When people think about investment risk, they usually picture share markets falling or have flashbacks to the GFC. One of the most damaging risks for long‑term financial security has only recently crept back into the news but often goes unthought of. It’s inflation.
While inflation has eased from its peaks globally, it certainly hasn’t disappeared. With Australia even seeing a significant uptick in the back half of 2025, leading to the RBA’s unanimous decision to again list the cash rate to 3.85%.
For those approaching or already in retirement, inflation is an important force that dictates what income is required to sustain a particular lifestyle. In turn, this changes the answer to the common question ‘what is enough to retire with’.
Why inflation matters more once you stop working
During your working years, inflation is uncomfortable but can be manageable. Salaries tend to rise over time, careers progress, and income can adjust, or at least partially to higher living costs.
Retirement however is different.
Once full‑time work stops, people typically have an asset base they have worked hard to accumulate throughout their lives and begin to draw down on. While these income streams can be reliable, they don’t all automatically increase just because everyday costs rise. This is where inflation becomes particularly powerful.
The Conservatism Trap
The transition away from employment can be daunting. From having a regular pay cheque whilst still accumulating wealth in the background to ‘I have accumulated this pot of wealth, and I have to make this last’.
For most, the fear of seeing market movements in their portfolios at this stage grows exponentially. This leads to a few common phrases:
- ‘Let’s be more conservative’
- ‘I’d rather earn less but know my money is safe’.
It is important to differentiate between low volatility and low risk. Assets like cash and term deposits feel safe because their value doesn’t move around. But if returns fail to keep up with inflation, their real value declines over time.
In practical terms, this means that holding too much in defensive assets can increase the risk of your money not lasting as long as your retirement does. The same grocery shop costs a little more, insurance premiums rise year on year, holidays and other activities can become harder to mentally justify. None of these feel alarming in isolation. But over 10, 20 or 30 years, the cumulative impact can materially change a retirement lifestyle.
This is why portfolios built solely for capital stability can struggle over time. Without some exposure to growth assets (such as equities), there may be limited capacity for income to rise in real terms. Importantly, this is not an argument for taking excessive risk or ignoring your comfort level. It’s about balance.
Managing inflation without chasing returns
Good retirement planning isn’t about predicting inflation or markets. It’s about building resilience into your plan so it can cope with a range of outcomes that can’t necessarily be predicted.
That often includes:
- Ensuring you hold enough growth assets in your portfolio to help income and capital keep pace with rising costs.
- Maintaining liquidity and reserves so that your spending needs can be met without being forced to sell assets at the wrong time.
- Regularly reviewing assumptions with your adviser as circumstances and economic conditions change.
For many retirees, the goal is not to maximise returns, but to maintain real spending power and flexibility over time. Market volatility tends to dominate conversations because it’s visible and emotional. Inflation risk is quieter but can be just as important and with advice, appropriately planned for.
