Advice critical to mitigating retirees’ inflation fears

Challenger research has reaffirmed advisers’ significant role in empowering retirement confidence as cost of living and inflation risk continue to bite retirees’ portfolios.

The investment firm’s Protecting retirement income from inflation research paper delves into the heightened impact of inflation risk on a portfolio in the retirement phase.

As a result, an investment strategy that provides a steady rate of return is required to provide confidence in retirement.

Speaking on the findings, Aaron Minney, Challenger’s head of retirement income research, commented: “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 is about having a secure, regular income that allows you to enjoy your lifestyle.”

While equities have historically delivered returns higher than inflation over 70 per cent of the time, this often requires a 16-year investment horizon, which retirees do not have.

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“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,” Minney explained.

To mitigate inflation risks on a retirees’ portfolio, the research head emphasised the importance of professional advice and financial education 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 per cent of respondents saying it would boost their happiness.”

Last month, Challenger’s 2024 Retirement Happiness Index found that rising cost of living and affordability remained a growing concern for retirees. Two-thirds of Australians over 60 indicated it impacted their confidence in having enough money for retirement.

Moreover, the index revealed that unadvised Australians were more likely to report cost-of-living as having a significant impact to their financial security (39 per cent) compared with those who have received financial advice (25 per cent).

Minney continued: “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.”

Recent research from Colonial First State also discovered a wide variance between how much advised and unadvised Australians believe they will need to retire comfortably. For those who had never received financial advice, participants estimated they would need $2 million in retirement savings. Meanwhile, advised Australians said they would need $1.3 million, underscoring the impact of advice on retirement perceptions.

Challenger encouraged retirees and their advisers to allocate a portion of capital to a guaranteed income stream, such as an inflation-linked lifetime annuity, to support retirement confidence and prevent underspending.

With the majority of retirement savings left unspent when most Australians die, Minney also called on the industry’s responsibility to drive confidence to spend in retirement and provide assurance that income will keep pace with inflation.