Last week we looked at the retirement of George and Katrina, showing the benefit of rolling George’s superannuation fund into an account based pension.
This strategy showed a saving of $5,830 in tax per annum, opposed to investing in joint names outside of superannuation.
This week we’ll consider the impact of inflation on their retirement income.
Inflation is the ongoing rise in prices which affects the cost of living; essentially it erodes the purchasing power of your money – you could think of it as termites for money.
While George’s choice of an account based pension delivered important tax savings, his choice of investments within that account based pension may be too conservative for his needs.
George, 60, invested his $1.1 million superannuation into fixed interest, earning 6% p.a, which funded their retirement income needs of $66,000p.a.
In Australia, inflation is currently around 3%, if that remains constant over their retirement they will need to increase their retirement income by 3%/p.a. to maintain their purchasing power.
Essentially, in 10 years time they would need $77,940 pa to maintain their purchasing power.
With this increased drawdown, their superannuation of $1.1million would be eroded each year, before running out at age 90.
If inflation was to rise to 4% their retirement savings would only last until age 80, that’s ten years of retirement funds gone with just a 1% increase in inflation.
Now for the elephant in the room – the 3% inflation average of the last decade isn’t normal.
Throughout the 1970’s and 80’s, annualized inflation rates were 10% and 8% respectively.
In fact, over the last 60 years inflation has averaged 5.41% per annum.
George and Katrina’s conservative approach has exposed them to a large degree of risk; they’ve ignored the corrosive effect of long term inflation and may be faced with outliving their money.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s top financial adviser. We think we’re the best financial advisers in Tasmania.
