Inflation erodes purchasing power, meaning retirees’ savings may lose value if returns don’t keep pace with rising prices.
9 October, 2025
Should you worry about inflation in retirement?
First Financial Team
If you’re nearing retirement or enjoying your retirement, you will be well aware of the impact Inflation can have on everyday living. Inflation is tied to the rise in prices for everyday goods and services. We feel it most at the petrol pump, paying for groceries and insurance, clothing, holidays and most things we usually take for granted.
The RBA aims to moderate our inflation rate between 2% and 3%, which is manageable. Australians born in the 50s and 60s who are entering or already in retirement have experienced several periods of high inflation. The “great inflation era” of the 1970s, when inflation peaked at around 15% and took the best part of a decade to rewind before accelerating again in the mid-eighties until the early 1990s, when the adoption of a more disciplined monetary policy and the RBA targeting inflation brought the figure to a controllable level between 2% and 3%.
Since then, we have had relatively stable inflation for much of the mid-nineties to early 2020s, with a short-lived spike in 2008 and more recently in 2021-2023.
The inflation spike in the early 2020s is attributed to global supply chain disruptions, energy costs, and stimulus measures during COVID-19.
Why does inflation matter to retirees?
Inflation acts like a hidden tax on savings. As prices rise ahead of income, your dollars buy less than they did previously. Over 20 years, even a minimal % inflation rate of 2.5% will significantly erode the value of a lump sum or fixed income. As inflation increases, this erosion becomes more substantial.
Due to your limited earning capacity, retirees or pre-retirees are more exposed to inflation. This is particularly profound for self-funded retirees whose income streams are not indexed to keep pace with the cost of living. Those on the Age Pension are not immune either, as the pension is designed to maintain, not improve, purchasing power. By not planning for inflation, retirees may be forced to cut back on discretionary spending or outlive their retirement savings.
“Inflation acts like a hidden tax on savings — over time, your dollars simply don’t buy what they used to.”
Inflation does impact superannuation and the aged pension
Let’s look at a hypothetical for context. If your superannuation investments earn 6% annually when inflation is 3%, the real return is closer to 3%. Defensive assets such as cash and fixed‑income securities can struggle to keep pace with high inflation. The real value of interest payments and the capital returned at maturity shrinks. Retirees relying on term deposits may see their income fall behind rising expenses.
Retirees receiving the Age Pension have their rates reviewed twice a year in March and September, and the rate is designed to adjust with the cost of living index based on movements in the CPI. In practice, this indexation helps maintain the real value of the pension, although increases are not guaranteed in every cycle, and the rise may lag specific costs such as health care. Pension supplements are indexed only to the CPI, so they might not entirely reflect rising living costs. It is important to understand how indexation works to help retirees anticipate future income and plan accordingly.
There are strategies to help beat the curse of inflation
Finding a workable balance between protecting capital and generating returns that outpace inflation is challenging. A diversified portfolio spreads risk across various asset classes, such as cash, fixed income, Australian and international shares, and listed property. Shares and property deliver higher long‑term returns and have historically outpaced inflation. Including growth assets in your retirement portfolio can help preserve and grow the real value of your savings, though it introduces volatility.
Income‑producing assets that offer some inflation protection are also worth considering. Real estate investment trusts (REITs) can offer rental income adjusted to market prices. Some retirees use products that provide a lifetime income stream linked to the CPI, ensuring payments rise in line with the cost of living. Others opt for market‑linked income products, where income depends on investment performance. There is no one‑size‑fits‑all solution, so advice tailored to your risk tolerance and goals is highly recommended.
“At First Financial, we help retirees strike the right balance between protecting capital and generating returns that outpace inflation.”
Practical tips to combat the influence of inflation on your retirement
At First Financial, we encourage clients to review their financial plan regularly and lean on our expert advice to ensure they maximise their retirement savings and plan. We recommend you:
- Review your spending plan regularly. As prices change, revisit your budget. Factor in expected cost increases for health care, insurance and utilities.
