Planning for your retirement and navigating the risks involved in managing your finances can be a complex and confusing journey.
No wonder so few people have confidence that they will have enough money for their retirement.
However, there’s a research tool called the Natixis Global Retirement Index (GRI) that has identified the three key risks facing retirement security – inflation, interest rates and longevity.
Read: Retirement rules and changes to watch out for in 2023
Inflation
Inflation is detrimental to retirees as a higher cost of living erodes their purchasing power and their lack of opportunity to recoup that loss by generating or increasing their income is limited.
Over the 12 months to November 2022, the consumer price index rose 7.3 per cent, with the most significant rises in housing, groceries, transport and furniture.
In its latest report in December, the Reserve Bank of Australia declared the official inflation rate of 6.9 per cent as too high, though it predicted that this would decline over the next two years to hover at about 3 per cent. The board does not meet in January.
Interest rates
Interest rates are also a vital part of retirement, especially for those planning to live off investments.
The recent low interest rates, while good for mortgagees, were detrimental to many in retirement with substantial cash savings.
Many retirees were forced to dip into their capital, possibly affecting their long-term lifestyle expectations and adding to concerns about money running out.
Another concern is banks not passing on interest rate rises. The ‘big four’ Australian banks are well known for dragging their feet when it comes to rewarding their customers with a rate rise.
It’s one of those times it does not pay to be loyal, so shop around for a better rate. Start your search here with Finder.com.
Read: Seven reasons seniors stay frugal in retirement
Longevity
We are living longer, which, while a fantastic indicator of our health and support systems, comes with the complication that many people will simply run out of money.
The model for retirement planning 20 years ago is no longer relevant for people who expect to retire in the next 20 years.
Managing the risks
There is good news, however, according to online financial publisher Firstlinks. With a suitable strategy, it’s possible to navigate these risks.
Cromwell Funds Management head of retail funds Peta Tiles told Firstlinks that understanding what is required to achieve your desired lifestyle in retirement is the foundation of a retirement plan.
“There are countless resources available to help you, including the Moneysmart retirement planner and Cromwell’s ‘Countdown to Retirement’,” she says.
Ms Tiles also recommends garnering a thorough understanding of how inflation will affect your lifestyle and investments.
“Inflation above anticipated levels is generally considered detrimental to stocks and fixed income investments; however, real assets, including real estate, land, precious metals, commodities, and natural resources tend to fare well in times of high inflation,” she says.
“For example, it is common for commercial real estate leases to have annual rent increases tied directly to increases in inflation – this is why commercial property is regarded as an inflationary hedge.”
Ms Tiles says it’s also fundamental to thoroughly understand your investment income, not only the income sources, but what quality of life your resources will provide.
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“It is important for investors to look beyond familiar investment options to diversify and spread their risk across multiple sectors, geographic regions, and asset classes.
“Without a regular source of income, retirees need to minimise their longevity risk by looking for investments that offer both returns and capital growth.”
Australians are now expected to live two decades past the retirement age of 65, and as such Ms Tiles says it’s “vital” to overestimate your life expectancy, rather than underestimate it when planning for your retirement.
Ms Tiles also recommends expecting the unexpected.
“With luck, unforeseen expenses can be kept to a minimum; however, it is important to factor these in.
“Whether these costs are associated with real estate maintenance or repairs, having to care for a loved one in a crisis, or looking after your own personal wellbeing, unforeseen costs can be significant and need to be a key consideration.”
Have you consulted a financial planner for your retirement? If you have, did you find it rewarding? Why not share your experience in the comments section below?
