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Retirees face higher inflation, growth assets still key

Nicki Bourlioufas  |  13 May 2019Text size  Decrease  Increase  |  
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Retirees face higher healthcare costs and greater inflation exposure, emphasising the importance of also holding growth assets in their investment portfolios, say financial planners.

Australian Bureau of Statistics data shows that living cost indexes (LCI) for pensioners and self-funded retirees were higher over the year to 31 March 2019 than the general consumer price index (CPI), with rising health costs falling harder on older Australians.  

The pensioner and beneficiary living cost index (PBLCI) rose 0.3 per cent in the March quarter 2019. A main contributor to the rise were health costs, which rose 5.5 per cent, driven higher by pharmaceutical products and medical and hospital services.

Over the twelve months to the March quarter 2019, the PBLCI rose 1.6 per cent while the CPI rose just 1.3 per cent. Separately, the LCI for age pensioner households rose 1.4 per cent over the twelve months to 31 March while the LCI for self-funded retirees rose 1.6 per cent.  

Jacqui Lennon, head of product and customer experience at Allianz Retire+, says that inflation typically has a greater impact on retirees as the costs of essential goods such as energy and health services have risen at a faster rate than CPI measures.

“Further, retirees have little flexibility or discretion to alter these essential expenses and deeply feel the impact of any price increase,” she says.

Elise Treagus, a financial planner with Wakefield Partners, says that changes in the Pharmaceutical Benefits Scheme (PBS) on 1 January 2019 caused a reduction in some medical subsidies and therefore meant pensioners had to pay more for some medications.

Brett Evans, managing director of Atlas Wealth Management, adds that medical costs like private health cover can be onerous for retirees. 

“A lot of the time these medical expenses do not follow inflationary price increases and can move out of step. A good example is the rising cost of private health insurance. Private health insurance premiums have been rising between 4 and 6 per cent per annum for more than 10 years,” says Evans.

Financial experts say it is crucial for retirees to invest in both income and growth assets in the early years of retirement and then re-structure their portfolios to include more income assets as time goes by.

“At retirement age, an investor should be invested in a balanced style investment. That is 60 per cent growth, 40 per cent income. For every year after that you should take 5 per cent of your allocation off growth assets and apply it to your income asset allocation,” says Evans.

Wakefield Partners’ Tregaus adds that it is best to ensure diversity in investment portfolios to minimise risk and to ensure capital preservation.  

“Growth assets are a key component of this as it is our experience that most income products do not account for inflation and are more likely to be interest rate-linked.

“Depending on the retiree’s age, we would still advocate a balanced approach to investment (50 per cent to growth assets and 50 per cent to income) to ensure that growth of assets is still possible and to somewhat make up for the low interest rate environment we are currently experiencing. After all, retirees can still be long-term investors,” she says.

Lennon of Allianz Retire+ says a balanced portfolio with a healthy allocation to growth assets and a mix of defensive assets can typically ensure longevity of retirement assets and a regular and sustainable income.

“Further, we recommend retirees consider allocating a risk control or protection orientated strategy ... Protection from market or the sequence of return risk helps to mitigate retiree’ most common fear, running out of money.”

Lennon quotes research undertaken by David Barrett, head of Macquarie Technical Services, which earlier this year found conservative portfolios, with large weights to defensive assets such as cash, increased the likelihood of retirees running out of money.

“For example, a capital stable portfolio had almost twice the probability of running out of money over 35 years of retirement than a balanced portfolio,” says Lennon.

The Association of Superannuation Funds of Australia (ASFA) Retirement Standard for the December quarter of 2018 reveals couples aged around 65 would need to spend $60,977 a year and singles $43,317, to live a comfortable retirement; up 0.2 and 0.3 per cent respectively on the September quarter figures. 

While the overall rate of inflation was relatively low, some costs rose sharply over the year to 31 December, including medical and hospital expenses (up 4.2 per cent), postal charges (up 10.4 per cent), gas and other household fuels (up 3.2 per cent) and automotive fuel (up by 6.7 per cent).

ASFA defines a “comfortable” retirement as involving a broader range of leisure activities, regular eating out and occasional international travel. At the modest level couples need to spend $39,775 and singles $27,648 a year.

is a Morningstar contributor.

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