Sobering truth about your spending power as you age

A financial adviser – and your own common sense – will tell you that you need to factor in inflation when planning for your retirement or tinkering with your spending and investing in retirement.

One dollar today will not be worth one dollar in five years’ time.

Stanford Brown portfolio manager Ashley Owen explains it disturbingly succinctly.

“$100,000 of assets or income in 1980 was a lot of money at that time (the median Sydney house price was just $69,000 in 1980), but $100,000 in 1980 dollars would have been whittled down to just $19,000 in (2022) dollars if you didn’t protect it against inflation,” he says.

Another way of looking at it, he says, is that if you had $100,000 in cash in 1980 and locked it in a safe then opened the safe in 2022, you still have that same $100,000 but it would only buy $19,000 worth of today’s goods and services. Inflation has eaten away 81 per cent of its purchasing power.

Fear of running out of money

The latest Consumer Price Index figures – for the June quarter – contained some good news. Inflation was on the slide – 6 per cent, down from 7 per cent in the previous December quarter. Reserve Bank interest rate hikes were crippling anyone with a mortgage but otherwise managing to bring down inflation.

But back to retirees and pre-retirees. The fear of running out of money in retirement is a key concern. In the YourLifeChoices 2022 Insights Survey, almost 60 per cent of about 4600 respondents said they did not believe their savings would provide an income for life. It’s a sentiment replicated in countless other surveys. And it’s why too many retirees are living more frugally than they need to and, as a result, leaving sizeable inheritances to the kids.

It is also being attributed to the faltering economy, with retirement spending deemed necessary to avoid economic stagnation.

Since 2017, YourLifeChoices and The Australia Institute’s senior economist, Matt Grudnoff, have been tracking the estimated living costs of retirees via six cohorts – well-off couples and singles, constrained couples and singles and cash-strapped couples and singles.

On receipt of the latest costs – and the weekly, monthly and annual spending estimates – we thought it timely to see how the totals have changed over the past five years. A key objective of the Retirement Affordability Index is to deliver an eyes wide open analysis to help you assess your preparedness for retirement or your spending power in retirement.

What you spent then and now

At the end of June 2018, well-off couples (couple homeowners with private income) could expect to spend almost $74,500 in a year while well-off singles could expect to spend almost $42,600. Constrained couples (homeowners on an Age Pension) needed to budget for costs that tallied $42,830 and constrained singles $23,750.

Fast forward to the end of June 2023, and those estimates were $87,900 and $50,198 for well-off couples and singles and $50,780 and $28,117 for constrained couples and singles. No wonder we’re working for longer and being frugal with our nest eggs.

For the other cohorts, cash-strapped couples and singles (renters on an Age Pension), the estimates jumped from $36,138 to $43,041 for couples and from $22,687 to $27,159 for singles. Couples on a full Age Pension currently receive $41,818 and singles $27,740. That means it’s almost impossible for these cohorts to make ends meet unless they have another source of income.

For the record, the Association of Superannuation Funds of Australia (ASFA) puts the annual estimates for a ‘comfortable’ retirement for couples aged 65 at $70,482 and for singles $50,004. That would require savings of $690,000 and $595 respectively.

Inflation is falling, but even if it returns to low levels purchasing power suffers.

Mr Owen writes: “Even in the ultra-low inflation post-GFC years, $100,000 in 2010 has been eaten away to a purchasing power of just $73,000 …”

He says that even if inflation can be returned to 2–3 per cent per year, money still loses half of its purchasing power over 30 years if we don’t invest in assets that at least keep pace with inflation.

We’re living longer

So building the nest egg is just one part of the equation for a confident retirement. That nest egg loses purchasing power the longer you live – and we’re living longer.

And the longer we live, the less likely we are to invest in growth assets.

“The defensive (debt) assets are usually favourites with retirees because they offer advantages of regular, relatively reliable income, and usually relatively stable capital values,” writes Mr Owen. “The downside of their relatively stable capital values and income is that capital values (and future income) do not provide any protection against inflation. They suffer inflation decay …”

The Conversation asked 27 leading economists for their take on inflation and all said it would continue to fall. The panel predicts a cash rate of 4.5 per cent by the end of this year, followed by a decline to 4.3 per cent by the middle of 2024, and to 3.9 per cent by the end of next year.

The panel expects growth in real household spending of just 1.5 per cent in 2023-24, meaning the amount bought per household is likely to shrink.

Giving retirees the confidence – and courage – to spend rests with good financial advice or knowledge, regular checks to ensure the plan is on track and, hopefully, greater assistance from superannuation funds that have been given the task – via the retirement income covenant – of assisting retirees more broadly.

So how can you fight back?

Tristan Harrison has an advanced diploma from the Association of Accounting Technicians (UK) and is studying to be a Chartered Institute management accountant. Writing for The Motley Fool, he poses the question: How long could $1 million last in retirement?

He offers some general thoughts while emphasising that financial advice is vital.

“If we had $1 million sitting in a bank account earning no interest, it would last around 20 years for a single person and 14 years for a couple, assuming no inflation.

“These days, we can get a good return from high interest savings accounts and term deposits. At the moment, $1 million could generate at least $50,000 of interest after some good research to find a good option.”

He says that interest could give a single person a comfortable retirement, though inflation would steadily become greater than what is possible with just interest.

“A couple would steadily need to eat into the capital balance, particularly if interest rates were reduced and term deposit returns declined,” he says.

Mr Harrison advocates investing in ASX shares “because they can deliver profit and dividend growth that’s (hopefully) faster than inflation over time”.

Is purchasing power a problem for you? Has that been factored into your retirement plan? Share your experience in the comments section below.

Also read: The four big retirement questions

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.