|
Back to Blog
Inflation has a way of doing its damage quietly. Unlike a market crash, which is visible and alarming, inflation works in the background — slowly reducing what your money can buy, narrowing the gap between your savings and your retirement needs, and making targets you set five years ago less meaningful than they used to be.
After Australia's inflation rate peaked at around 7.8% in late 2022 — the highest in three decades — the topic moved from financial planning conversations into everyday life. Groceries, energy bills, insurance premiums, rent. People felt it. What many didn't consider is what that period did, quietly, to the longer-term assumptions inside their financial plans. This is worth understanding in some detail, because the response to inflation isn't the same for everyone. It depends on where you are in life, what you own, what you owe, and how your investments are structured. The real cost of "safe" cash savings When the RBA lifted the cash rate to 4.35% in late 2023, high-interest savings accounts started offering returns that actually looked reasonable on paper — some above 5% for introductory periods. Many Australians moved money into cash and called it a day. The problem is what inflation does to that calculation. If you're earning 4.5% on a savings account and inflation is running at 3.5%, your real return — the actual increase in purchasing power — is roughly 1%. Not nothing, but a long way from the headline figure on your bank statement. Over time, this matters enormously. A dollar that buys a certain amount today, subjected to 3% annual inflation over 24 years, will buy roughly half as much. That's not a distant theoretical concern — that's a working Australian who plans to retire in their mid-fifties and needs their money to last into their eighties. Cash has a role in every financial plan. It's essential for emergency funds and short-term needs. But treating it as a growth asset is where people get into trouble, and inflation is the reason why. What it does to your retirement number Most people who've thought seriously about retirement have a number in mind — a savings target they're working toward. The difficulty is that inflation means the target itself is moving. The ASFA Retirement Standard is updated each year to reflect cost-of-living changes. What it cost a couple to live comfortably in retirement five years ago is materially different from what it costs today. If your financial plan set a target of, say, $600,000 a decade ago and you've been working toward that number without revisiting it, you may be aiming at a goal that's quietly become insufficient. This is one of the more practical arguments for reviewing a financial plan regularly rather than setting it once and assuming it remains accurate. The underlying goal — a comfortable retirement — doesn't change. But the dollar figure that funds it does, every year, in line with what things actually cost. How different assets respond to inflation Not all investments behave the same way when prices rise, and understanding the distinction matters when you're thinking about how your portfolio is positioned. Shares and equities have historically been among the more reliable inflation hedges over long time horizons. Companies that have pricing power — the ability to pass cost increases on to customers — tend to maintain their real value reasonably well. That's not a guarantee, and in the short term, equity markets can fall sharply in high-inflation environments as interest rates rise. But over a decade or more, diversified share portfolios have tended to outpace inflation in most developed economies. Property is often cited as an inflation hedge, and in Australia's context, that reputation is largely earned — particularly in cities like Sydney where underlying supply constraints have kept values elevated over long periods. Property values and rental income both tend to move with inflation over time. The complication is that property is illiquid, concentrated in a single asset, and involves significant transaction costs. It's a meaningful part of many Australians' wealth, but treating it as the only inflation hedge in a portfolio is a structural risk. Bonds and fixed income are where inflation does the most obvious damage. A bond that pays a fixed 4% coupon becomes a poor investment in a 6% inflation environment — the real return goes negative. This is precisely what happened to many conservative investment portfolios in 2022 and 2023 as central banks lifted rates aggressively. The people who felt it most were those closest to retirement who had shifted heavily toward "safer" fixed-income assets. Superannuation investment options are worth revisiting through this lens too. The default "balanced" option inside many funds carries meaningful fixed-income exposure, which served members poorly during that inflationary period. Whether your current super investment option still fits your timeline and risk tolerance is a question worth actually answering. The one group inflation actually helps Homeowners with mortgage debt. This is counterintuitive for many people, but worth understanding. When inflation is high, the real value of a fixed debt falls. A mortgage of $600,000 borrowed in 2020 is still nominally $600,000, but if wages and asset values have risen significantly with inflation, the debt has become easier to carry relative to income and net worth. That's why periods of sustained inflation tend to benefit borrowers and penalise lenders — which is precisely why the RBA raises interest rates to fight it. This doesn't mean carrying more debt is a smart inflation strategy. But it does mean that homeowners sitting on significant mortgage debt shouldn't assume inflation is uniformly bad for their position. The picture is more nuanced than that. What to actually do about it Inflation is not a reason to panic or restructure everything at once. It is a reason to ask whether your financial plan still reflects what you need it to do. A few questions worth working through honestly: Is your retirement savings target current, or is it based on figures that haven't been revisited in years? Does your investment portfolio have enough growth assets to outpace inflation over your remaining working life? Is your super fund's investment option still appropriate, or has inertia left you in something that no longer fits your stage of life? These are the kinds of questions that a good financial plan answers on an ongoing basis, not just at the moment it's written. If you're based in Sydney and want to review how your current plan holds up against an inflationary environment, Financial Planning Sydney is where Davlin Wealth Management starts that work. The team helps clients across Greater Sydney examine the real-dollar impact of inflation on their retirement projections, investment positioning, and superannuation strategy — and adjust accordingly. Inflation doesn't announce itself dramatically. That's what makes it worth taking seriously before it becomes a problem you can see. Comments are closed.
|