Without the benefit of a crystal ball, it’s impossible to determine exactly how much someone will need to meet their individual retirement needs. We often hear that we’re living much longer, so the amount we retire on must last longer. But what about the value of your retirement funds? How will inflation impact your savings, particularly if you’re being conservative and holding a large portion of your portfolio in cash, waiting for the economy to “get back on track”?
Christine Swanson, Owner and Financial Adviser at Prominent Financial, advises, “Understanding how inflation can erode your savings over time is crucial. Awareness of inflation’s impact allows you to make smarter investment choices to protect your retirement funds.”
Now and Then
A good place to start is by looking back at how inflation has affected the cost of living in Australia. The Reserve Bank of Australia (RBA) has a handy calculator on its website that shows how the cost of a “basket of goods and services” has changed over a chosen timeframe. For example, $100 worth of goods purchased in 1982 would cost $418.44 in 2023. While a 40-year retirement isn’t typical, even over a more realistic 20-year timeframe, inflation still has a significant impact.
How Much?!
Consider this: $100 spent in 2002 grew to $165.65 in 2022. At first glance, this may not seem like much, but it becomes more concerning when you realise that the increase over that time was over 65%. This averages out to just 2.5% per year, which doesn’t sound too bad and is within the RBA’s target. However, this small percentage can have a large impact in the context of your retirement fund investments and the current economy.
Your Retirement Savings
Currently, most “bonus” interest cash accounts are earning about 4.75% per annum, with term deposits around the same. Applying the current inflation rate of 7% to this shows that these accounts are barely earning minimal real returns; in fact, some are losing value. This highlights the importance of being vigilant about how inflation may affect your superannuation in the lead-up to and during your retirement.
A Final Thought
Every investment must meet your individual needs now and into the future. At Prominent Financial, we understand that planning for inflation is a critical part of retirement strategy. If you would like to learn more about managing inflation in your retirement, reach out to us today. While we may not have a crystal ball, we do have the expertise to help you protect and grow your retirement savings. Contact us to ensure your financial security through all economic conditions. Please book an appointment with our team here.
Sources:
www.finder.com.au Comparison of online savings accounts
Reserve Bank of Australia website www.rba.gov.au
