How the cost-of-living crisis is hitting retirees


Watching the news, it is easy to believe that cashed-up boomers are splashing out and fuelling the cost-of-living crisis. However, the reality is retirees are now faced with the challenge of generating income that can keep up with the cost of living.

Heading into 2024, it seems a lot harder to find investment returns that can provide for the income needs of retirees.

While higher interest rates mean deposits pay a return, the returns are less than the higher-than-average inflation we are suffering. The value of savings is being eroded and can't support income needs through retirement.

how the cost of living crisis is hitting retirees

To offset the impact of inflation, retirees have typically relied on rising share prices. Despite some gains, this hasn't happened over the last couple of years. The market outlook for 2024 remains unclear.

While the prospect of stable interest rates is a positive, continuing global political tensions, a potential looming recession, and the possibility of another divisive US election campaign throughout the year present strong headwinds.

Markets are providing a reminder that the equity premium presents real risks. At least franking credits can provide a much-needed boost to income.

Navigating the income challenge

Part of the challenge in managing money in retirement is the multiple goals retirees have for their money. Income is needed for everyday expenses as well as having something available for small luxuries, like a weekend away, and bigger expenses, like an overseas trip, that make retirement enjoyable.

In addition, there is family, especially grandkids, to spoil, and for some, the goal of leaving a legacy. Hitting all these retirement goals can be hard, and having a clear, staged plan in place is vital.

For everyday needs, a secure investment that keeps up with the cost of living, like a lifetime annuity, can allow retirees to take some risk with volatile investments that can provide growth and support non-essential spending.

This stable income stream gives retirees the confidence to spend in their golden years, both on the essentials and small luxuries, knowing they have a guaranteed source of income for life. It may also allow retirees to build a long-term portfolio for any legacy. With today's rising cost-of-living challenges, this surety of income can be a welcome relief.

Much has been written about the government legislating that the purpose of super is to provide income in retirement. In many ways, that is the easy bit. The hard part is finding ways to generate the income that retirees need from their super investments.

Economic and market conditions can make this hard and 2024 will be no exception. Breaking the challenge down into achievable goals and targeted investments can meet the needs of retirees.

Get good financial advice

Many retirees need help to find the right mix for retirement. However, accessing this help is a challenge. While we have record numbers of people entering retirement, we have a shrinking pool of advisers to assist them.

The government has promised reforms to assist with the delivery of financial advice, but these are still in progress. For now, getting the right financial advice is an additional expense that is out of reach for many people.

In the absence of good advice, it will be problematic for many retirees to find their best-suited source of income. When navigating the income challenge, it is important to ask key questions, such as:

  • Does the income keep up with the cost of living?
  • Does the income go up (and down) with markets?
  • Can it enable a higher Age Pension payment?
  • Is the income tax-effective?

When there are these challenges, and more, to navigate, limited access to advice is an additional burden on retirees.

Today's retirement challenge

Heading into 2024, retirees are increasingly faced with the challenge of how to generate income that keeps up with the rising cost of living and gives them the confidence to enjoy their prime time.

Traditional income investments, like shares or savings accounts, are no longer delivering the rate of return needed for a comfortable retirement.

Meeting the income needs of today's retirees will be a rising challenge and seeking support, advice, and stable investment solutions that can deliver this will be crucial.

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Aaron Minney is the head of retirement income research at Challenger. He has more than 25 years' experience in the investments space, with previous roles including head of investment research and development at Colonial First State Global Asset Management and head of Australian fixed income at Macquarie. Aaron has a Bachelor's degree in economics from the Australian National University and is a Chartered Financial Analyst. He is an honorary fellow of the Macquarie Applied Finance Centre.
Robert Wigg
May 24, 2024 8.02pm

With all age groups there are people in many different financial positions. As a Baby Boomers owning a house was the first goal (some never achieved that). In retirement owning a home has many advantages, the rent assistance is not keeping up with rent increases.

Australia have has superannuation for around 30 years , this was a bonus as in the younger days you never planned for super. We had little idea on the money it would generate (compounding interest) , until one day you looked at the yearly super statement, and you realised this super is a good thing.

We also had home loan interest rates at 18%, we just payed the loan off as fast as we could, none of this Debt Recycling stuff there was no way we could earn 18% tax free on our investments. The 18% interest rates could have been an advantage, we hated it and would do anything to clear the debt.

When the home was payed off we had a bit of a go at investing any spare cash. We worked hard for this money and we put the research in to make sure you made the right decision. Then this salary sacrificing into super came in, tax advantages to save WOW and you had experts investing your money and you only payed 15% tax on the profits.

There are many Boomers who have saved for the future and now are reaping the rewards, there are some that are struggling. This applies to Gen X , Gen Y etc. - some do well and some don't.

In my opinion Boomers are the lucky ones, some Boomers are now banks (bank of mum and dad). I will admit when we go to a restaurant or coffee shop , the clientele are mainly Boomers.