Are retirees now better off?

‘Inflation’ is a word very likely to jump into sight as you read your morning news. It’s also reported on the nightly TV news, a frequent topic in discussion in our federal parliament and a regularly reported source of concern in financial circles. Which can lead us to assume that inflation is a bad thing – particularly for those on fixed incomes.

But the team at Retirement Essentials believes that it’s time to challenge this view.

Here’s why.

First, before we look at the effect inflation has on different segments of the population, let’s define it.

The MoneySmart website somewhat curtly describes inflation as ‘an increase in the cost of goods and services over time’.

The Oxford Dictionary is a little more helpful, noting it as a ‘general increase in prices and fall in the purchasing value of money’.

The discussion of inflation in Australia also includes three more specific types: ‘headline’ inflation and ‘underlying’ or ‘trimmed’ inflation.

Headline inflation is the quarterly reported Consumer Price Index (CPI) which measures the movement in the value of a ‘basket’ of goods.

This measure can be misleading, however, as a lot of short-term volatility can affect this quarterly percentage. For instance, recent floods on the eastern seaboard of Australia have affected certain crops and livestock businesses very negatively, thus the prices of such produce (lettuces, dairy products, beef) have jumped.

So economists like to also reference ‘underlying’ or ‘trimmed’ data. The former excludes particularly volatile classes of goods and services. The latter refers to the data on the extreme ends of the scale, which is excluded, ‘smoothing’ the results. Being aware of the use of underlying or trimmed inflation as a useful benchmark makes a lot of sense.

And then there is the relationship of inflation to retirement households to think about. Many retirees are less affected by high fuel prices than the households with working adults and school age or teenage children who need ferrying around. Many retirees share a car, and some receive generous seniors’ travel discounts, so the transport aspect of their household budget is very differently affected.

In fact using the CPI as a benchmark across Australian households is bound to lead to poor conclusions. There is no average household as such.

Which brings us to the use of the CPI in reviewing the Age Pension.

As you are no doubt aware, the Age Pension is reviewed twice a year, in March and September, and depending upon the results, it is usually adjusted.

The CPI is one of two indices used for this purpose. The Pensioner and Beneficiary Living Cost Index (PBLCI) is the other one. And whichever is the higher of these two measurements is the one that is used to adjust the base rate of the full Age Pension.

This is a really important point.

It is not the lower amount, but the higher.

Which would suggest that, unlike wage and salary earners, Australian Age Pensioners are largely protected from the eroding affects of price rises on their primary source of income.

By contrast, the most recent data shows us that the Wage Price Index rose by just 2.6% over the previous 12 months, compared to inflation at more than twice that rate. There are pockets of industry delivering higher wage increases, but generally speaking those of an Age Pension are much better protected from inflation than those earning a wage.  This is one of the many reasons applying for the Age Pension as soon as you are eligible is so important.

Given that we now know that the annual CPI is 6.1% and the PBLCI is 5.0% Age Pensioners can expect a big hike in Age Pension rates on September 20 this year.

What does inflation mean for retirees specifically?

Does being on a fixed income, facing higher prices, automatically mean that your income will be eroded?

This is not necessarily the case.

There is normally an income side to this equation.

Rising prices and subsequent increases to the Reserve Bank cash rate has inevitably led to higher market interest rates – even for savers. This means that many retirees who hold cash or term deposit savings are now earning more.

And this is where it gets interesting.

Those retirees who are on a full or part Age Pension have their entitlements linked to a ‘deemed’ income on their investments. This deeming rate was frozen in May by former Prime Minister Scott Morrison (and agreed to by incoming Prime Minister, Anthony Albanese). So many Australians on an Age Pension are – until June 30 next year – likely to be earning more on their savings than they are deemed to be earning.

Yes, this could be seen as a case of swings and roundabouts when the same retirees were used to deeming rates far higher than their earnings, but it’s still worth noting that higher prices, followed by higher interest rates means inflation, is far from the retirement horror story that’s generally reported.

At worst, it presents a mixed bag, and at best a positive outcome compared with other segments of the population.

A cautionary note

Those holding high cash deposits might now start to enjoy higher returns. But if such returns are still less than the current price increases ( CPI 6.1 or PBLCI 5  ) this means that your money is being eroded. This means that you may wish to consider using the cash component of your assets first, and leave the other investments in superannuation, shares or property to increase at a more robust rate.

Understanding the way money markets work and how inflation can affect the longevity of your retirement income is challenging. Inflation is neither a positive nor a negative for all retirees. Better understanding your own situation and how to protect your hard-earned savings is important. For a one-on-one advice consultation to learn ways of responding to changing market conditions, speak to us today.

The Age Pension is a terrific hedge against inflation.  So check what you are entitled to receive.

Or if you would like to talk to someone about how inflation is affecting your retirement spending you can book a consultation.

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This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.