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Inflation: the hidden threat to your retirement savings


Inflation can reduce the value of your money, and how much you can spend to fund your golden years. Wondering why that is? We’ve got you covered.

Earlier this year, as part of their biannual pension review, the Australian government increased the Age Pension by roughly 3.6% to account for high inflation. The ‘indexation’ of this payment (where it’s increased to match the rate of inflation) was welcomed.

However, according to the latest ASFA data* it costs upwards of $1million to retire comfortably as a single homeowner. For couples or renters who retire at 60 and live until 85, that skyrockets into multimillion-dollar territory.

What’s more?

These million-dollar figures don’t account for inflation.

Inflation is a vital consideration in planning your income for retirement. It can reduce the purchasing power of money and have a substantial impact on how much you can spend on enjoying your golden years.

What is inflation?

Inflation is, simply put, how much more you must pay for the same goods and services this year, in comparison to last year.

Technically, it’s the average “rate of change” of consumer prices, tracked by the Australian Bureau of Statistics’ (ABS) Consumer Price Index (CPI). CPI takes into account thousands of items over almost 100 categories including housing, health, education and recreation.

As of the March 2023 quarter in Australia, the average cost of consumer goods and services has increased by 7%. That means, on average, things cost 7% more than they did last year. However, if you feel like costs have increased much more for some things, it’s because they have.

Inflation is measured as a “weighted average.” So, even though housing has increased by 9.8%, recreation by 8.6% and food by 8%, the average across all goods and services is 7%.

How does inflation impact the value of money?

The reason why inflation is such an important concept when it comes to planning your retirement is because it changes the ‘real value’ of money.

Every year, as prices increase, your money will buy you less. For example, in the past twelve months, goods and services have increased by 7%.

That means what cost $100 last year will cost around $107 this year.

In essence, you’ve “lost” $7.

This gets even more complex when looking at larger sums of money, like your nest egg, where $7 can turn into thousands, or even more in “lost money.”

It's also why Australian Bond Exchange CEO Bradley McCosker says, “Rational investors should expect a return on their investment greater than inflation.”

How does inflation impact my retirement?

When it comes to investing, one of the key things to remember is that you want to retain the value of your money, despite inflation.

While 7% may not seem like much when reviewing the rising cost of a $100 basket of shopping, it can have a huge impact when dealing with larger amounts.

This is especially true with investing in retirement.

If you invest $100,000 or $1,000,000, and the inflation rate is higher than your annual return, this can turn into thousands, or even tens of thousands of dollars in “lost money.”

Though you’ll still technically receive the same amount of money, it won’t buy you as much.

For instance, according to the RBA’s Inflation Calculator, a $100 basket of goods in 1966 would be worth closer to $1,475 in 2022. Further, a $100 basket in 2000 has almost doubled in price in just two decades and would as of 2022 cost around $178.

If we take the above calculations as a rough reference, the cost of goods and services has the potential to double in the next two decades. To cover these soaring retirement costs, investors need to attract returns across their portfolio with a per annum % return higher than inflation.

Australian Bond Exchange (ABE) has a range of fixed income products and investments offering close to or above the current inflation rate. If you’d like to chat about how to get a return higher than inflation, or about alternative products like inflation-linked bonds, get in touch with an investment adviser.

Free Webinar: Retire Confidently with Bonds

Want to learn more about how investing in bonds and other fixed income products can help you better plan for retirement?

Check out this free webinar from one of ABE’s Investment Advisers:

What you’ll learn: 

  • Unleash the power of bonds: Discover why bonds are a more stable, conservative investment option to predictably fund retirement.
  • Review the risks and returns: Learn how bonds perform in comparison to alternative investments, and how they can provide stable returns in comparison to shares.
  • See how easy it is to start investing: Gain transparency into ABE’s product approval process and learn how to start investing in fixed income from as little as $10,000.In an era of high inflation, it’s important to be aware of all your investment options. That way, you can make sure the money you worked so hard for, works just as hard for you.

* Sources: AFSA Retirement Standard March Quarter 2023. ABS Consumer Price Index (CPI). Services Australia, Age Pension. Data accurate as at 13th June 2023

Disclaimer: The information and any advice provided in this email has been prepared without considering your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.  Australian Bond Exchange Pty. Ltd. ABN 73 605 038 935 | AFSL 484453