWM, we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Ben Calder.

The information contained on this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.

Contact us now for a no obligations discussion about your needs.