Inflation threatens retirement dreams of millions: Challenger study

Inflation is a threat to the nest eggs of millions of Australians nearing or in retirement, with Challenger research finding that protecting their lifestyles is now a top priority for them.

The report found the cost-of-living concerns and their impact on retirement were most notable among pre-retirees, unadvised Australians, and women.

Inflation is threatening the nest eggs of millions of Australians nearing or in retirement, with a Challenger research paper finding that protecting their lifestyles from its impact is now a top priority for them.

With most economists agreeing that the sustained low inflation of the 2010s is unlikely to come back, Challenger found two-thirds of Australians over 60 say the rising cost of living is reducing their confidence about having enough money for retirement.

The study comes as inflation data this week surprised markets, with prices jumping 3.6 per cent during the March quarter, on an annualised basis. That was down from 4.1 per cent in the previous three months but higher than the 3.5 per cent the market had expected.

“While the fall in inflation from multi-decade highs is good news for our economy, many retirees continue to struggle with cost-of-living because of the cumulative impact inflation has had on their financial position,” Challenger head of retirement income research Aaron Minney said.

The report found the cost-of-living concerns and their impact on retirement were most notable among pre-retirees, unadvised Australians and women. Almost 40 per cent of these cohorts reported cost of living as significantly impacting retirement happiness and their view of financial ­security.

Mr Minney said that white inflation spikes tended to be brief and therefore manageable for younger people still in the accumulation phase of their retirement savings journey, the impact on those already in retirement was very different.

“Retirement is all about having a secure, regular income and that allows you to enjoy your lifestyle,” Mr Minney said.

Based on data since 1900, Challenger estimates there’s an 80 per cent probability that equities will deliver returns exceeding inflation (real returns) over a three-year period.

But Mr Minney highlighted that in some cases, obtaining real returns in equities over the past century has “required a 16-year investment horizon” and retirees do not have the luxury of time.

“They are at heightened risk to the impacts of inflation and need a hedge in their retirement portfolio that can protect the income,” he said.

In the paper, titled ‘‘Protecting retirement income from inflation’’, Challenger says retirees who want to be able to maintain their lifestyle need the inflation protection that can be provided by a CPI-linked income stream, a type of income that is designed to automatically adjust for inflation, based on the Consumer Price Index.

With more than four million retirees and another 2.5 million set to retire in the coming decade, Challenger found education about retirement and access to professional financial advice was “critical”.

“We found only one in five Australians over 60 are currently receiving it,” he said.

“Advisers have an important role to play in enabling safe spending, empowering retirement confidence, and protecting income to last throughout their clients’ golden years. As we continue to navigate a volatile market and geopolitical landscape, retirees need a portfolio that is protected from inflation risks so that they don’t experience another cost-of-living crisis when inflation has another upturn.”

The age pension will be a safety net for retirees, but those with a lifestyle goal above that will need an additional source of income that is protected for the effects of inflation. Allocating a portion of capital to an inflation-linked lifetime annuity, can enable greater retirement confidence and minimise investment risk, it said.

“Today, many retirees are underspending due to the fear they will outlive retirement savings,” Mr Minney said. “We, as an industry, have a responsibility to empower confidence to spend in retirement, provide assurance that income will keep pace with inflation, and protect from the highs and lows of market-linked investments.”

Originally published as Inflation threatens retirement dreams of millions: Challenger study