With high inflation biting into retiree lifestyles, Challenger believes there are strategies that can be adopted for advisers to better serve their older clients.
Speaking at an adviser webinar, national strategy manager, Amanda Gardner, explained: “Retirees in particular can be harder hit than others because they don’t have that rise in wages to help with the impact [of inflation].
“This can lead to retirees underspending because they’re worried about their purchasing power of income and how long that’s going to last for.”
In the December quarter 2022, the ASFA Retirement Standard to fund a comfortable lifestyle for a couple aged 65–84 rose 7.5 per cent in the past 12 months, now standing at $69,691.
“Retirees at the moment are very worried about inflation, and we’ve had a decade where it hasn’t really been much of an issue,” said Aaron Minney, head of retirement income at Challenger.
“From a planning point of view, you may have had a conversation with a client where it hasn’t come up for a while […] but now they’re reading the paper, seeing the news, and saying ‘how can I cover this cost of living? What can you do to help me?’”
For those in retirement, he believed the best way to manage inflation risk was by revisiting investments through the lens of expected and unexpected inflation to find effective hedges.
While investment options like equities fared well amid expected inflation, others like commodities adjusted well to unexpected inflation. However, inflation-linked assets like the age pension and lifetime annuities seemed to fare well in both environments, he said.
“When you’re looking at the range of options available, you need to think about whether you’re preparing the portfolio for the known inflation, or expected inflation, or you’re getting a bit of insurance in there for something that goes wrong and how you manage the inflation shocks,” Minney added.
Andrew Lowe, Challenger’s head of technical services, highlighted recent research by the firm and National Seniors that found some 80 per cent of retirees were already negatively feeling the impact of inflation and the majority were concerned it would mean they run out of money.
“Certainly, in response to increasing inflationary pressures, there are a couple of angles you can take [with lifetime income streams],” he said.
“A fixed lifetime income stream doesn’t help us solve for inflationary pressure; it gives us a level of income that remains static for as long as the client lives in those circumstances.”
However, Lowe observed growing popularity in the firm’s range of income products in the current environment.
“For a long time, advisers said to me: ‘I like the idea of lifetime income streams, but I want to retain access to growth assets for my clients’ [and] we’ve launched a range of lifetime income streams that happen to coincide with an increase in inflation,” Lowe said.
“It’s quite interesting, the number of conversations I’ve had, that have reverted from market-linked to CPI-linked lifetime income streams. I really like this idea of being able to blend the best of each of those for different clients.”
