The affect of inflation on retirement

Most monetary discussions in 2025 have centred on inflation and, in particular, its impact on interest rates and the housing market. This is an essential sector of Australian society, and buying your first home should be a rite of passage; however, it is proving increasingly out of reach for many young Australians. With low supply and high demand, it is only getting tougher.

While this news is concerning, inflation also affects retirees and those in the pre-retirement phase. In this article, we address questions from clients and provide a framework to help individuals and couples navigate the impact of inflation during this phase.

Inflation means that prices for everyday things increase over time, so each dollar buys a bit less than it did before. You’ve probably noticed it, at the petrol station or the supermarket, your money doesn’t go as far as it used to. The Reserve Bank aims to keep inflation at around 2–3% per year, but it sometimes spikes higher. For example, in the late 1970s, inflation soared to approximately 15%, a period you may recall. It eventually came back under control. From the early 1990s until recently, inflation stayed around 2–3%. We saw a jump in 2021–2023 due to COVID-19 disruptions and rising energy costs, but fortunately, that spike was short-lived.

The current rate of 4.5% means inflation is still running hotter than the RBA would like, which is why they’ve maintained a relatively tight monetary policy with higher interest rates to help bring it back within the target range of between 2-3%

That’s a great question. Think of inflation as a hidden tax on your savings; over time, it erodes the purchasing power of your money. As retirees, you don’t get pay rises anymore to help keep up with higher costs.

For instance, if your investments earn 6% in a year but inflation is 3%, your real return is only about 3%. Inflation quietly took away half of your gain. And if much of your nest egg is sitting in the bank at low interest, it may not keep up with inflation at all. So even if your account balance isn’t dropping, its buying power is shrinking.

The Age Pension gets adjusted for inflation twice a year, which helps, but those increases can lag behind actual living expenses. So, whether your income comes from your super and investments or from a pension, we need to plan for inflation. Otherwise, you might have to cut back your spending or risk outliving your savings.

A key strategy is diversification; don’t keep everything in cash or term deposits. Include some growth investments like shares and property in your portfolio, which tend to grow faster than inflation over time, despite some ups and downs. That will help your savings keep up in the long run.

We also consider inflation-proof income options. You could go with a lifetime annuity indexed to inflation. It guarantees a lifetime income that increases annually in line with inflation. Alternatively, consider a market-linked account-based pension, which keeps your super invested in the market, allowing your income to grow if your investments perform well. However, it may decline in years of poor performance.

There’s no one-size-fits-all answer. The right approach depends on your goals and comfort with risk. That’s why working with a financial adviser is so important; we can tailor a plan to find the right balance for you.

Now, here are a few practical tips to help you stay ahead of inflation:

• Review your budget regularly. As prices rise, adjust your budget to avoid being caught off guard.
• Don’t keep everything in cash. Include some growth investments so your money grows faster than inflation.
• Consider inflation-linked income streams. Products like CPI-indexed annuities help raise your income to keep pace with living costs. Market-linked investments can also beat inflation over time, though they’ll rise and fall.
• Stay informed. Keep an eye on news about inflation and interest rates. Knowing what’s happening helps decide when to adjust your plan.
• Work with your adviser. Regular check-ins enable us to adjust your strategy as needed and keep your retirement plan on track.

Inflation is a fact of life, but it doesn’t have to derail your retirement. With the proper planning, you can keep your lifestyle. And remember, you’re not alone; we at AFPG are here to help. We’ll monitor the economy and adjust your plan as needed, so you can enjoy your retirement with peace of mind.

Step Up Financial Group, now AFPG, has the expertise to guide you with a sound and responsible retirement plan that takes into account shifts in inflation and interest rates. We’ve helped hundreds of retirees make informed decisions that enable them to live with peace of mind.

Contact us today for experienced, compassionate, and professional estate planning advice.