Inflation and Retirement

Wednesday, May 18, 2022

Inflation, and the rising cost of living, is becoming a major concern for households and policymakers. Inflation can especially put pressure on savers, homeowners and retirees.

You will most likely have noticed prices are rising. Petrol is obvious, electricity and gas costs have increased, and you are likely paying more for your groceries. Many countries around the world are experiencing these same increased price pressures.

There are several ways of measuring inflation, but the most common referenced in Australia is the Consumer Price Index (CPI), which looks at the changing prices of some of our most popular products.

Inflation, and the rising cost of living, is becoming a major concern for households and policymakers. From increasing costs, to wages of declining value, the effects will flow on to your standard of living.

What is behind the current inflation cycle?

When Covid-19 struck, countries around the world were forced into lockdowns: factories shut down, workplaces closed and many businesses stopped trading altogether. Shipping of goods around the world was also massively reduced.

During this time, most governments stepped in to provide massive investments and monetary support to keep people out of poverty as well as the economy alive. In Australia, the biggest source of support were the job keeper and job seeker programs through which the government provided for those unable to work. 

As a result of having fewer opportunities to spend when working from home and shops being closed, for example, many households built up unexpected savings. When restrictions started to lift, these savings poured out into the economy exactly as hoped.

The problem is that with many countries around the world still facing Covid-19 regulations, there just aren’t enough products to go around: there are fewer businesses working with fewer staff, producing fewer items. Supply chain issues are compounded by reduced numbers of container ships moving around the globe.

Despite all the money going around, businesses can’t keep up and prices are going up as a result.

Who is being effected?

Everyone. We are all paying higher prices which means less buying power.

Inflation can especially put pressure on savers, homeowners and retirees. If you’ve been saving for a long time, are paying off a mortgage, or are drawing on a fixed pension, all of a sudden you have to fund more expenses and have less left over in your budget.

One of the most common ways central banks and governments try to combat inflation is to increase interest rates. If rates go up, people tend to save more and spend less, reducing item shortages and, in theory, bringing prices down. However, increased interest rates puts pressure on people with mortgages as the amount they pay on a mortgage will generally increase.

Retiree investments may need a review within these new market influences. Inflation and interest rates put downward pressure on share markets and make bond yields more attractive. During COVID many retirees reviewed the amounts they are drawing from their superannuation because of lower returns during that cycle. In this inflationary time achieving an adequate income without taxing your investments may again need a review. 

How long will we be in an inflation cycle?     

Countries around the world are facing this inflation process.

The BIG question is what are the Government and the Reserve Bank going to do in order to combat inflation and support households.

It has become evident that interest rates will continue to rise. This should bring down the rate of inflation and is the most likely policy to be pursued by central banks throughout the world. For savers this will be good news, but will be of concern for homeowners on variable mortgage rates.

The cycle will also be influenced by the rate of global recovery from the pandemic. As countries relax restrictions, global supply chains should return to normal levels which will also give way to improving item supplies.

As we step through this inflationary phase it is well advised to consult a financial planner to review your retirement investment strategy. Mention this article for a complimentary initial consultation with Maher Digby on the Sunshine Coast for specialist retirement financial advice.

For more Information contact Mark Digby at Maher Digby Securities Pty  Ltd - Financial Advisers – AFSL No. 230559. This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor