Protecting retirement savings from inflation
Written and accurate as at: Jun 08, 2022 Current Stats & Facts
When entering the retirement phase of life, there’s often a shift from primarily employment income to income derived from our retirement savings and potential social security entitlements.
With this shift comes the need to understand certain risks—that if not properly managed—could impact our retirement lifestyle and the money left to live on in later years. One of these risks is inflation risk.
In broad terms, inflation risk refers to the potential of high inflation, which can increase the cost of living and force more spending of our investment capital than expected.
Below we take a close look at recent inflation and some of the strategies that can be used to help with managing this risk.
How inflation is measured
Inflation refers to price inflation—the increase in the general price level of goods and services in the economy, typically measured in terms of movements in the consumer price index (CPI). CPI measures household inflation and includes statistics on price change for categories of household expenditure (eg food and non-alcoholic beverages, housing, health, and transport).
According to the latest Australian Bureau of Statistics (ABS) data*, CPI rose 2.1% in the March 2022 quarter—and 5.1% over the 12 months to the March 2022 quarter. By comparison, CPI rose just 0.6% and 1.1% during the same time periods twelve months earlier.
While CPI is primarily used as a measure for all households, the ABS' selected living cost indexes (LCIs)* go one step further and measure the price change of goods and services and its effect on different household types. As the below tables show, the impact of price changes can vary across different household types.
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Selected Living Cost Indexes (LCIs): Retirement-focused – Part 1 |
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December 2021 Quarter to March 2022 Quarter |
March 2021 Quarter to March 2022 Quarter |
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Weighted average of eight capital cities, All groups |
% change |
% change |
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Selected Living Cost Indexes (LCIs) – Household type: |
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Employee household LCI (ie main source of income is from wages and salaries) |
1.7 |
3.8 |
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Age pensioner household LCI (ie main source of income is the Age Pension) |
2.3 |
4.9 |
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Self-funded retiree household LCI (ie main source of income is super or property income) |
1.8 |
4.4 |
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Consumer Price Index (CPI) |
2.1 |
5.1 |
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Selected Living Cost Indexes (LCIs): Retirement-focused – Part 2 (Selected Category Examples) |
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|
December 2021 Quarter to March 2022 Quarter |
|
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Weighted average of eight capital cities, All groups |
% change |
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Food and non-alcoholic beverages |
|
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Employee household LCI |
2.8 |
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Age pensioner household LCI |
3.3 |
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Self-funded retiree household LCI |
2.9 |
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Consumer Price Index (CPI) |
2.8 |
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Housing |
|
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Employee household LCI |
0.6 |
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Age pensioner household LCI |
0.7 |
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Self-funded retiree household LCI |
0.5 |
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Consumer Price Index (CPI) |
2.7 |
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Health |
|
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Employee household LCI |
1.9 |
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Age pensioner household LCI |
5.5 |
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Self-funded retiree household LCI |
2.6 |
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Consumer Price Index (CPI) |
2.3 |
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Transport |
|
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Employee household LCI |
4.3 |
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Age pensioner household LCI |
4.9 |
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Self-funded retiree household LCI |
4.1 |
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Consumer Price Index (CPI) |
4.2 |
How inflation can impact retirement budgets
The Association of Superannuation Funds of Australia (ASFA) Retirement Standard benchmarks the minimum annual cost of a comfortable or modest standard of living in retirement for singles and couples aged 65 to 84, and aged 85+. This is reviewed regularly and updated quarterly in line with inflation.
According to ASFA^, over the year to March 2022, prices were up by around 4.2 per cent for the comfortable couple budget and by 4.7 per cent for the comfortable single budget. Furthermore, unavoidable price increases on everyday items such as food, petrol, and health costs are putting significant pressure on retiree budgets and reinforcing the need to build sufficient savings for retirement.
So, what does a comfortable retirement cost? According to ASFA’s figures for the March 2022 quarter, homeowner couples aged 65-84 living a comfortable retirement need to spend $65,445 per year and singles $46,494. Please note: ASFA suggests that the super balance required to achieve a comfortable retirement is $640,000 for couples and $545,000 for singles—this assumes that they draw down all their investment capital, and receive a part Age Pension.
Managing inflation risk in the lead up to (and during) retirement
High inflation can increase the cost of living and force higher spending than expected in retirement. For many, investment capital is a finite resource, and will, therefore, run down (and out) at some point and needs to be appropriately managed.
There are several strategies that can help with managing inflation risk (and other risks), both pre- and post-retirement. Depending on personal circumstances (eg financial situation, goals, and objectives), these strategies may include one or more of the following:
- diversifying investments (in and out of super)
- building up retirement savings to a sufficient level
- using available concessions to help reduce expenses
- aligning our investment objective to outperforming inflation
- boosting retirement income by accessing equity in the home
- supplementing retirement income with part-time or casual work
- reducing the income drawdown (subject to the minimum requirements)
- employing the three-bucket (cash, stable, growth) approach in retirement
- investing a portion of retirement savings in an annuity (eg inflation-linked annuity).
These are just some of the strategies available. As mentioned, the appropriate strategy (or strategies) for you depends on your unique financial situation, goals, and objectives. If you have any queries about this article, please contact us.
*ABS. (2022). Selected Living Cost Indexes, Australia.
^ASFA. (2022). Cost of living pressures hurt retirees too.
