What is inflation risk?

Inflation risk is the potential for prices to rise, eroding the purchasing power of money. For retirees, this risk can be particularly acute because they often rely on income sources that don’t adjust for inflation. When prices rise, retirees may find their income doesn’t stretch as far as it once did, leading to a decreased standard of living unless they draw additional funds from their capital.

Why is inflation risk important in retirement income planning?

Many retirees are relying on superannuation, savings, or annuities for their living expenses for an unknown period of time. Unlike those still working, retirees don’t receive regular wage increases to cushion the impact of rising prices. Without a strategy to manage inflation risk, retirees could see their purchasing power significantly diminish over time, impacting their quality of life. 

How can retirees combat inflation risk?

There are various approaches retirees can take to combat inflation risk, such as:

• Investing in assets that historically outpace inflation, like shares or property. However, these investments come with their own risks and may not provide the steady income retirees need.
• Purchasing inflation-linked bonds, which adjust their payouts based on inflation rates. While this can offer some protection, these bonds might not always deliver the returns retirees expect.
• Allocating a portion of their retirement portfolio to guaranteed income products that specifically include inflation protection features.

How can an income stream linked to CPI help?

A CPI (Consumer Price Index) linked income stream adjusts income payments in line with inflation. This means as prices rise, so do the payments received by retirees, helping maintain their purchasing power. This is especially important in times of high inflation, where the cost of living can increase rapidly.

Challenger research shows that allocating a portion of retirement savings to a guaranteed income stream that includes CPI-linking, can help mitigate inflation risk and enable greater confidence in retirement.

For more information on how CPI-linked income streams can help manage inflation risk in retirement, download Challenger's whitepaper today.