Investors with long memories – or a good education – will recall the bad old days when inflation was the economic bogeyman. It broke Germany’s Weimar Republic in the 1930s and nearly cratered America’s economy in the 1970s.
Fortunately, inflation has been a non-issue in Western economies for decades. But is that about to change? In the first quarter of FY2021, Australian inflation ran at a comfortable 1.1%. By the second quarter it had leaped to 3.8%.
Perpetual’s recent Quarterly Update summed up the problem: “With very easy monetary policy likely to continue for the next couple of years, and government spending at record-breaking levels, there remains the risk that inflation could become out-of-control. Historically, high levels of inflation have been very difficult to contain once in place.”
Inflation hurts retirees
Inflation is bad news for retirees. “A continual rise in the price of goods and services can really affect someone who’s retired or approaching retirement”, says Malissa Tobias, a Perpetual Private adviser in Melbourne. “Inflation eats your purchasing power – you get fewer goods and services for the same amount of money.”
If you’re still working, your salary can rise to keep pace with inflation. Retirees – especially those with money in low-rate assets like term deposits or cash – suffer because their spending power is cut and the real (after-inflation) value of their capital is falling.
Anti-inflation strategies for retirees and near-retirees
Manage your retirement
By managing the timing and shape of your retirement you can offset some of the inflation threat.
If you work a little longer (either full or part-time) you can earn an income that might go up with inflation. Those extra earning years also give you more time and money to build up the largest possible nest egg to generate your retirement income. Finally, but just as importantly, retiring later delays the day you start drawing on your capital.
Invest in inflation-beating assets
Investing in higher-returning assets – like shares or property – can deliver the same benefits as earning work-income because their value can rise in line with, or above, the rate of inflation. However, the inevitable complication is that higher returning assets are usually higher risk assets.
Plan your spending
Knowing how much money you’re going to need in retirement is a crucial part of retirement planning.
Draw on capital
The recent Retirement Income Review suggested many retirees die with their capital intact. But that’s not the case for everyone. In a world where the threat of inflation is rising, some retirees will need to dip into their capital to fund the retirement lifestyle they want. The key is to do that prudently.