How to stop inflation derailing your retirement goals
Written and accurate as at: Feb 12, 2025 Current Stats & Facts
The rising cost of goods has been a major concern for Aussie households for some time now. And while inflation in Australia seems to be coming down from its unnerving highs, many of us are still struggling to adjust.
Inflation by itself isn’t necessarily a bad thing — in fact, low and predictable inflation is a normal part of a healthy economy. In economists’ eyes, it’s even preferable to prices falling, which slows economic activity as people put off spending in the hopes of getting a better deal in the future.
But when inflation surges beyond normal levels (and stays elevated for long periods of time), it can wreak havoc on household budgets. The immediate outcomes — sharp increases at the petrol pump and supermarket checkout — are hardly welcome. But just as worrisome is the long-term effect inflation has on savings and, by extension, your retirement plans.
Why managing inflation risk is crucial in retirement
For individuals, the net effect of prices going up is the purchasing power of our money goes down. So if the annual rate of inflation is 4%, that means that $100 today will be worth $96 next year. Over a long enough period this can put a major dent in our savings — that is, unless earnings grow enough to compensate.
One way to roughly calculate the impact of inflation is to use a formula known as the Rule of 72. By dividing 72 by the rate of inflation, you can approximate the number of years before a sum of money loses half its purchasing power.
Let’s say you had $10,000 sitting idle in a transaction account, not earning interest. Dividing 72 by 4 gives us 18, which means it will take around 18 years for half the real value of that $10,000 to disappear — and that’s without you even spending a cent.
This is especially pressing for retirees, who are no longer earning a salary and whose retirement plans depend on making their money last as long as possible. If inflation outpaces the returns on your super and other investments, you might have to rethink your plans, or even abandon some of them altogether.
Ways to hedge against inflation and keep your plans on track
Investing in growth assets
If your savings and investments are generating returns below the rate of inflation, you're effectively losing money. Investing in growth stocks could give you a greater chance to outperform inflation, although you’ll need to consider your investment horizon and the level of risk you’re comfortable with.
Diversify your investments
It pays to have some exposure to investments that offer a degree of protection from inflation. Carefully picked shares are one option, but there might be others worth looking into, such as property, Real Estate Investment Trusts, and annuities.
Three bucket strategy
One way to help ensure your long-term growth needs and shorter term cash flow needs are taken care of is a 'three bucket' strategy. This strategy splits your retirement savings into three buckets with different time horizons:
- A short-term bucket that contains enough low-risk, liquid assets (such as cash) to cover your immediate expenses
- A medium-term bucket stocked with defensive assets
- A long-term bucket containing growth assets.
The idea is to replenish the first bucket with the returns from the other two, hopefully providing you with enough regular income to live on while giving the rest of your savings an opportunity to grow.
Manage your expenditure
Shaving dollars off your household expenditure could help to offset the effect of inflation and leave your budget looking a lot healthier. Yes, it might be easier said than done in high inflation periods, but you’d be surprised how much you can save by buying in bulk, taking advantage of sales, or shopping at a cheaper supermarket.
Use your offset account
If you have a mortgage, putting money into your offset account can be a smart move. The balance in your offset account reduces the amount of your home loan that’s subject to interest, and since home loan rates are traditionally higher than what’s on offer from savings accounts and term deposits, you could potentially save more money than you can earn elsewhere.
Inflation is an unavoidable feature of the economy, and navigating it doesn’t have to mean abandoning your financial goals. With the right strategies — and a willingness to be flexible and proactive — you’ll hopefully be able to ride out any inflationary storms and make your money last. And if you’d like more tailored advice, be sure to speak with a financial adviser.