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What retiree portfolios need to avoid future cost-of-living crises

The key to a "successful investment strategy" is the ability to generate returns over the long term and managing inflation is an important piece of the strategy, says a Challenger report.

Investments much achieve a real rate of return that not only provides growth but also offset inflation over time.

But managing inflation risk is particularly crucial during retirement because it impacts portfolios differently during this phase. That's because capital needs to regain its real value and every income payment needs to keep its value to maintain the target lifestyle of a retiree.

Challenger head of retirement income research Aaron Minney said an investment strategy that provides a steady rate of return is required to confidence in retirement.

"Cost of living spikes tend to be short term and that is manageable during the accumulation phase as there is time to recover. Retirement is different. It's about having a secure, regular income that allows you to enjoy your lifestyle," he said.

"While equities have historically delivered a rate of return higher than inflation more than 70% of the time, for positive returns this sometimes required a 16-year investment horizon.

"Retirees do not have this luxury, meaning they are at heightened risk to the impacts of inflation and need a hedge in their retirement portfolio that can protect the income."

The report said cost-of-living concerns were most notable for pre-retirees, unadvised Australians, and women, with almost 40% of these cohorts reporting cost-of-living as significantly impacting retirement happiness and their view of financial security.

Minney said professional advice and increased financial education were crucial to empower safe spending and confidence.

"There is a clear need for some form of professional financial advice, yet we found only one in five Australians over 60 are currently receiving it. Education on retirement options was also found to be critical, with almost 80% of respondents saying it would boost their happiness," he said.

"Advisers have an important role to play in enabling safe spending, empowering retirement confidence, and protecting income to last throughout their clients' golden years. As we continue to navigate a volatile market and geopolitical landscape, retirees need a portfolio that is protected from inflation risks so that they don't experience another cost-of-living crisis when inflation has another upturn."

Meanwhile, Minney noted that with over 2.5 million Australians expected to retire in the next decade, 70% of those over 60 would prefer guaranteed income. He also highlighted the "misguided perception" that exposure to the equity market alone is sufficient to sustain a desired lifestyle in retirement.

"... in retirement you need an investment strategy that will help you maintain your lifestyle regardless of market returns or spikes in inflation," he said.

"Today, many retirees are underspending due to the fear they will outlive retirement savings. We, as an industry, have a responsibility to empower confidence to spend in retirement, provide assurance that income will keep pace with inflation, and protect from the highs and lows of market-linked investments."

Read more: RetirementInflationCost-of-livingChallengerInvestmentsAaron MinneyAdvisers