More than 20% of Australians believe they won’t achieve their desired retirement standard of living, and half of those who are currently working admit they are unsure how much they will have, or need, when they retire. Some of the risks facing Australians who are nearing, or who are in, retirement are outlined below – as well as several ways to mitigate each of these.
The risks
The 2022 Natixis Global Retirement Index (GRI), now in its tenth year, is a multifaceted research tool that examines the factors driving retirement security. The 2022 GRI identifies three key risks – inflation, interest rates, and longevity risk.
1. Inflation
If you were unaware of what inflation was prior to 2022, you undoubtedly know what it is now. Simply put, inflation refers to the average price increases over a given period, typically a year.
The measure of inflation and deflation – the consumer price index (CPI) – rose 1.8% across the September 2022 quarter, and 7.3% annually; this marks the highest annual CPI increase since 1990. Further, the 9.6% annual increase in the price of goods was the highest since 1983. The price of non-discretionary goods and services increased 8.4%, with discretionary goods rising 5.5%.
Inflation can be particularly detrimental to those in retirement, as it not only chips away at savings and investment returns, but it does so to those with limited means to recoup that lost purchasing power.
The Reserve Bank of Australia (RBA) maintains that the optimal target for monetary policy is to achieve an average inflation rate of 2% to 3% over time. However, even when inflation sits within the RBA’s target range, it can still be detrimental to savings over the long-term, as demonstrated in the chart below.
