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Inflation and your retirement

With the property market cooling, Australians have finally stopped talking about real estate prices.  At dinner parties everywhere, there’s a new conversation.

The bad news?  The new conversation is about the rising costs of living.  It’s understandable.  In the year to July 2022, the costs of consumer goods and services rose 7 per cent.

While the media focus has been on the plight of young families with mortgages, rising inflation presents unique challenges and risks to retirees as well.  Especially in low growth economic conditions.  

But there are things retirees can do to manage inflation risk and make sure their money lasts. 


Interest rate squeeze

The Reserve Bank of Australia (RBA) is increasing interest rates faster than anyone expected.  It’s clear that the rising costs of living caught the RBA off guard. 

Now they’re scrambling to keep inflation in check by raising interest rates 50 basis points or half a per cent each month.  Keep in mind it was only six months ago that the RBA Governor was anticipating no interest rate increases until 2024.  


Inflation or stagflation?

For retirees, the return of inflation means it’s much harder to make the money last.  It makes it even more complicated when the economy isn’t growing, and the market outlook is uncertain.

The last time we had high inflation during a recession was 50 years ago.  It’s called ‘stagflation’; combining ‘stagnation’ with ‘inflation’.

Usually inflation is caused by overheating, booming economies.  But that’s not the case this time.  The global growth outlook is worsening by the day, especially in Europe and the United States.  There, recession is becoming more of a probability than a possibility.

In Australia, economic growth is slowing and there is a tightrope the RBA must walk.  The RBA wants to reduce inflation to between 2 and 3 per cent by increasing interest rates, but it needs to be careful not to constrain growth and trigger a recession.


Managing retirement risks

Retirees must manage several risks all at the same time; short-term risks such as the risk of a share market or property crash (market risk), as well as long-term risks such as outliving your savings (longevity risk) and losing purchasing power (inflation risk).

The different risks require different strategies to manage them.  At When Financial Solutions, we find the best way to achieve this is to segment your money according to its purpose and the risks you’re managing.  We typically segment your money in one of three ways: when you expect to spend it (bucketing); what you’re spending on (income layering); or a combination of these two approaches.

Bucketing allows you to balance your short-term risks while still enabling you to manage your long-term risks with high quality growth assets like shares and property.  Income layering provides you with cashflow to fund the lifestyle you desire in the different phases of retirement.  We call them the ‘go-go’, ‘go-slow’ and ‘no-go’ years.

This framework for retirement investing will give you the confidence to spend no matter the market conditions.  It’s not a matter of ‘if’ but ‘when’.  


This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please give us a call.










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