- Avoid concentrating your retirement savings in cash or fixed income alone. A mix of growth assets, defensive assets and alternative investments can improve resilience against inflation.
- Consider income‑stream products. Lifetime annuities indexed to the CPI provide certainty and protect against longevity and inflation risks. Market‑linked income streams may offer higher potential returns but come with greater variability.
- Stay informed. Understanding when and how rates change helps you anticipate shifts in your income and adjust your spending.
- Engage a qualified financial adviser. We can design an investment strategy that balances your need for income with inflation protection. Our advice considers your superannuation balance, desired lifestyle, risk tolerance and estate planning objectives.
Inflation is unavoidable, and its impact on retirees can be significant. Working closely with a professional financial planner helps you understand how inflation affects your superannuation and pension and when and how to adopt investment strategies that mitigate its effects. Proactive planning, diversification, and regular advice are the keys to staying ahead of rising costs and maximising your retirement.
Talk to the financial planning specialists
Inflation affects everyone, whether retired, working, or studying. It can be particularly troublesome for retirees who must budget carefully and anticipate the rise and fall of inflation’s impact on their purchasing power.
At First Financial, our highly experienced planners offer expert advice on budgeting and investment strategies for retirees and pre-retirees to ensure they stay ahead of inflationary impacts. To understand more about how we can help, contact our team today for professional, tailored advice specific to your circumstances.
Read more retirement planning articles.
Key Takeaways
Diversification is essential — a mix of growth and defensive assets helps protect income and preserve long-term wealth.
Regular financial reviews matter, as adjusting your spending plan and investment strategy ensures you stay aligned with changing economic conditions.
Professional guidance from First Financial helps retirees manage inflation risk, optimise income streams, and maintain their desired lifestyle in retirement.
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Frequently Asked Questions
How does inflation affect retirees?
Inflation gradually reduces money’s purchasing power. For retirees who rely on fixed or limited income sources, this means that over time, their savings buy less. As essential expenses like groceries, insurance, and healthcare rise, retirees may need to adjust their spending habits or risk outliving their savings.
Why is inflation especially challenging for self-funded retirees?
Self-funded retirees often depend on income from investments such as term deposits, shares, or superannuation withdrawals. When inflation outpaces investment returns, their real income declines. Unlike indexed pensions, these returns don’t automatically adjust with the cost of living, leaving retirees more exposed to rising prices.
Does inflation impact superannuation returns?
Yes. The real return on superannuation is the nominal investment return minus the inflation rate. For instance, if your super earns 6% annually and inflation is 3%, your real return is only 3%. High inflation can diminish the real value of income payments and capital, particularly for retirees holding large amounts in cash or fixed-income investments.
How does inflation influence the Age Pension?
The Age Pension is reviewed twice yearly, in March and September, and adjusted based on the Consumer Price Index (CPI). This helps maintain purchasing power, but not all living costs—especially healthcare—align with CPI. Pension supplements only track CPI, which may not fully offset inflation in some expense categories.
What strategies can retirees use to protect against inflation?
A well-diversified portfolio can help. Balancing defensive assets like cash and fixed income with growth assets like shares and property provides opportunities for returns that outpace inflation. Some retirees consider income streams indexed to the CPI or investments like REITs that tend to rise with market prices.
How can reviewing your financial plan help manage inflation?
Regularly revisiting your financial plan ensures your spending and investments align with current economic conditions. Reviewing budgets, adjusting income strategies, and rebalancing investments help retirees remain resilient as prices and interest rates fluctuate.
How does First Financial help clients manage inflation in retirement?
First Financial provides tailored financial advice to help retirees protect their wealth against inflation. Their advisers design strategies that combine income stability with growth potential, factoring in superannuation balances, lifestyle goals, and risk tolerance to ensure clients can maintain their desired standard of living.
Why should retirees seek professional advice from First Financial?
Inflation affects every retiree differently, depending on income sources, lifestyle, and investment structure. First Financial’s experienced planners work closely with clients to model scenarios, manage risk, and identify opportunities to improve returns. Their proactive approach ensures retirees stay ahead of rising costs and make confident, informed financial decisions.