A sudden and significant increase in the number of retirees concerned about inflation has emerged, according to recent research from investment management firm Challenger.
This marks the first time such a notable rise in inflation concerns has been recorded since the company started surveying older Australians back in 2013.
Challenger’s annual survey asks seniors about their concerns and how various factors affect their lives. This year more than ever, it showed inflation has become a major worry for retirees.
“By and large, wages have kept up with inflation, but when you are retired and you no longer have a wage, you start to wonder, well, how on earth do I get my increase? What’s going to go up for me to offset the costs of living?” says Aaron Minney, Challenger’s head of retirement income.
“Consequently, they are left wondering how they will counterbalance the rising costs of living.”
How is rising inflation affecting retirees right now?
Retirees may have to cut back or sacrifice aspects of their lifestyle, and they may need to identify and develop solid investment solutions.
The impact of inflation on the lifestyle of retirees today is very real, says Andrew Lowe, Challenger head of technical services.
Only 20 per cent of the Australian retirees surveyed said they were unaffected by cost-of-living increases. In the next 12-month period, just 10 per cent believed they would remain unaffected.
Moreover, over 60 per cent of respondents indicated that they were looking to reduce spending in certain areas, such as food and energy.
“All this says to me that the impact is real, that clients are acting in response to that,” says Mr Lowe.
How does rising inflation impact the cost of retirement?
YourLifeChoices Retirement Affordability Index – Australia’s most accurate cost of retirement table – suggests couple homeowners would spend $86,257 and a single homeowner will spend around $49,232.08 per year for a comfortable retirement. One year prior, that figure was $79,849 and $45,604.
Current levels of inflation are concerning retirees, and it may stay at the top of the worry list for the time being.
“Inflation is still too high and while it looks to be on a declining path, it is likely to remain higher than target for a few years,” Reserve Bank of Australia governor Philip Lowe said in his keynote speech to the Financial Review Business Summit in March this year.
Mr Minney provides some clarity around two crucial inflation concepts – expected and unexpected inflation – and how retirees and funds may be able to better cope in either situation.
He explains that markets are forward looking, with expectations for future inflation built into current prices. Expected inflation is a component of this, derived from the gap between two government bonds. Unexpected inflation, on the other hand, occurs when inflation exceeds expectations.
“All you need to do is look at 2022, which is when the actual inflation was well above the expected level. That’s what shocked markets,” he explains.
Different hedging levels exist for expected and unexpected inflation. Equities, for example, have high long-term real returns and are an effective inflation hedge when it is expected.
“But when we get into the unexpected, equities don’t do well,” explains Mr Minney.
“They didn’t do too well in 2022. Other assets like commodities don’t do well when expecting inflation because they don’t really have a high long-term return on real return. However, they adjust well when there’s unexpected inflation.”
Key takeaways
To mitigate the effects of rising inflation and the cost of living, Australian retirees may consider several steps:
- Diversify investments
- By spreading investments across various asset classes, retirees may be able to protect their portfolio against the negative impacts of unexpected inflation.
- Consider inflation-protected investments
- Government inflation-linked bonds or securities can help safeguard investment income against inflation.
- Focus on growth investments
- Equities and property investments may provide higher returns than fixed-income investments in the long term, assisting in outpacing inflation.
- Review spending and budgeting
- Regularly assess expenses and adjust budgets to accommodate changing costs of living, cutting back on non-essential spending if needed.
- Seek professional advice
- Financial advisers can help retirees devise a tailored plan to address inflation concerns and ensure a secure financial future.
As inflation worries rise among Australian retirees, taking proactive steps to protect their financial wellbeing is crucial. By seeking professional advice, retirees can better navigate the challenges posed by rising inflation and the cost of living. Doing this may enable them to continue to enjoy a comfortable and secure retirement despite the challenges that inflation may bring.
Also read: Latest inflation figures show self-funded retirees hit hardest
Is inflation concerning you? What is your biggest retirement worry right now? Why not share your thoughts in the comments section below?
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Very interesting comments, however, nothing the average savvy retiree doesn’t already know. Reviewing spending and budgeting should be the first item on every retirees agenda. Do your due diligence on investing and never be greedy. If it’s too good to be true, it’s generally some kind of scam. Live as good a life as you can pursuant to your financial position. No need to try to keep up with the Joneses, again live within your means. I would refer you to the parable of the Ant and the Grasshopper. If you haven’t prepared for retirement, you have no one to blame but yourself, an unfortunate truth. Always try to be positive, you never know what tomorrow holds. All the best in these trying times. Jacka.
Ok, sounds good, so scrap the pension increases attached to the CPI and attach then to the Retirement Affordability Index with seems to be more in tune with CoL these days.
Being a cash strapped, asset poor, full-rate, single age pensioner, it make me more comfortable and better off if I had 49G’s a year to live. As it is I’m about 20G’s shy of that ‘Retirement Affordability’ amount.