Inflation eroding super payments and savings rapidly

Inflation is eroding super payments and savings rapidly while costs are rising.

Tuesday, September 6th 2022, 9:25AM

by Sally Lindsay

Kiwis need to save even more for retirement

Transport, housing, household utilities, and food are hitting retirees hard because, as a percentage, they spend more than the average Kiwi in these areas.

Retirement households continue to spend more than their New Zealand Superannuation payments and have to supplement their budgets regardless of whether they are frugal or want more choices about how they live.

The latest Retirement Expenditure Guidelines show excess expenditure has increased since last year due to inflation, with retirees making up the shortfall from savings.

The biggest increase in costs for retirees are transport, up 14.05%, housing and household utilities, up 9.1% and food up 6.55%.

Inflation hit 7.3% in the June quarter and while superannuation rates are adjusted every year to CPI, this does not always fully offset the increase in expenditure in practice.

Because the increase in the super rate was only 5.5% - based on inflation to 31 December last year - retirees have had to dip into their own pockets.

The expenditure patterns of retirees do not match the CPI basket, and the CPI can understate the actual level of inflation that these households face, says the report.

This means that while the adjustments to superannuation over time appear fair, they may not fully compensate recipients for the increased costs that they face.

Savings erosion

Another issue is inflation can erode the value of savings if nominal returns do not offer a real return over inflation.

At high levels of inflation that becomes a much greater risk.

To illustrate this, the Sorted KiwiSaver calculator assumes returns of 2.5% to 6.3% (excluding defensive funds), which generates a real return of 0.5% to 4.3% given the assumption of inflation at 2%. However, with existing inflation at 7.3% those returns represent a loss of value in real terms.

This is a reminder of why it is important that inflation does return to levels experienced in the past, says the report.

Interest rates

A second issue is the increase in interest rates resulting from attempts by the Reserve Bank and other central banks around the world to bring inflation under control, that can negatively impact the value of fixed income investments that are held in KiwiSaver and other managed fund products. KiwiSaver members could see a lower balance in their KiwiSaver accounts.

It is likely retirees and those nearing retirement have a greater proportion of fixed income investments due to the lower volatility associated with this asset class.

Those with cash investments such as bank deposits may feel better off with the higher interest rates, as they will see bigger returns in dollar terms.

However, if the nominal interest rate is not high enough the buying power of that return will be reducing.

A related issue is higher interest rates coupled with the higher rates of inflation create increased volatility in the stock markets.

This becomes a problem for retirees wanting to make a planned withdrawal from their investment if it coincides with a fall in the markets.

Inflation also affects retirement planning, because it is one of the variables required to calculate the lump sum needed.

The guidelines show without having money to supplement super payments many retirees will struggle.

This year a two-person household in the main cities need to have savings of $755,000 to fund a choices lifestyle, while a couple living in the provinces would need to have $480,000.

The lump sums required for a choices lifestyle for a one-person household are $561,000 and $658,000 for metropolitan and provincial areas respectively.

Only two-person provincial households living a no frills lifestyle come close to being funded by superannuation, though they still need savings of $77,000. A metropolitan two-person household with a no frills lifestyle require $191,000 savings.

Never too late

KiwiSaver manager Consilium’s managing director Scott Alman says as the cost of living climbs it is becoming clear people need to plan carefully for their retirement and stay focused on it.

“It starts with budgeting and spending carefully and flows from there. Set a target, put a plan in place and chip away with regular savings to ensure there is a good nest egg for when you retire.”

The golden rule is it’s never too early to start planning for retirement.”

Financial Advice chief executive Katrina Shanks says the report is a further reminder about the need for everyone, even those who think they are going to be comfortable, to plan for their retirement.

The guidelines have been produced by Massey’s NZ Fin-Ed Centre and are supported by Financial Advice New Zealand and fund and KiwiSaver manager, Consilium.

The report’s findings, are based on figures from Statistics New Zealand’s triennial Household Economic Survey, adjusted for the effect of inflation. The guidelines do not represent recommended levels of expenditure, but reflect actual levels of expenditure by retired households.

Tags: KiwiSaver