The difficulty of accumulating retirement savings during inflation
One of the most prominent financial regrets of retirees is insufficient savings during their employment years. Yet, with ongoing inflation and escalating consumer prices affecting Australia in recent times, numerous households are struggling to reconcile saving for retirement with fulfilling their everyday financial responsibilities.
Inflation has diminished purchasing power, complicating the ability of Australians to reserve funds for their future. The living expenses have soared, and many individuals are finding it tough to manage basic costs, much less contribute to their superannuation or other retirement funds. This has fostered a difficult environment for those aiming to create a retirement nest egg.
Ric Edelman, the Founder of Edelman Financial Engines, points out that while saving for retirement has always posed challenges, the current economic surroundings have exacerbated the issue. He emphasizes that in spite of these hurdles, consistently adding to retirement accounts from an early age is still the most dependable method for achieving long-term financial stability.
“Everyone wishes they’d begun saving in their twenties, and very few did,” Edelman comments. “That’s undoubtedly the biggest regret.”
For individuals lagging in their retirement savings, Edelman presents a sobering fact: the route to recovery is likely to demand sacrifices. He notes that many Australians might have to extend their working years and boost their savings contributions, even if it feels financially difficult.
“You’ll need to work longer, and you’ll have to allocate more money to savings than you might feel feasible,” he states. “There’s not really much of a choice other than to cut your expenses. Even drastic measures like selling your house and downsizing that significant expenditure — few are inclined to do so.”
For those not on track with their retirement objectives, Edelman stresses the importance of taking prompt action. He recommends embracing an aggressive saving and investment approach to recover lost time.
“We truly lack the option to do anything but save more, work longer, and ensure you’re investing for greater returns,” he elaborates. “Because if you funnel all that extra work and savings into a bank account earning 3%, you will never meet your goal. So, you must remain invested in the financial markets to have any chance of gathering the funds you will need.”
Investment strategies to surpass inflation and taxes
To tackle the twin challenges of inflation and taxes, investors must implement a more strategic method with their portfolios. Ric Edelman emphasizes that merely saving money in low-interest accounts won’t suffice in the long run. With inflation rates overshadowing traditional savings account yields, Australians are compelled to seek investments that offer the possibility of higher returns.
“We need to acknowledge that inflation is a reality,” Edelman states. “We’ve endured 4 or 5 years of dreadful inflation, and those elevated prices are expected to persist for many years ahead.”
A major tactic to outpace inflation is to diversify across asset categories that historically yield returns above inflation. This encompasses equities, real estate, and even alternative investments such as commodities or digital assets. However, Edelman warns that while these investments might promise higher returns, they also carry increased volatility and risk.
“When evaluating returns across various asset categories — stocks, bonds, real estate, gold, oil, crypto — alongside bank accounts, money market funds, and treasuries,” he clarifies, “we must select those that present the best opportunity for exceeding the inflation rate, particularly considering the influence of taxes.”
For Australians, superannuation is still a vital vehicle for retirement savings, but it’s crucial to confirm that the investments within super are positioned to outpace inflation. Many super funds provide a spectrum of investment choices, ranging from conservative to aggressive, and Edelman recommends that those behind on their retirement savings might need to explore more growth-oriented approaches.
“We have to navigate the combination of inflation and taxation to achieve a real rate of return,” Edelman mentions. “It complicates matters; there’s no doubt about it.”
Taxes also constitute a significant aspect that can diminish investment returns. With tax rates likely rising in upcoming years, it is essential to consider the tax implications associated with your investment decisions. Edelman advises collaborating with a financial advisor to identify tax-efficient investment tactics, such as using tax-advantaged accounts or investing in assets that offer favorable tax treatments.
Ultimately, the aim is to achieve a real rate of return — one that surpasses both inflation and taxes. While this may appear daunting under the current economic conditions, Edelman underscores that it is not impossible. By staying invested in financial markets and being strategic regarding asset allocation, Australians still have the potential to construct a retirement portfolio that will cater to their future requirements.
