What do rising prices mean for your retirement savings?
Prices on everyday essentials like food, petrol and medicine have increased significantly, impacting us all. Managing these price hikes is even more difficult when you’re living on a fixed income. We unpack how we got here and set out some things you can do to increase your buying power.
Inflation refers to the rising costs of products and services over time. It’s a case of too many dollars chasing too few goods. And there are plenty of reasons why we’re experiencing record rates of inflation. These include COVID-related supply chain disruptions, Russia’s invasion of Ukraine and past stimulus actions like government spending and low interest rates. The result is that Australian inflation is growing at its fastest rate in 20 years¹, with consumer prices in Australia rising 5.1% for the year ending March 2022². We’re feeling the pressure, yet we’re doing better than the US where consumer prices surged 8.5% over the same period³.
Inflation of 5.1% means, on average, you need $105.10 today to buy what $100 bought you 12 months ago. In Australia, the Australian Bureau of Statistics measures inflation, that is, increases to the cost of living, using the Consumer Price Index. Across 11 categories, the prices for thousands of necessary goods and services are tracked every month. The 11 categories are food, alcohol and tobacco, clothing and footwear, housing, household furniture and services, health, transport, communication, recreation, education and insurance and other financial services.
As prices rise, it’s wise to consider cutting back your non-essential spending and regularly reviewing your budget to ensure that your money is being spent on the things that are your highest priority.
How the price hikes compare⁴
Annual price rise to March 2022
Food and non-alcoholic beverages
Recreation and culture
Inflation is particularly challenging if you are on a fixed income as your dollar has less buying power than you expected when you set out to retire. Where retirees are feeling the most pain is with food, petrol and healthcare prices.
Some relief in the 2022-2023 Federal Budget
To meet cost of living pressures, in March 2022 the government announced these short-term measures:
A one-off payment of $250 was paid to concession card holders in April 2022.
The 2021-22 low and middle income tax offset increased by $420 but hasn’t been extended into the 2023 financial year.
Fuel excise on petrol and diesel was halved for six months until 28 September 2022.
And from 1 July 2022, concessional patients will reach the Pharmaceutical Benefits Scheme (PBS) Safety Net quicker. It’s expected to take approximately 12 fewer scripts to reach the safety net, and when you do, you’ll receive PBS medicines at no cost for the rest of the calendar year.
General patients will also reach the safety net quicker (by approximately two fewer scripts) and receive PBS medicines at the concessional co-payment rate of $6.80 for the rest of the calendar year⁵.
What does the future look like?
The current price spikes are certainly painful but aren’t expected to continue long-term. The Reserve Bank of Australia took action in April 2022 to help quell inflation by increasing interest rates by a quarter of a percentage point. And they have promised that more action is coming. Increasing interest rates helps to slow the economy, reducing demand for goods and services. Lower demand tends to lead to lower prices and inflation usually falls as a result.
The likelihood of future interest rate rises may provide more opportunities for people chasing higher incomes. Higher interest rates are potentially good news for investors in term deposits, savings accounts and new bonds.
What are your options?
While it may be tempting to dip into your retirement savings to help cover these extra costs, this can have a long-term impact on the size of your balance. Drawing down extra now will mean that there will be less available to you in the future.
As prices rise, it’s wise to consider cutting back your non-essential spending and regularly reviewing your budget to ensure that your money is being spent on the things that are your highest priority. Budgeting is one of the best tools to manage economic strife, helping you to track areas where prices have increased and where you can cut back or replace with a cheaper alternative.
If you are concerned about the impact of inflation on your investments, your financial adviser can review your portfolio with you. They can help you consider types of assets that are expected to increase their value over time, growing your long-term purchasing power. Your financial adviser can also model the impact that drawing down more of your savings could have on your retirement savings.
Talk to your financial advisor
Times of high inflation can be very disruptive. It can be helpful to talk to us at Serendipity Wealth, about the options available to you and the impact on your retirement plan.
¹ ABC News, Inflation is growing at its fastest pace in 20 years. Is it making you behave differently? 8 May 2022, accessed 10 May 2022.
² ABS, Consumer Price Index, Australia, March 2022, accessed 10 May 2022.
³ Trading Economics, United States Inflation Rate, April 2022, accessed 10 May 2022.
⁴ ABS, Consumer Price Index, Australia, March 2022, accessed 10 May 2022.
⁵ National Seniors, 2022 Federal Budget winners, 29 March 2022, accessed 10 May 2022.
What you need to know
This information is provided and produced by Serendipity Wealth Advisors. The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation, or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product. Information in this document is based on current regulatory requirements and laws, as of 1 June 2022, which may be subject to change.