Inflation, longevity eating retirement income

Inflation longevity retirement

Longer lifespans and higher inflation may lead to retiree’s being caught short of income to fund to the full term of their retirement.

The rising level of inflation and increased longevity are creating a higher risk that those in retirement will have insufficient funds to last their lifetime, according to a new report from Challenger.

The report, “Inflation risks and retirement income innovations”, found that if the rate of inflation remains steady at 5 per cent, the nominal purchasing power of retirees will halve in 14 years.

Challenger head of retirement income Aaron Minney said inflation, even at lower levels, would still have an impact on retiree lifestyles.

“With inflation of only 2 per cent a year, one-quarter of the real value of a retiree’s income is lost after only 14 years. The risk from moderate inflation is stark; 5 per cent a year would halve their purchasing power over the same period,” Minney said.

The report noted retirees are now living around twice as long post-retirement in comparison to the last major inflation crisis in the 1970s when cash, fixed income and equities all posted negative real returns over the decade.

“Retirees have become silent casualties of the surge in inflation and many must now rethink their whole approach to wealth management,” Minney said.

“Given retirees have to make their money last, on average, for around 24 years compared to 13 years in the 1970s, finding a solution is critical to the health of the economy.”

The report noted retirees will now have to manage the impact of inflation on income streams and will need investments that benefit from high inflation or that are automatically adjusted by a link to the consumer price index (CPI).

Such investments would include short-term CPI-linked bonds, real assets, such as infrastructure and real estate, traditional defined benefit pensions, which are increased in line with inflation, and the age pension with its in-built inflation protection.

The report also suggested the use of guaranteed CPI-linked lifetime annuities, which pay an income stream that is adjusted in line with CPI changes, or a lifetime annuity that provides payments that increase, but may also decrease, in line with an underlying diversified portfolio or a nominated basket of market indices.

“It is important to generate an income stream that compensates for inflation and this is more important than managing the real capital value. Innovations in recent years provide more products for retirees to generate income and has expanded the ways that retirees can manage inflation,” it said.

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