Inflation And Retirement: Building Wealth when Inflation is High  

There’s no denying that the soaring cost of living is hurting the hip pockets of most Australians, but how does inflation impact retirement and how can you safeguard your retirement funds when the inflation rate is bound to ebb and flow throughout your golden years?  

In the video and blog below we talk about investing for retirement in a high inflationary environment and what to consider when planning for a comfortable and enjoyable retirement. 

DISCLAIMER – The information provided in this blog is general and does not consider your individual financial needs or objectives. It does not constitute personal advice. We recommend seeking out professional and independent financial, legal and tax advice which has been designed for your individual situation before acting on any information contained below.  

Inflation and Retirement 

At the time of publishing (August 2022), the official inflation rate in Australia was 6.1% (and that figure is bound to get even higher by the time the year is out!) 

Inflation erodes purchasing power for everyone, but for the working population wages generally rise at a similar rate. On the other hand, retirees who are no longer able to work  use their savings and assets to live. So, over time the value of those assets will decrease. 

Retirees in this position may no longer wish to take on the volatility of the share markets and other growth assets, and in turn opt for a defensive investment allocation.  

However, the problem with removing that investment risk is that it exposes you to inflation risk – your money isn’t growing but your cost of living is.  

How to Invest for Retirement in a High Inflationary Environment? 

A low-risk investment plan for retirees should incorporate a diversified portfolio with both growth assets, such as shares and property, and defensive assets like term deposits.  

Why? Well, if inflation is running at 4 or 5 per cent or even higher over a 20 or 30-year period, your cost-of-living skyrockets but your investments aren’t growing, and it reduces the value of your assets and it can have very poor outcomes for you in the future.  

Incorporating growth assets in a high inflationary market is vital because those growth assets are going to help protect you from high inflation devaluing your assets. 

IMPORTANT NOTE: When considering your retirement plan, it’s important to step back and take a bigger view of the returns of asset classes over a long period of time. There will always be market downturns, but there are also a lot of up periods, which means that over the long-term growth assets do generally provide a return that’s generally in excess of inflation. 

High Inflation in the 80s 

In 1982 inflation reached about 11 per cent.  

During this period, investors could actually receive high returns for cash and many thought, “I’m getting such good returns from cash, I don’t need to take on any investment risk.”  

Yet, fast-forward 20 or 30 years, and the average return someone received from cash was fairly low, and the returns they achieved from taking on growth assets over the period were much higher. So, the people that actually achieved a much lower risk when looking at the inflationary risks had an allocation of growth assets: shares and/or property.  

How do I know what Retirement Investment Strategy is best for me?  

Having that right allocation of growth assets to ensure your money can keep pace with inflation and provide you with the income you need is a really important part of investing in retirement in a high inflationary market. However, what is right for you won’t be the same as your neighbour.  

For example, your tolerance to risk and volatility is important. If you have too many growth assets and you’re going to panic and sell in the next downturn, well then that’s not right for you. 

Likewise, if you have a small allocation of growth assets it is pretty likely that inflation will mean you’ll run out of money and you won’t earn a high enough return, and that’s probably not right for you either. 

Would you like advice tailored to your needs and wishes? Our Certified Financial Planner® in Brisbane can assist with personalised retirement planning advice.  

For more information, please enquire online here or call us on 1300 200 012.