Impact of inflation

Inflation risk

Think back to how much a loaf of bread or carton of milk cost when you were younger compared to what it costs today. Over time, small price increases can add up.

A dollar today would be worth roughly half of what it was 25 years ago at an average inflation rate of 2.5%. Protecting the purchasing power of your money is key to maintaining your lifestyle in retirement.

Why does inflation matter in retirement?

Inflation measures the change in the cost of living over time. There’s a good chance the spending power of the income you have now will be reduced by inflation during your retirement because the costs of goods and services will rise.

Part of maintaining your lifestyle in retirement is making sure your retirement income can keep up with inflation.

Even low rates of inflation can have a large impact on your purchasing power

Even low inflation rates can have a large impact on purchasing power if the time period is long enough. For example, if inflation averages 2.5% per annum, then after 15 years, 31% of the real value of each dollar of retirement savings has been lost and by year 28, half the real value is gone. The chart below shows the falling value of $100 over a 30-year period.

Inflation risk chart

Managing the risk of inflation – what are the options?

  • Consider a retirement income stream that helps protect the value of your savings from inflation, such as a Challenger lifetime annuity. Challenger’s lifetime annuities provide different monthly payment solutions to suit your financial circumstances and needs. For income certainty, you can choose CPI indexed or fixed payments. Alternatively, you can choose to have payments linked to changes in the RBA cash rate or investment markets. 

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