Inflation-proofing your retirement

It’s important that you have a plan and know how much you will need to meet your individual retirement needs. We often hear that we’re living much longer so the amount we retire on must last a longer distance. However, what about the value of your retirement funds? How will inflation impact on your savings, particularly if you’re still being highly conservative and holding a large portion of your portfolio in cash waiting for the economy to “settle down”? With term deposit rates so low, funds being kept in term deposits can actually be eroded each year after considering account fees, tax and inflation.

Looking back 30 years

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 tells us how the cost of a “basket of goods and services” has changed over a chosen timeframe. It’s a great eye-opener.

One hundred dollars worth of goods purchased in 1972 would now cost an astounding $918! You’re right, 40 years of retirement is not the norm (and we hope Australia never experiences 10% inflation like it did in the 70s), so let’s look at the value of $100 in a more realistic retirement timeframe of 20 years.

One hundred dollars spent in 1992 equates to just over $168 in 2012. On first glance that doesn’t seem as astounding BUT when you realise that the increase over that time is 68.7%, you might be a bit more concerned. Over the 20 year period this averages out to just 2.7% per year, which doesn’t sound too bad and is within the RBA’s target – but let’s go back to your retirement fund investments.

Your retirement savings

With the average “high” interest cash accounts currently earning interest of around 2.5% per annum, and term deposits not much more, apply the current inflation rate of 2.4% to this and you’ll realise that your cash is earning virtually nothing; perhaps less than nothing. This is why it’s so important to ensure your super is invested for growth that takes into account inflation in the lead up to and during your retirement.

Every investment must meet your own individual needs, now and into the future.

If you would like to learn more about how to manage inflation in your retirement, give us a call to book a meeting with one of our qualified financial advisers.

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