OverSixty January 2023 Issue

15 YOURMONEY OVERSIXTY.COM.AU | ISSUE 3 | JANUARY 2023 Inflation’s hidden danger for older Australians The first step is to determine exactly how much you need to get by PATRICIA HOWARD YOUR MONEY A s Reserve Bank Governor Philip Lowe warns Australians to brace for higher in- flation and lower growth, the question facing many is how should they prepare themselves financially as higher prices decimate the real buying power of fixed incomes. Mr Lowe warned global economic and geo-political developments would make in- flation less predictable and harder to keep low than has been the case over the past 30 years. However, he promised, if Australia can “ride through this period” with wages bare- ly rising and with authorities focused on resolving the underlying pressures pushing prices higher, then inflation will come down. Australia’s rate of inflation has now passed seven per cent a year, prompting economists to estimate the cost of living for those in re- tirement could jump by as much as 10 per cent or by $6,600 during the next two years. More, if Australia’s inflation rate remains at or above seven per cent for the next decade, the rising cost of living will effectively halve the purchasing power of those receiving fixed incomes today, causing a dramatic fall in their standard of living. So, what can older Australians do to counter rising costs? The Association of Superannuation Funds of Australia estimates a couple aged between 65 to 84 years of age, needs $66,725 a year to enjoy a comfortable lifestyle in retirement, while those 85 and over need about $61,108. If the rate of inflation remains at about where it is, the income needed in 10 years to maintain the same lifestyle will increase to $73,377 and $67,200 respectively, according to interest rate comparison site, Rate City. For those already struggling to make ends meet, the question is, what can they do to help maintain their standard of living? Most advisers suggest the first step is to determine exactly howmuch you need to get by. Detail your monthly expenses and break them into two lists, essential items such as food, electricity and household expenses you can’t live without and items such as dining out and travel, that you can cut back on. This will give you a clear idea of just how much money you will need in the years ahead and it will be more accurate than just using an industry index figure to estimate your income needs. You may find you need a lot less than $66,000 a year to enjoy life, which will take some pressure off. The next step is to estimate how much money you expect to receive from all sources in the year ahead, including any pension enti- tlements, earnings, interest received on fixed term investments or income fromassets. The Federal Government has provided two mechanisms to soften the inflationary blow for many in retirement. Firstly, the age pension is automatically in- creased in line with the Consumer Price In- dex figure every quarter. This means as pric- es rise, as measured by the Consumer Price Index, so will fortnightly pension payments. Secondly, the Government has also lift- ed the Work Bonus balance by $4,000 from $7,800 to $11,800 a year, meaning those on the age pension can earn this amount from a bona fide employer without it reducing their pension entitlements. Although this increase is only for one year, there is a lot of pressure on the Federal Gov- ernment to make it permanent as a means of encouraging older Australians back into the work force and so, counter the current wide- spread labour shortages. While inflation is the immediate concern, it is possible the attempts by the Reserve Bank to drag price rises down to below three per cent by lifting domestic interest rates, could spin the Australian economy into a recession. Continued on page 16 Our finance expert looks at how those on fixed incomes can safeguard against higher inflation A few wise precautionary measures can make what looks to be a tough couple of financial years more manageable Photo: Patricia Howard YOUR MONEY About the author  Patricia Howard, author of The No- Regrets Guide to Retirement: How to live well, invest wisely and make your money last (Wiley), is a licenced Australian financial adviser. She has a Commerce Degree, holds an Australian Financial Services Licence and recently passed the FASEA Financial Adviser exam. Visit her at www.patriciahoward.com.au