Inflation a rising concern in retirement planning

Tuesday 6 September 2022

Retirement planning remains as important as ever for New Zealanders with inflation becoming a significant factor to take into consideration.

Last updated: Tuesday 6 September 2022

Massey’s New Zealand Financial Education and Research (Fin-Ed) Centre has produced their annual Retirement Expenditure Guidelines, which assists pre-retirement New Zealanders in making financial plans for their future. The latest edition reports that with inflation rising to 7.3 per cent in the 12 months ended 30 June 2022, this could be of particular concern for those planning or nearing retirement.

The Consumers Price Index (CPI) increased by 6.9 per cent for the year to 31 March 2022, with the New Zealand Superannuation increase being less, at 5.95 per cent. While levels of expenditure in most household categories have exceeded the New Zealand Superannuation in past reports, this year’s report shows that the difference has increased further for all household groups.

The guidelines show levels of expenditure by current retirees categorised by being a ‘no frills’ retirement, which reflects a basic standing of living with few, if any, luxuries, or a more comfortable standard of living referred to as ‘choices’. Costs have been calculated for one and two person households in both metropolitan and provincial areas.

The estimated lump sum savings required to fund a two-person ‘no frills’ household living in the city sits at $191,000, and $77,000 for a couple living in the provinces. A metropolitan two-person ‘choices’ household in the city would require $755,000 while a provincial ‘choices’ household needs $480,000.

The household groups in this survey show that many New Zealanders seeking to achieve a certain standard of living in retirement will need to supplement their Superannuation to do so, and must also now factor the indeterminate variable of inflation into their preparations.

Report author, Associate Professor Claire Matthews from the Massey Business School, says that although higher inflation rates are not a new phenomenon, the most recent CPI increase is the highest it has been in Aotearoa New Zealand since 1990.

“Rates of inflation at this level are not unusual, but it is markedly higher than our recent experience. When we look at historical trends, there was an average annual CPI increase of 12 per cent between March 1971 and December 1989. However, comparing that to the last three decades, it puts it into perspective as there was an average annual CPI increase of two per cent between March 1991 to December 2020.”

The current rate of inflation reflects, in part, the ongoing impacts of the pandemic and the war in Ukraine, with key drivers including increasing energy prices, rising wages, and supply-chain disruptions.

The legislated adjustment process for NZ Superannuation is guided by measuring CPI, which can provide some reassurance, yet Dr Matthews says this method can understate the actual level of inflation that retirement households are facing.

“For people on a fixed income, such as those receiving NZ Superannuation, inflation can be a huge concern because their income may not be increasing at a rate that keeps up with increases in expenses. CPI is measured using a particular basket of goods and services, but the expenditure patterns of our retired households don’t match the CPI basket, meaning the NZ Superannuation adjustments may not fully compensate for the increased costs.”

The report outlines further inflation-related issues alongside erosion of purchasing power that can affect those near retirement, including increased volatility in the stock market leading to reduced value of investments.

The main contributors to the continued rise in costs for retirees for the 12 months ending June 2022 were transport, housing and household utilities, and food. Recreation and culture was also a key inflationary driver for the ‘choices’ households due to a higher proportion of expenditure represented relative to the CPI.

Dr Matthews says it’s important for New Zealanders to start planning and taking action now if they want to achieve a particular style of living in retirement.

“Retirement is a significant life change. Without the right preparation and planning, it can be hugely challenging to achieve a certain way of living retirees may aspire to. This is where reviewing your expenditures and making mindful spending choices can help. It’s also important to think about where your funds are invested, and engage with a financial advisor who can help with navigating a high inflation environment.”

Financial support to produce the Retirement Expenditure Guidelines report was provided by Financial Advice New Zealand and financial advisor firm Consilium.

About the Retirement Expenditure Guidelines

The New Zealand Fin-Ed Centre was set up in 2011 with the aim to improve the financial wellbeing of New Zealanders. The report’s findings are based on figures from Statistics New Zealand’s triennial 2018/2019 Household Economic Survey. It is important to note the guidelines do not represent recommended levels of expenditure, but reflect actual levels of expenditure by retired households.

Read the full report here.

Associate Professor Claire Matthews, Massey Business School.

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